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Av. Ali Yurtsever L.L.M

RESTRICTED (TIED) SHARE CERTIFICATES AND THEIR LEGAL STANDING

As noted in previous sections, the core principle in JSCs is anonymity. A JSC, by definition, provides anonymity to its shareholders with loose share transfer regulations. Principle of transferability is the rule and share transfers are not subject to registration and announcement at the trade registry. This allows shareholders of a JSC to easily transfer their shares to third parties without ever giving a formal notification to any third party, and as a result, the only way to effectively determine the current shareholders of any JSC is to physically review the company’s share ledger.

However, this anonymity and the ease of transferability of shares poses a different kind of problem for certain JSCs, especially closed and family owned ones. In such companies, the number of shareholders is quite small, and the company is controlled by a small group of individuals with close ties to each other. Therefore, cooperation among shareholders is of paramount importance for these companies to function. In such cases, this anonymity and ease of transferability may create a problem, as any shareholder can transfer his/her shares to an unrelated third party, which may effectively cripple the company, disrupting the close relationship and understanding between the shareholders.

To prevent this, the law allows for certain restrictions that can be imposed upon share transfers, where the share transfers will only be deemed valid if certain conditions are met. Shares that are subjected to such conditions are called restricted shares, and if these shares are tied to a registered share certificate, then they are called restricted registered share certificates (RRSC).

The provision allowing for such restrictions to be placed upon share transfers in JSCs in noted in Article 490/1 of the TCC, which states that registered shares may be transferred freely unless a restriction is imposed upon such transfer by the law or by the articles of association. Article 492/1 further sets forth that the articles of association may impose that the registered shares may only be transferred with the approval of the company. According to these two provisions, such restrictions may only be imposed upon registered shares of JSCs, which actually makes sense considering the nature and legal standing of bearer shares (see Part-I for further details on bearer shares).

It should be noted here that the presence of a restriction and therefore RRSCs, does not change the legal standing of registered share certificates as securities. These shares should still be transferred in accordance with the rules and procedures mentioned in Part-II. The only difference in the transfer of an RRSC is that there is an additional procedure/rule that must be satisfied in order to ensure the transfer is valid.

TRANSFER OF RESTRICTED SHARES AND POSSIBLE ISSUES

Procedures for Transfer

As noted above, RRSCs are essentially registered share certificates with and additional restriction imposed upon. Therefore, the transfer of RRSCs will still be subject to the general rules and procedures for the transfer of registered shares, meaning that a full endorsement should recorded on the relevant share certificates to be transferred and the actual physical certificate should be handed over (as note in Part-I), and the share transfer should be recorded into the company’s share ledger (as noted in Part-II). However, since these shares are restricted as per Article 490 and 492, the approval of the relevant company should also be obtained in order to finalize the transfer. Accordingly, once the endorsement is recorded and the RRSC is handed over to the new owner, both the transferor and the transferee of the shares should submit an application to the company’s Board of Directors for the approval of this share transfer and the subsequent recording of it to the share ledger.

Board’s Refusal to Approve the Transfer

Before the new Turkish Commercial Code was implemented, the old TCC allowed the company (and therefore the company’s BoD) to refuse the transfers of RRSCs without justification. This, unsurprisingly, created a lot of problems where the BoDs refused to approve share transfers arbitrarily. With the changes in the new TCC however, the BoD may only refuse a RRSC transfer based on a substantial reason set forth at the company’s articles of association, or the BoD may offer to buy the relevant RRSCs on behalf of the company, the other shareholders or third parties.

It should be noted here that the phrase “substantial reasons” is not clearly defined in the TCC and is open to interpretation. The important thing here is that such substantial reasons (whatever they may be as determined by the company) should be set forth in an exhaustive manner at the company’s articles of association (these will be reviewed in detail in separate article).

LEGAL RAMIFICATIONS OF BOD’S REFUSAL

As mentioned above, in order to impose a restriction on a share transfer, the imposed rule should tie the validity of the transfer of the relevant share to a specific action (such as an approval/consent), and in the absence of such action, should deem the transfer transaction invalid. So, if a JSC’s articles of association contains a provision stating that the transfer of registered shares shall be subject to the approval of the company as per Article 490 and 492 of the TCC (by also defining the “substantial reasons” where the company may refuse a share transfer), this will constitute a valid restriction on share transfers.

