1. INTRODUCTION
A share in joint-stock companies represents a part of the share capital and rights and responsibilities of the shareholders. In principle, the principle of equity is applied in the joint stock companies and each share grants the equal rights and imposes obligations to each shareholder as per such principle. Pursuant to this principle, the shareholders exercises their right of casting a vote which is granted under Article 434 of the Turkish Commercial Law numbered 6102 (“TCC”) considering their percentage of shares in the share capital, or in other words, “total nominal value” thereof. Thus, the shareholders have the right of casting a vote depending on the percentage of their partnership and the risks of which are borne in the company.
However, the rights among shareholders may be allocated in different ways by the addition of relevant provisions in the company’s Articles of Association. As indicated under Article 478 of TCC, privileges may be granted to shares through the assignment of superior rights such as, dividends, liquidation shares, pre-emption and voting rights, or the designation of any other shareholding rights not stated under the law. Such privileges can be created in three (3) groups; (i) property rights (ii) voting rights and (iii) representation in the managing body of the company and the privilege on the voting rights allocate greater voting rights when compared to shareholders under the same conditions.
The granting of privileges on shares and the examination of such rights under the TCC, Capital Market Law No. 6362 (“CML”), and any other relevant legislation shall be detailed in this article.
2. Examination Under TCC
2.1. Privilege in Voting Rights in General
In general principal pursuant to Article 434 of the TCC, shareholders can exercise their voting rights in proportion to their percentage of shares, or in other words, the “total nominal value” thereof. However, granting privileges to voting rights under Article 479 of the TCC constitutes an exception to the aforementioned rule. As stated in Article 478 of the TCC, privileges in voting rights may be granted during the establishment process of the company or by subsequent amendments made in the Articles of Association. It shall not be sufficient to write that a privilege is granted to a group of shares in the Articles of Association provided that the subject and scope of such a privilege should be clearly expressed. In addition, the issuance of any privileged shares by the Board of Directors in a joint-stock company, which adopts the registered capital system, should be subject to prior authorization of the Board of Directors to implement privileged shares under the Articles of Association.
The privilege on voting rights can be effectuated by granting different number rights for the shares that have equal nominal value. Therefore, granting equal voting rights to shares with different nominal values are not permitted under the TCC. The legal justification of the respective article in the TCC states that, such a prohibition is written to prevent fraud against legal restrictions with respect to privileged voting rights and leverage restrictions, to avoid confusion and difficulty during the practice of Article 479/2 of the TCC which indicates a maximum number of votes that can be designated to a single share is set.
In the legal justification of Article 479 of the TCC, some examples are provided to explain under which circumstances privileges in voting rights may and may not be granted. In the first example, there are two (2) group shares comprised of Group A, having a nominal value of one (1) TL for each share, and Group B, having a nominal value of five (5) TL for each share. In this case, it is stated in the legal justification that Group A, which holds one (1) vote per share, cannot be granted additional voting right privileges. In another scenario under the aforementioned legal justification, it is demonstrated that a privilege can be established by granting the different number of voting rights to shares having different nominal values. In such an instance, Group A, having a nominal value of one (1) TL per share, and Group B, having a nominal value of three (3) TL per share, are created. Six (6) voting rights may be granted to each share in Group B. Under ordinary circumstances, even though each of Group B’s shares are expected to have three (3) voting rights per share according to the principle of voting rights in proportion to nominal value, the allocation of six (6) voting rights per each Group B share refers to a voting right privilege.
2.2. Restrictions Regarding the Privilege to Be Granted in Voting Rights
Paragraph 2 of Article 479 of the TCC determines the limits of the privilege granted in voting rights and states that the maximum number of voting rights to be granted to each share is limited to fifteen (15) votes. Article 434/1 of the TCC concerning the designating the calculation of voting rights in line with their nominal values, shall not be applicable as stated in the legal justification of Article 479, Paragraph 2. However, it should be noted that the limitation in regard to the upper limit of fifteen (15) votes per each share should only be considered for ordinary shares.
However, the relevant provision of TCC states that the maximum limit corresponding to fifteen (15) votes per each share should not be applicable in two (2) cases. The first case is one where there exist corporate requirements, the second case is proving the valid reasons. Both cases must be affirmed by a court decision and the Commercial Court, where the registered office of the company is located, has been authorized to decide in such matter. When there is a requirement for institutionalization, a relevant plan must be submitted to the court. It is rare in the legal doctrine for a court to find an affirmative decision in accordance with the legal justification for the plans as they scrutinize the plan through a narrow and strict lens. Furthermore, Article 479 intends to prevent the abuse of this exception by granting authority to the court to repeal the exception in cases where it is evident that the institutionalization will not occur or the valid reasons are no longer compelling.
In addition to imposing limitations on the maximum number of voting rights in privileged shares, it should be noted that, under the last paragraph of Article 479 of the TCC, the privileged voting rights shall be ineffective and shall not be exercised in the general assembly meetings regarding the filing on release and liability actions, and amendments on the Articles of Association. In such circumstances, privileged shares must have equal voting rights with the other ordinary shares and the voting rights must be exercised in proportion to their nominal values.
In addition to above mentioned information, other provisions of the TCC, regarding the meeting and resolution quorums in the general assembly, should be examined carefully during the creation of shares having privileged voting rights.
