1. INTRODUCTION
Usage of shareholders’ agreement becomes an alternative for shareholders since articles of association is accessible to public and subject to registration and certain limitations and in this regard, it has created the need to arrange the bond between shareholders other than articles of association. The reasons of frequent use of shareholders’ agreement are, shareholders’ agreement provides flexibility for relations to be established between shareholders and the company and makes possible to regulate the provisions beyond the rigid structure within the scope of mandatory provisions that articles of association is subject to as per Turkish Commercial Code numbered 6102 (“TCC”) and provides opportunity to organize rules in accordance with the promotion of corporate governance, protection of weak shareholders’ and makes it possible to regulate the provisions upon the requests of shareholders under law of obligations. Shareholders’ agreement serves the purpose to regulate binding provisions in order to plan or prevent undesirable changes in partnership structure to protect the shareholders especially in limited and joint stock companies that can be narrowly regulated in articles of association.
Shareholders’ agreement is an agreement, signed by and between a company’s existing or future shareholders or by the owners of the shares in company regulating the provisions regarding the relations among shareholders and company; especially the provisions in relation to the operation of the company. Shareholders’ agreement is significant in terms of its use in practice since it allows obtaining the flexibility unobtainable within the context of company’s articles of association, also has great importance in terms of protection of confidentiality among shareholders.
Shareholders’ agreement is subject to freedom of contract and is binding within the scope of law of obligations. Shareholders’ agreement is not regulated under TCC and thus it does not have any compulsory content. Therefore, shareholders can determine the provisions of the agreement freely. This is one of the important factors that distinguishes the shareholders’ agreement from articles of association.
First of all in our article, common issues involved in the shareholders’ agreement and articles of association will be outlined and thereafter opportunities which shareholders’ agreement provides will be discussed and lastly limitations against share transfer will be considered.
2. COMMON PROVISIONS REGULATED UNDER ARTICLES OF ASSOCIATION AND SHAREHOLDERS’ AGREEMENT IN JOINT STOCK COMPANIES
The content of the shareholders’ agreement may be divided into provisions related to (i) the organization and functioning of partnership, (ii) shareholders’ rights and (iii) shareholders’ rights and compliance with the agreement.
a. The mechanisms regarding the subject, scope, legal structure and organization of the partnership, composition of bodies, powers, quorums, especially transfer of powers of board of directors to general assembly and mechanisms providing to participate the management of the partnership to third parties may be created within the scope of the provisions related to the organization and functioning of partnership in shareholders’ agreement.
b. Shareholders’ rights in general, restrictions to shareholders rights and validity of these restrictions, principal of equal treatment, voting rights and liabilities in this regard, limitations as to transfer of shares, financial rights and payables can be regulated within the scope of the provisions related to the shareholders’ rights.
c. Economic disincentives, and incentives, limitation regarding share transfer of possession by abolition on share certificate and provisions guaranteeing to vote convenient with the agreement can be regulated within the scope of the provisions complying with the agreement.
Although TCC is silent regarding the content of shareholders’ agreement, Article 339/2 regulates the mandatory contents of the provisions to be regulated in articles of association. If articles of association does not include all mandatory provisions specified in TCC, relevant registry office shall not register the articles of association. Provisions to be regulated in articles of association as per Article 339/2 are as follows:
a. Commercial name and registered office of the company,
b. Area of activity described and specified in detail of the company,
c. Nominal value of the capital and shares, form and conditions of payment of these,
d. Whether the shares will be registered or bearer and the privileges to be granted to the certain shares and limits of transfer of shares,
e. The rights and assets provided other than monies, their values, the amount of shares to be given in return of these, if there is a taking over of a company or assets, the cost of such taking over, and payment made by founders in relation to assets and rights purchased during the establishment of the company and the amount of the salary, allowance and reward to be given to people who served during the establishment of the company
f. The benefits to be provided to the founders, board members and other people from company’s profit,
g. The number of board members and members authorized to sign on behalf of the company,
h. The invitation procedure regarding general assembly and voting rights,
i. If the company is limited for a period, the duration of such period,
j. The announcement procedure of the company,
k. The type and the amount of the shares guaranteed by the shareholders,
l. Fiscal period of the company
As it is seen most of the issues regulated under shareholders’ agreement fall within the areas regulated under articles of association. Unlike Former Turkish Commercial Code (“FTCC”), TCC limits the regulations set out under articles of association and instead of principle of freedom of contract as per FTCC, mandatory provisions principle to be explained in detail below dominated for articles of association.