In such a case, if the BoD of the relevant company refuses to approve the transfer of RRSCs due to one of the reasons noted in the articles of association, then the ownership of the shares and the associated rights will not be transferred from the transferor (the seller) to the transferee (the buyer), and therefore both the ownership and the associated rights of these shares will continue to vest in the transferor, as per Article 494 of the TCC. In more simpler terms, unless the BoD approves the share transfer of RRSCs, the transfer transaction will be deemed invalid and will have no legal consequences.

Av. Emir Aksoy LL.M, LL.M. IP

Legal Liabilities of Board Members

Liabilities of Board members are regulated under Article 553 of TCC. Accordingly, board members may only be responsible of the damages caused to the company to it’s shareholders and to the creditors of the company (related third parties) in case they fail to fulfill their obligations arising from the law and articles of association at their own fault. Two conditions mentioned above should co-exist to hold the Board Members liable for their acts.

Pursuant to Article 553/2, if the management function of the company were partially or completely delegated, the Board would be released of their duty to the extent of the delegated function. Liability can only arise in case the assignee is appointed without due care.

According to the Article 553/3 of the TCC, Board members cannot be held liable from the breaches of the law or articles of association beyond their control. These breaches cannot be justified by duty of observation and care.

As per Article 555/1 of the TCC, the Company and every shareholder bear the right to claim damages from the board members due to the sustained loss of the Company. Shareholders can only request the damages to be paid to the Company.

Differentiated Liability

Differentiated Liability is applied to the damages claimed against Board Members. It is defined in Article 557 of the TCC “In case more than one person is liable to compensate for the same damage, each of them, regarding the fault and the circumstance, to the extent the damage can be attributed personally, shall be jointly liable of the damage with the others. The claimant can sue more than one liable person for the entire damage and can ask the judge to determine the damage liability of each of the defendants in the same case.” Avoiding liability as a board member is possible by not taking on any signatory authority and by getting your vote recorded in the minutes to be on the safe side in case the resolution that you voted against results in damage to the company.

Statue of Limitations

Statue of Limitation is regulated in Article 560 of the TCC “The right to claim damages prescribes two years after the claimant finds out about the damage and who the responsible individuals are and at any discretion five years after the damaging action has occurred. If the act is penal and the Turkish Criminal Law stipulates a longer period for limitation of action, this limitation term is applied to the claim for damages”. Accordingly, legal liabilities of board members shall be limited with these statue limitations and shall also be subjected to the above mentioned rules.

Tags: Board Members, Commercial Law, Company Formation Turkey, Istanbul Lawyer, joint stock company, JSC, Liability of Board Members, limited liability company, LLC, Turkey Law, Turkish Commercial law, Turkish Law

As part of our share transfer and corporate law series, we already analyzed the rules and procedures of share transfers in Joint Stock Companies (Part-I) and the role of share ledgers in such transactions (Part-II). Due to the complex nature of these transactions, we also created an infographic in order to make the information more accessible and easily understandable. This infographic provides a visual summary of share transfers in Turkey and the contents examined in detail in the relevant articles and aims to help our clients better understand the complexities of the procedures involved.

THE ROLE OF COMPANY SHARE LEDGERS IN SHARE TRANSFERS IN TURKEY

Av. Ali Yurtsever L.L.M

a) The Problem of Attaining Shareholder Status in a JSC

Owning shares in a JSC and claiming the shareholder title before the company are two different things. This may be kind of confusing, as in order to become a shareholder of a specific company, one must first acquire shares of that company. Without shares, there can be no shareholder status. However, the simple act of acquiring shares will not be enough to claim shareholder status before a company.

The issue arises from the definition and the role of the share ledgers of JSCs. Article 499 TCC sets forth that, only those who are recorded at the share ledger as share owners shall be deemed as official shareholders of the company. As a consequence of such procedure, share owners who are not recorded at the company share ledger will not attain the shareholder status within the company, even if they acquired the shares lawfully. Hence, if a share owner cannot claim shareholder status before the company, then that share owner will not be able to exercise his/her rights arising from the shares towards the company. Meaning, the share owner will not be able to cast votes as a proper shareholder at the company’s general assembly.

b) The Legal Standing of Share Ledgers & Notice of Record

According to Article 375 TCC, the share ledger is a company book kept by the company’s board of directors, and it is one of the compulsory company books noted in Article 64 TCC. Meaning, all JSCs and therefore their board of directors, are required by the law to duly keep a share ledger and record the shareholders of the company into that ledger. Furthermore, the board of directors have an obligation to keep the records of the share ledger in a truthful and lawful manner and shall be liable for any discrepancies within the records.