2.3. General Assembly Meeting and Resolution Quorums under the TCC
As per Article 418 of the TCC which states the meeting and resolution quorums in the general assembly, unless the law or Articles of Association sets a higher quorum, the general assembly can only convene with the presence of shareholders or their representatives representing at least one forth (1/4) of company’s total share capital and the resolutions can be adopted with the majority of the votes at the meeting.
Paragraph 3 of Article 421 of the TCC which governing the increased quorums asserts a particular regulation and only quorum regarding the decisions regulated without identifying meeting quorum. Under this provision, it is required to adopt the following three (3) clauses with the affirmative votes of the shareholders or their representatives representing at least seventy five percent (75%) of the share capital: (i) changing the scope of the company entirely, (ii) creating privileged shares, and (iii) restricting the transfer of the registered shares.
In light of the foregoing, as per item (b) of the paragraph 3 of Article 421 of the TCC increased quorums shall be applicable to the amendments of Articles of Association with regard to the creation of privileged shares. Hence, it should be noted that any decision with respect to amending the Articles of Association to create privileged shares must be taken with the affirmative votes of the shareholders or their representatives representing at least seventy five percent (%75) of the total share capital. This provision is relatively mandatory. Therefore, the quorum can only be amended with a higher quorum to be designated under the Articles of Association.
2.4. Special Assembly of Privileged Shareholders
The Special Assembly of the privileged shareholders (“Special Assembly”) is composed of shareholders having privileged shares and is not authorized to represent the company against third persons. Each of the privileged share groups has its own Special Assembly. The Special Assembly shall be formed automatically provided that the privilege shall be granted under the Article of Association by law. Therefore, the Special Assembly may not be abolished by way of amending the Articles of Association. Hence, the Special Assembly shall automatically be formed upon the creation of any voting right privileges to the shares.
In joint-stock companies where shares having privileged voting rights exist, privileged shareholders must also approve the several decisions under some circumstances in order to execute the decisions under Article 454 of the TCC. Thus, the Special Assembly must grant its approval in the following matters as stated in the relevant provision of the TCC:
i General assembly resolutions regarding the amendment of Articles of Association, which restricts the rights of the privileged shareholders;
ii General assembly resolutions regarding the authorization of board of directors to increase the share capital under registered capital system; and
iii Board of director’s resolutions regarding the capital increase under the registered capital system.
Procedures and principles concerning the invitation of the Special Assembly meeting are set forth under Article 454 of the TCC. In the event that respective shareholders do not convene following the invitation, the approval will be deemed to be given by the Special Assembly. The Special Assembly will convene with the majority of sixty percent (60%) of the share capital representing the privileged shares and will take its resolutions with the majority of the shares representing in the meeting. Attendance of the ministry representative in such meetings is also required. The Special Assembly is not required to convene in cases when the privileged shareholders or their representatives have previously granted their affirmative votes in the general assembly meeting regarding the amendment of the Articles of Association.
3. Review Under CML and Relevant Respective Legislation
Joint-stock companies whose shares have been offered or considered to be offered to the public are subject to the CML. Article 23 of the CML sets forth a provision concerning the privileges. According to this Article, “create privileges or amend the content or subject of existing privileges.” in public joint-stock companies are considered “significant transactions” under the CML.
Pursuant to paragraph 6 of Article 29 of the CML, unless higher quorums are designated under the Articles of Association, the resolutions regarding the “significant transactions” shall be taken with the affirmative votes of the two-thirds (2/3) of shares having the voting rights and represented in the general assembly of the company without any requirement for meeting quorum. However; in the event that at least half (1/2) of the shares having voting rights are present in the general assembly meeting, resolutions can be taken with the simple majority of those present in the general assembly meeting, unless higher quorums are stated in the Articles of Association. Provisions diminishing the quorums stated in the Articles of Association are considered invalid.
Capital Markets Board (“Board”) is authorized to set forth the procedures and principles on enforcement of “significant transactions” and the adoption of decisions concerning such transactions. Hence, a provision concerning shares having the privileged voting rights is stated under Article 1.4.2 of Annex-1 of the Communiqué on Corporate Governance numbered II- 17.1. The provision is as follows:
Privileges regarding the voting rights should be avoided. In case there is a privilege in the voting rights, the privileges in a feature to prevent the holders of publicly traded shares from being represented at the board of directors shall in principle be revoked.
In light of this Article, the Board does not encourage the establishment of privileges in voting rights and contends that all circumstances that may prevent the representation in management have already been removed.
4. Conclusion
As a general rule, shareholders exercise their voting rights in proportion to their share percentages. However, different number of voting rights may be designated to the shares having the same nominal value by asserting a provision into the Articles of Association, provided that one share may have a maximum number of fifteen (15) votes. According to Article 421/3 of the TCC, resolutions with regard to amending the Articles of Association and the creation of privileged shares shall be adopted with the affirmative votes of the shareholders representing at least seventy-five percent (75%) of the share capital of the company.
Additionally, resolutions with respect to amending the Articles of Association regarding the establishment of preferential voting rights in publicly-held joint-stock companies shall be adopted with the affirmative votes of the twothirds (2/3) of shares having the voting rights and represented in the general assembly of the company without any requirement of meeting quorum. However, in the event of the presence of at least half (1/2) of the shares in the general assembly meeting, resolutions can be taken with the simple majority of those present in the meeting, as long as higher quorums are not stated under the company’s Articles of Association.
Furthermore, even though the respective legislation enables establishment of privilege with regard to voting rights, the Board does not encourage or support establishment of such privileges.