Under Article 340 of TCC, provisions of articles of association “in relation to joint stock companies can only diverge from TCC if it is clearly allowed in TCC. The supplementary provisions of articles of association allowed to be stipulated by other laws shall be effective only for that specific law”. In accordance with this provision applicable for both publicly held joint stock companies and non-publicly held joint stock companies, instead of freedom of contract, mandatory rule principle shall be in force for articles of association of joint stock companies. If articles of association shall diverge from TCC, it has to be clearly permitted in TCC and not being prohibited by law shall not be enough. However, the concept of clear permission shall also cover permissions to be understood from the essence of the provision with teleological interpretation considering the equity of the provision and balance of interests other than letter of the law. For instance, Article 421 of TCC regulating the quorum, allows to make different regulations other than this provision by indicating “unless regulated otherwise by law or under articles of association” in the provision. On the other hand, some articles of TCC indicate that provisions of articles of association cannot diverge from TCC by including the phrases such as “unless agreed otherwise” and “cannot be limited”. For instance, Article 493/7 of TCC regulating share transfer restriction indicates that conditions of share transfer restriction shall not be heavier than conditions set forth under TCC in terms of form and ground. In addition to above mentioned issues, mandatory provisions of TCC contain regulations for domestic structure of the company, internal bodies, inalienable and irrevocable duties and powers of bodies. Diverging from these mandatory rules and regulating otherwise under articles of association can only be possible if it is clearly permitted in TCC. Age limitation and professional work experience requirement of board members, group of shares to be taken part in board, shareholders forming a certain group, number of members representing minority shareholders and nomination right regarding the qualification of board members may be regulated under articles of association. Since minority rights have mandatory qualification such rights may not be relieved by regulating such provisions in articles of association.
While FTCC was in force, although provisions regulating share transfer rights such as right to purchase and sale of shares which are against shareholders’ single debt obligation, it was allowed to include such provisions in articles of association, due to freedom of contract principle but these provisions shall not be binding under company law and accepted as shareholders’ agreement signed by and between the founders of company. As clearly expressed in the preamble of Article 480 of TCC stating that “alteration of Article 405/1 of FTCC, which includes single debt obligation clearly, aims to dispose arrangements made under law of obligations”. Likewise, preamble of Article 336 of TCC clearly demonstrates the will of the legislator excluding the shareholders’ agreement from company law. Pursuant to Article 340 of TCC, since the rights related to joint stock companies such as pre-emption, put option and repurchase rights are not clearly regulated under TCC, regulation of such rights under articles of association will not be possible as well. Although regulation of such rights under articles of association is prohibited, if such rights are regulated under articles of association somehow1, they shall not be binding upon third parties but shall be binding between parties of the agreement.
3. OPPORTUNITIES OFFERED UNDER SHAREHOLDERS’ AGREEMENT
Shareholders’ agreement as a promissory transaction among shareholders is accepted as an alternative for articles of association or TCC, in the way of provisions regulated towards shareholders’ wishes. In reality, this alternative is based on the fact that articles of association involve in the corporate field whereas shareholders’ agreement involve obligations law therefore by this alternative, limitations predicted under TCC may be exceeded. As a result of the fact that such regulations situated under different legal grounds, regulating provisions under shareholders’ agreement which cannot be specified under articles of association, will not constitute circumvention of the law.
The main difference of shareholders’ agreement from articles of association is that it cannot be alleged to third parties other than the shareholders and debts and obligations from the agreement arise merely between parties to the agreement. This nature of shareholders’ agreement provides having an effect on the partnership even it is limited. Firstly it needs to be pointed out that shareholders’ agreement has an indirect effect through the partnership. The agreement cannot be alleged against the partnership and company’s bodies, since joint stock company and its shareholders are independent legal persons and joint stock company is a third party in terms of agreement. Also, rights and obligations arising from shareholders’ agreement are not linked to ownership of shares. Therefore, although partnership rights arising from ownership of shares may pass to third parties with share transfer, rights and obligations arising from shareholders’ agreement do not pass to third parties. Rights and obligations arising from shareholders’ agreement must be transferred separately through novation or assignment of claim. Likewise, legal transactions which constitute a contradiction to shareholders’ agreement shall be evaluated as liability arisen from obligations between parties since they cannot be alleged to joint stock company.
4. REGULATING PROVISIONS IN RELATION TO SHARE TRANSFER LIMITATION UNDER SHAREHOLDERS’ AGREEMENT WHICH CANNOT BE REGULATED UNDER ARTICLES OF ASSOCIATION
Despite TCC allows share transfer restriction under articles of association as per binding provisions, Article 493/7 of TCC indicates that these restrictions may not be heavier than the provisions of TCC and according to Article 340 of TCC as mandatory rule principle; such restrictions may not be increased by supplementary provisions. Pursuant to TCC, share transfer restriction will be formally possible either by company’s approval or satisfying some material conditions together. However, under shareholders’ agreement shares can be transferred by a group of shareholders approval or by satisfying some lighter material conditions together which would be binding in terms of law of obligations.
Share transfer restrictions to be regulated under shareholders’ agreement are pre-emption, put option and repurchase rights. Additionally, prohibition of share transfer may also be regulated under shareholders’ agreement. Basically, shareholders’ agreement creates rights for shareholders rather than being a restriction. Although share transfer of all types may be restricted under shareholders’ agreement, in order to regulate such restriction, shares must be registered.