It is important to note that a share transfer can only be recorded into the share ledger if it can be definitively proven that it conforms to all rules and procedures set forth at the law. This means that share transfers cannot be recorded into the share ledger if they are not duly executed. This seems like a pretty straightforward procedure. However, as an indirect consequence of this rule, it is accepted that the board of directors of a JSC cannot record a share transfer ex officio, unless the share transfer transaction is notified to the company. Therefore, it is important to submit a notice to the relevant company informing the share transfer along with a request to record such share transfer into the share ledger. This notice can be done in various ways (mails, e-mails, official notices etc.) as the Law does not provide specific procedures for such notifications.

III. BOARD’S REFUSAL TO RECORD SHARE TRANSFERS

In connection with the above noted mechanism, a company’s board of directors have the right and duty to inspect and review a share transfer notified by the relevant shareholders, as per Articles 499 and 686. In order to determine whether or not the notified transfer is lawful, the board will have to first review the transfer procedures and documents, and then determine whether the transfer conforms to the rules and procedures set forth by the law. Therefore, this inspection procedure ties into the above mentioned obligation of the board to not record a share transfer if that transfer is not duly executed.

Accordingly, the board of directors of a JSC may refuse to record the share transfer between a former shareholder of the company and a third party, if it finds upon inspection that such transfer transaction was not executed properly and in accordance with the procedures set forth at the law. In case the board refuses to record the share transfer into the share ledger the new holder of the relevant shares (the party that acquired the shares) shall not be able to claim shareholder title and therefore shall not be able to use the voting rights attached to the shares (as noted above at section II.a). However, it is important to note at this point that the records in the share ledgers do no effect the validity of the share transfers, but only effect whether such share transfers bestows the shareholder status before the company.

IV. REMEDIES AGAINST BOARD’S REFUSAL TO RECORD

As mentioned above, the board of directors of a JSC may refuse to record the share transfers into the share ledger. Such refusal may be based upon a justifiable reason in cases where the transfer procedure is not executed properly and in accordance with the rules and procedures set forth by the law. However, it is also possible for the board to refuse recording a share transfer without any justification (even if the share transfer procedures were duly executed). Such refusal by the board will of course be deemed as an unlawful action. Unfortunately, since the daily management of the company is handled by the board of directors, the board is the body solely responsible for keeping the company books. Therefore, the only way to force the board to record a duly executed share transfer, is to file a lawsuit at the competent commercial court. If the commercial court accepts the claims and rules for the share transfer be recorded at the company ledger, such decision by the board shall be deemed as a board of directors decision.

V. CONCLUSION

As also outlined in Part-I, share transfers in JSC are quite complex procedures with numerous rules and procedures. Recording such transfers into the company’s share ledger is one of such procedures, if not one of the most important ones. It has implications for both the new shareholder and the members of the board of directors. Without such records in the share ledger, it will not be possible for a share owner to claim shareholder title and use the voting rights attached to the shares at the general assembly meetings. As for the liabilities of the board of directors members, the board have a duty and obligation to inspect and verify the share transfers and to refuse recording such if they are not duly executed. If the board wrongfully records a non-conforming share transfer into the ledger, then the board members shall be liable for the damages arising from that wrongful recording. It is therefore highly important to execute the share transfers in accordance with the law and to inspect such transfer with the utmost care in order to avoid any possible complications. Due to these requirements, the records of share ledgers in share transfers in Turkey are highly important. For further information and assistance regarding the matter, please do not hesitate to contact us here.

SHARE TRANSFERS IN TURKEY – PART I

Av. Ali Yurtsever L.L.M

Share transfer Procedures

The TCC sets forth that the principle of transferability shall be applicable to shares of JSCs. This means that as a rule, the shares of JSCs can be freely transferred by shareholders of the relevant company to third parties without any prior permission and/or approval of any other person and/or entity. There are, of course, certain exceptions to this rule where the transfers can be limited voluntarily or due to certain provisions set forth at the law, but that is a different topic to be reviewed in a separate article. Although the principle of transferability allows for the transfer of shares, such share transfers are still subject to certain procedures, and these procedures vary for (a) shares without any issued certificate, (b) duly issued share certificates, and (c) temporary share certificates:

a. Shares Without Any Issued Share Certificate (Naked Shares)

It should be noted that according to the Turkish Company Law provisions, joint stock companies that are not publicly traded are not required to issue share certificates and can just issue their shares as “naked shares”. Of course the TCC has certain provisions where in certain situations where the non-public JSCs are required to issue share certificates (such as the requirement to issue bearer shares within three months from the date of full payment of share capitals, if the company articles of association sets forth that the company’s shares shall be issued as bearer shares). But other than these specific instances, the non-public JSCs are not really required to issue any share certificates for their shares.

