Corporate and M&A

Contact: Att. Ecem Cetintilmaz; Erdem & Erdem (Turkey) 

Introduction

Article 491 of Turkish Commercial Code No. 6102[1] (“TCC”) regulates statutory restriction by setting forth that the paid-in registered shares of joint stock companies can be transferred only with the approval of the company; whereas Article 492 enables the restriction of share transfers by the articles of association (“contractual restriction”). Notwithstanding, restriction of a share transfer is possible only under limited and exceptional cases; a transfer cannot be restricted for convenience or merely upon request[2]. The company may refuse the request for approval of the transfer of non-listed registered shares only for an “important reason” specified under the articles of association, or by proposing that it buys such shares, that other shareholders purchase the shares, or that third parties purchase them for their real value at the time of application. This Newsletter article examines the important reasons that a joint stock company can abstain from approving the transfer of non-listed registered shares.

Concept of Important Reason

Whereas it is possible for a company to refuse the request for approval due to an important reason under the articles of association, Article 493/2 of the TCC limits the concept of important reason, not being subject to the numerus clausus principle. Accordingly, provisions of the articles of association regarding the composition of environment of the shareholders constitute an important reason if the refusal of the request for approval in terms of the field of business of the company or the economic independence of the entreprise is justified. Although important reasons are deemed to have not been listed numerus clausus, evaluation criteria for the determination of compliance of important reasons under the law are numerus clausus; joint stock companies may not put forth important reasons based on other points of validity[3].

Taking into consideration that various reasons are listed as important reasons under the articles of association do not automatically make such reasons “important”. Whether or not the reasons listed under the articles of association can be deemed as important reasons in terms of Article 493 of the TCC must be evaluated in legal terms. If a reason is not considered to be important as a result of the evaluation, such restriction is construed as invalid. In order to evaluate if an important reason specified under the articles of association is valid, composition of the environment of the shareholders must be identified as per the articles of association.

The TCC does not list important reasons in terms of the composition of the environment of the shareholders, and there is no high court decision on the subject; consequently, there is no rooted court practice. According to scholar Tekinalp, “Share transfers in closed joint stock companies can be restricted if the limitation of the shareholders to a closed environment will provide benefits in terms of the field of business of the company or serve the economic independence of the company.”[4] Composition of the environment of the shareholders must be strictly linked the field of business and independence of the entreprise.

Within the scope of this main opinion, it is generally accepted that the refusal would be justified for reasons based on professional qualifications and competence, religious, philosophical and political tendency; reasons to prevent share acquisitions of competitors of the company; as well as reasons to prevent change of control in the company.

On the other hand, it is argued that the reasons for familial belonging, reasons based on citizenship, and reasons that prevent share acquisions of legal entities or foreigners would not justify the refusal and, therefore, be invalid.

Scholar Uzel clearly states that “it is extremely clear that a provision of the articles of association that allows the shares to be transferred within an extremely limited envorinment would not be in accord with the structure of joint stock companies.”[5]. Moreover, Tekinalp mentions that an artificial shareholders environment cannot be created under the articles of association; for example, a provision of the articles of association such as “A, B, C, D and E form an environment, and no share transfer can be made to any person other than these.” is invalid. Similarly, he is of the opinion that a provision of the articles of association setting forth that the shares cannot be transferred to those who do not execute a shareholders agreement is also invalid[6].

Common Contractual Restriction Types in Practice

It is very common in practice that shareholders execute shareholders agreements in order to regulate the relationship between each others and between themselves and the company, and that they reflect the provisions thereof to the company’s articles of association. Share transfer restrictions are the main area of regulation between the shareholders. In a multi-shareholder joint stock company, by adding a provision to the articles of association, transfers of shares and registration of the same in the company’s share ledger are made subject to the approval of the board of directors, and it is agreed that the board of directors is entitled to abstain from approving such transfer based on the reasons specified under the articles of association. There are also provisions stating that all other share transfers are invalid, and no share transfer can be alleged towards the company unless approved in accordance with the terms and conditions of the articles of association.

The most common restrictions relate to the composition of the environment of the shareholders, in practice. As stated, above, there is no clear provision in the TCC, nor in high courts’ decisions on share transfer restrictions. Notwithstanding the above, in light of the opinions put forth by the scholars, it is possible to evaluate common examples in practice, as follows:

• Share transfers to the competitors of the company: It is clear that shareholding of the competitors or relevant persons in a company would harm the economic independence of the company. It is accepted that an important reason exists for the company to not approve such a transfer.
• Share transfer to a real person: Although the invalidy of such share transfer restriction is not clearly mentioned by the scholars, one can argue that such a reason is not strictly linked to the field of businesss and independence of the enterprise.
• Share transfer to a company other than the current shareholders of the company, or companies controlled by or under the common control with such shareholders: It is argued that since it allows the shares to be transferred within an extremely limited envorinment, it is not in accord with the structure of joint stock companies.
• Share transfer to those from a specific profession or region: It is accepted that this common type of restriction is in a close relationship with the field of business of joint stock companies. However, what is important is the fact that a person from such profession or region has special knowledge and experience in that field of business of the company. Otherwise, since there is no interest by the company to reject the share transfer, such a reason would not be deemed important.

Legal Remedies in case of Refusal by the Company

As per Article 494/3 of the TCC, if the company does not refuse the transfer within three months as of its receipt of the request for approval, or if the refusal is not justified, it is deemed to have approved the transfer. On the other hand, if the company does not grant approval of the transfer of the share based on the provisions of the articles of association, the company may be sued for the cancellation of the refusal and for registeration of the shareholder in the company’s share ledger. Upon the transfer of registered shares in closed companies, ownership of the shares, and all rights related to the shares, stay with the transferor unless it is registered with the share ledger; therefore, there is no doubt that the transferor is entitled to sue the company. This being said, it is also accepted that the transferee can also bring such claims against the company since the transferee has interest in the transfer of the share.

In the event of such a dispute, the validity of share transfer restrictions under the articles of association shall be evaluated by the judge and, if considered invalid, the court shall resolve for the approval of the share transfer and for the registration of the same in the share ledger.

It is argued that the acceptance of the case, i.e. determination of the unjustness of the refusal, is retroactive. The transferee becomes the shareholder as of the date of its request for approval of the share transfer. If there has been distribution of profits in the interim period, the transferee may, as well, request the compensation of his losses from the company.

Conclusion

Whether or not share transfer restrictions specified under the articles of association of joint stock companies can be deemed as an “important reason”, and therefore, can justify the refusal of the share transfer should be evaluated case by case, in terms of each reason, the company, and the composition of the environment of the shareholders. Provisions of the articles of association listed as important reasons that relate to the composition of the environment of the shareholders constitute an important reason only when they justify the refusal of the request for approval in terms of the field of business of the company, or for the economic independence of the entreprise. In light of this, each reason must be clearly linked to the field of business of the company, or to the economic independence of the entreprise.