Share Transfers in Turkish Joint Stock Companies

The two most common types of private companies in Turkey are limited liability companies and joint stock companies. This article covers share transfers in joint stock companies. The general principle for joint stock companies is that their shares are freely transferable. The exceptions to this principle depend on the type of share.

What are the different types of shares for Turkish private companies?

The two types of shares in a Turkish private company are nominative shares and bearer shares. The person who holds the physical share certificate of a bearer share is the owner. In nominative shares, the certificate of share lists the owner’s name. The main difference between the two types is that nominative shares are more challenging to transfer, whereas bearer shares can be transferred almost without restriction. This article mainly focuses on nominative shares because their transfer is subject to stricter rules.

I. Transfer of Nominative Shares in Joint Stock Companies and Potential Restrictions

There are several types of restrictions on share transfers under Turkish law. The primary restrictions arise from explicit provisions in the Turkish Commercial Code (“TCC”). For example, such a “legal restriction” applies when the share price for the sold shares is not fully paid. Secondly, restrictions also arise from provisions of articles of association of the company. The articles of association that set out specific rules on transfer may also impose restrictions on nominative shares.

Legal Restrictions

Legal restrictions are set out in Art. 491 of the Law. This article allows the board of directors to avoid approving the transfer without relying on an explicit provision in the articles of association. The condition for such legal restrictions is doubt on whether the share prices are fully paid or whether the transferee has the necessary purchase power.

Restriction by Articles of Association

Restricting share transfers by incorporating provisions in the articles of association under TCC Art. 492/1 is categorised as “restricted by articles of association”. This type of restriction is repeated in the provisions of Art. 493/1 and requires the articles to include important reasons for refusal.

The company’s power to reject share transfers under the TCC by relying on provisions of articles of association also has certain limits. This issue arose in a dispute before the Court of Cassation, where the Court examined a case in which the company relied on the articles of association’s provisions to refuse the transfer registration. The Court decided that in the specific case, reliance on the articles of association was against the good faith principle in Art. 2 0f the Turkish Civil Code and the principle of equal treatment in Art. 357 of the TCC.

In the same Court of Cassation judgement, a dispute regarding the ownership of the shares was not accepted as a sufficiently vital reason to constitute the basis for a valid rejection of the transfer under Art. 493. Finally, the company’s failure to provide an alternative by offering to purchase the shares from the transferor also meant that the transfer could not be refused.

Restrictions in the Absence of Explicit Terms in the Articles of Association

In principle, joint stock company shares can be transferred freely. Yet, the transfer of nominative shares can be prevented even when there are no legal restrictions or restricting provisions in the articles of association. This third possibility arises by using the “escape clause”.

The Escape Clause

The previous section discussed refusing the transfer by relying on essential reasons in the company’s constitution per TCC Art. 493/1. The same TCC article also allows the company to deny the request for approval by offering to the transferor. The proposal must be for buying the shares at market price.

The company’s rights arising from the escape clause are subject to the principle of equal treatment and another Turkish law principle called “not using legal rights for harmful purposes”. As discussed above, the Court of Cassation decided that such limitations apply even when relevant transfer restriction articles are in the company’s constitution.

The escape clause provides an alternative to the restrictions arising from the articles of association and aims to allow the company to avoid unwanted individuals. It should be emphasised that the transferring shareholder is not obliged to accept the company’s offer to purchase shares. A final condition of the escape clause is that the company must make an offer for the total number of shares that the transferor considers selling.

Escape Clause in the Turkish Case Law

The escape clause under Art. 493, which allows refusing the transfer despite the absence of restricting provisions in articles of association, constitutes the legal grounds in Court of Cassation judgements. According to the Court of Cassation, the purpose of the escape clause is to act as a precaution to protect the company from losing its identity and essential characteristics.

Art. 493/1 states that only the company can reject the transfer of shares. The Court of Cassation emphasises this rule and rejects lawsuits started by shareholders who request annulment of the share transfer.

Another Court of Cassation judgement ruled that the offer to purchase under the escape clause can be made only between the company and the transferor. Furthermore, the Court highlighted that determining the value of shares that are the subject of the offer is not an exclusive right of the transferee. Accordingly, the transferor also has the right to ask for the share value to be determined by the Court. Under the next heading of this article, further details on the transferor’s right to apply to the Court are discussed.

Other Reasons for Refusing the Transfer

The transferee must declare that he is purchasing the shares for himself and under his name. Otherwise, the company may refuse to register the transfer.

There is a specific rule for “transfers resulting from the law”, which includes acquisition by inheritance, marital property distribution, and enforcement proceedings. The company may refuse approval by acquiring the shares in transfers resulting from the law, according to Art. 493/4.

Art. 493/5 provides the right to apply to the Court to determine share price in cases where transfers result from the law. Although this application right could be associated with paragraph 1 of the same article (the escape clause), the Court of Cassation judgements refuse such a connection. This judicial approach is also mentioned above concerning the case law on the escape clause.

The Court of Cassation does not completely dismiss the right to apply to the Court for the determination of share price outside the scope of share transfers resulting from the law under Art. 493. According to the Court, there is a right to apply to the Court for transactions under Art. 493/1. However, this is based on the existence of “legal interest” and the right to a trial under the Turkish Procedural Code.

II. Transfer of Bearer Shares in Joint Stock Companies

Contrary to nominative shares, bearer shares can be freely transferred. It is, therefore, essential to act with caution when creating bearer shares. The transfer restrictions examined above cannot be applied to bearer shares, and neither are the restrictive provisions in articles of association are not valid for bearer shares. In terms of the transfer procedure, being in possession of the bearer share is sufficient for the transfer of these shares. However, rights arising from ownership of bearer shares cannot be used unless registered at the Central Securities Depository as promulgated by the Communique on the Notification and Registration of Bearer Shares to the Central Securities Depository.

III. Share Transfer Agreements in Turkey

Share transfers of nominative shares and bearer shares in joint stock companies are regulated in TCC Art. 489 and the following provisions as discussed above. On the other hand, there are not any specific legal provisions regulating share transfer agreements for joint stock companies. Therefore, share transfer agreements for joint stock companies do not have to be in any particular legal form to be valid and enforceable. The overarching principle of freedom of contractual “form”, stated in Art. 12 of the Turkish Code of Obligations, applies to share transfer agreements.

Is notarising the share transfer agreement of joint stock company shares mandatory?

The legal requirements for a valid share transfer agreement for limited liability company shares are explicitly provided in the Law: “Transfer of principal capital share and the transactions giving rise to transfer obligations shall be made in writing, and parties’ signatures shall be certified by a public notary.” (Art.595/1). However, there is no such provision for share transfers in joint stock companies. Therefore, it is not mandatory to notarise the share transfer agreement of a joint stock company according to the freedom of contract principle.