Due to the principle of transferability, naked shares can also be transferred freely, albeit subject to certain procedures. Unfortunately, the TCC does not have any specific provisions regarding the transfer of naked shares (whereas there are separate provisions for the transfers of bearer and registered share certificates). Therefore, the transfer of naked shares shall be governed by the general rules of asset transfers, which are regulated under the Turkish Code of Obligations (TCO). It should be noted at this point that the procedures for transfer of a naked share will differ, depending on whether or not the corresponding capital of the relevant shares is fully paid.

Accordingly, if the capital amount of the respective shares to be transferred is fully paid, the shares can be transferred in accordance with the provisions of the assignment of claims, as stated in Article 183 TCO. Whereas for shares for which the committed capitals are not fully paid, the provisions of assignment of claims will not be applicable, as the transfer of such shares will also mean the transfer of debt (the debt of company capital committed by the shareholder of the company) to a third party. Therefore, in this case, the share transfer shall be subject to the debt transfer procedures as set forth at Article 195 TCO and to the approval of the company as per Article 491 TCC.

b. Shares Tied to Share Certificates

Article 484 TCC sets forth that JSCs can issue bearer or registered share certificates for the company shares. Although these are not mandatory, as mentioned above, it is still preferable to issue share certificates for company shares to establish proof of ownership and to ensure the safety of the shares. All company share certificates are deemed as securities (although there is dispute regarding the security status of registered share certificates) and the transfer of such shall therefore be subject to the rules and provisions of securities. However, that the rules and procedures for share transfers differ depending on whether the issued share certificates are (i) bearer share certificates, or (ii) registered share certificates:

i. Bearer Share Certificates

This type of share certificate bestows the ownership of the respective share to whomever holds the physical share certificate in his/her possession (hence the name bearer). A bearer share certificate will not have the name of the shareholder printed on it and is therefore seen as the more private alternative to registered share certificates (as it is fairly easy to hide the identity of a shareholder holding a bearer share). Due to this nature of bearer share certificates, the procedures for transfer for such shares are quite simple. Since bearer shares bestow the power of the relevant share certificates to whomever holds the physical share certificate in his/her possession, the transfer of these share certificates can be done with a simple handover of the actual physical share certificate to the relevant third party. There are no requirements to notify and/or to obtain the approval of the company, or to register the transfer into the company’s shareholder ledger.

ii. Registered Share Certificates

As noted above, there is a dispute regarding the status of registered share certificates and whether or not they should be deemed as securities. The issue arises from the provision set forth at Article 490 TCC, which states that registered share certificates may be transferred only by the handover of the actual physical share certificate containing an endorsement regarding the transfer. The disputes and the debates regarding this issue is quite complex and even the Court of Appeals have conflicting decisions. It would therefore be fairly lengthy and time consuming to discuss this issue here. Instead, the safest way to finalize a transfer to avoid any possible complications, will be analyzed below.

The disputes regarding the procedures for transfer of registered shares are mainly focused on whether or not an endorsement is required to be written on the certificate in order for the transfer to be valid. To avoid these issues, it is crucial that a full endorsement be recorded on the relevant share certificates to be transferred and the actual physical certificate (containing the endorsement) handed over to the receiving third party. It is also highly important that the transferring and the receiving party sign a share transfer agreement notarized before a public notary, and transfers of registered share certificates should also be recorded to the company’s shareholder ledger, which will be analyzed in further detail in a separate article.

c. Temporary Share Certificates

Temporary share certificates are exactly what their name suggests, they are temporary certificates issued by a company, before issuing the actual share certificates (due to certain restrictions where the company is unable to issue the actual share certificates at a certain time). However, that temporary share certificates may only be issued if the company shares are deemed as registered shares at the relevant company documents (articles of association). So, for companies with bearer shares, it will not be possible to issue a temporary share certificate.