Another issue that should be examined is whether the sanctions regulated under TCC shall be applicable to the party who is in breach of shareholders’ agreement. According to jurisprudence, such sanctions are applicable for cases set forth under TCC and shall only be applicable for such cases. Therefore, these sanctions shall not be enforceable to the parties who are in breach of shareholders’ agreement.
In light of this determination, sanctions to be imposed as a result of breach of shareholders’ agreement shall be the sanctions regulated under the shareholders’ agreement and under law of obligations. Such sanctions may be specified as; specific performance, indemnity, termination of the agreement for synallagmatic agreements and termination for default in terms of corporate agreements. Preference between these options will depend on nature of the breach.
5. RELEVANT PROVISIONS REGULATED FOR LIMITED LIABILITY COMPANIES
The agreement referred to as articles of association in joint stock companies is named as articles of association for limited companies as well. However, articles of association for limited companies has heavier formal requirements compared to joint stock companies. In this respect, pursuant to Article 575 of TCC, articles of association of the company must be in writing, founders’ signatures shall be approved by notary and mandatory provisions must be included in the articles of association. Provisions to be regulated in articles of association as per Article 576 are as follows:
a. Commercial name and registered office of the company,
b. Scope of company business with main points defined and specified,
c. Nominal value of the capital, number of shares in capital, their nominal values, privileges attached thereto, if any, and groups of shares in the capital,
d. Names, surnames, titles and nationalities of the managing directors,
e. Form of notices to be made by the company.
In case articles of association of the company does not clearly include aforementioned matters, relevant trade registry shall refuse to register articles of association2. Also, TCC includes provisions that shall be binding if they are stipulated in the articles of association and are as follows:
a. Provisions diverging from the statutory provisions regarding restrictions on the transfer of shares,
b. Granting to the shareholders or the company the right of pre-emption, right of first refusal and option to purchase regarding the shares in the capital,
c. Imposing additional payment obligations, and the form and scope thereof,
d. Imposing ancillary performance obligations, and the form and scope thereof,
e. Provisions granting veto rights to designated shareholders or superior voting rights to certain shareholders in the event of a tie on a general assembly resolution,
f. Penalty provisions that may be applied when the liabilities set forth in the TCC or in the articles of association are not fulfilled at all or in due time,
g. Provisions pertaining to non-compete obligations diverging from the legal provisions,
h. Provisions granting privileged rights as to the invitation to a general assembly meeting,
i. Provisions diverging from the legal provisions regarding decision making at general assembly meetings, voting rights and the calculation of voting rights,
j. Provisions authorizing the assignment of company’s management to a third party,
k. Provisions diverging from the legal provisions regarding the disposal of balance sheet profits,
l. Granting the right to withdraw and terms of its exercise, and the type and the amount of cash payment to be made in such cases,
m. Provisions determining special cases regarding the dismissal of a shareholder from the company,
n. Provisions governing dissolution on grounds other than those specified under the TCC.
Hence, besides the provisions that must be contained in articles of association of a limited company voluntary conditions may also be regulated. Pursuant to preamble of Article 577 of TCC, founders of the company may include terms as they wish into articles of association unless they are not contrary to mandatory provisions. However, in order for these provisions to be binding certain provisions must be included in articles of association. Otherwise, it shall not be binding in terms of company law and it shall not be deemed as a constitutional principle. For instance, obligations such as share transfer restrictions, pre-emption rights, tag along, right to offer, subsidiary payments, can only be set forth under articles of association. If such provisions are regulated apart from articles of association, it can only be enforceable under law of obligations.
However, when regulating voluntary provisions, whether TCC allows regulation of such provisions must be considered since Article 579 of TCC provides that articles of association can only diverge from TCC, only if TCC clearly allows such deviation.
Unlike FTCC, TCC regulates that the restriction of share transfer is only be possible if it is regulated under articles of association. Therefore, parties of the agreement may arrange share transfer restrictions under articles of association which is not set forth under TCC (unless it is not contrary to mandatory provisions).
6. CONCLUSION
Despite TCC allows regulating many topics under articles of association and shareholders’ agreement, existence of mandatory provisions limits shareholders’ opportunity to be flexible when executing shareholders’ agreement and articles of association. In this respect, although shareholders’ agreement may not be enforceable against third parties and may only be accepted as an agreement executed under law of obligations; shareholders’ agreement holds its place as the most preferred agreement due to the fact that it provides flexibility to shareholders and regulates their domestic relations.
FOOTNOTE
1 Due to different implementation of trade registries, articles of association containing provisions which are not allowed to be set forth under articles of association as per TCC, such articles of association shall not have any effect under company law even if they are registered and announced.
2 Trade registries’ implementations may differ in practice.