In any case, there are no separate procedures for transfers of temporary share certificate, as Article 486 TCC sets forth that rules and procedures governing the registered shares shall also be applicable to the temporary share certificates. Therefore, the procedures for temporary share certificate transfers shall be the same as the procedures for transfers of registered shares as mentioned above at section b(ii).

Conclusion

As noted above, the rules and procedures governing share transfers in JSC share transfers in Turkey can be quite complex and may differ depending on the nature of the shares of a specific company. It is therefore highly recommended for companies and shareholders to consult a professional before proceeding with such transactions to avoid any possible complications in the future. Please also note that, as the title suggests, this is part 1 of our share transfers and corporate structure series, and other issues concerning share transfers, the role of the board of directors and company shareholder ledgers in these transfers shall be discussed in separate articles. For further information and assistance regarding the matter, please do not hesitate to contact us 

II. COMPANY TYPES

Although the Law does allow for the incorporation of “personal companies” (where company owners are fully liable with their personal assets for any and all company debts), capital companies are the most common form of business entities in Turkey utilized by both local and foreign investors. Investors may either choose to incorporate a new company or participate into an already existing capital company (either via merger or acquisition). It should be noted here again that full ownership (100%) of Turkish corporate entities by foreign (non-resident) companies and/or foreigner individuals is permitted. Under Turkish law, the two types of capital companies are noted as joint stock companies (‘Anonim Şirket’ – AS in Turkey) and limited liability companies (‘Limited Şirket’ – LTD in Turkey).

a) Limited Liability Companies

According to Article 573 of the Turkish Commercial Code No. 6102 (the TCC), a limited liability company can be incorporated by a only one (1) shareholder. It is also possible to convert a limited liability company previously established by more than one shareholder, into a LTD with a sole shareholder, however this conversion shall be notified to the relevant trade registry for registration and announcement. The minimum capital requirement for LTD companies is TRL 10.000.-, and this capital amount will need to be paid in full within 24 months as from the date of incorporation (no upfront payment of company capital is required at the incorporation and registration stage).

It should be noted that in LTD companies, the liabilities of shareholders differ from those in Joint Stock Companies. Accordingly, the liabilities of the shareholders of an LTD are limited with the capital commitment amount for commercial liabilities. However, the shareholders and the management are also liable for amounts owed by the company to government authorities (public debts) with their personal assets for taxes, duties and charges that cannot be collected from the Company (the liabilities are assigned depending on the ratio of the shares of each shareholder).

b) Joint Stock Companies

According to the provisions of the TCC, the minimum capital requirement for Joint Stock Companies (JSC) is TRL 50.000 and at least ¼ of the total company capital is required to paid (deposited) upfront during the incorporation stage (unlike the LTD’s where the shareholders are not required to pay any company capital during incorporation). Whereas the remaining ¾ of the company capital shall need to be paid in full within 24 months from the date of incorporation.

JSCs can also be incorporated by one (1) shareholder. Shareholders could be non-resident companies or foreigner individuals. Foreign investors are permitted to own 100% of the company (similar to LTDs). However, unlike an LTD company, the liabilities of the shareholders of a JSC shall be limited only with their respective capital commitment amounts and therefore shall have no personal liability (even for public debts).

III. FORMATION PROCEDURES

Although it may vary due to the type of entity and other specifications with respect to the investors; the procedures for incorporation are generally quite complex, involving many steps and required documents. Accordingly, these steps can be briefly summarized as below (these procedures may differ depending on the company type, for example, LTD’s no longer require a capital advance blockade account prior to the incorporation):

• Obtaining and legalizing shareholder identity documentation (for foreign individuals);
• Obtaining an investment decision from the foreign company (if a foreign corporation will become a shareholder of the Turkish company) along with an apostille certificate dully issued by the relevant authority (this apostilled document will need to be translated into Turkish and the Turkish translation will also need to be notarized);
• Opening a temporary capital advance blockade account at a bank (for JSCs), which can be tricky as most banks in Turkey have adopted the Know Your Client principles and will therefore require the shareholders/representatives to be present at the bank during account opening;
• Getting a draft office lease contract for proving company address;
• Drafting of certificate of incorporation (Article of Association) and the submission of all the relevant information and documents via the online registry system;
• Registration to Chamber of Commerce Trade Registry;
• Appointment of company management;
• Notarizing of company books (legal and accounting);
• Registration to tax office (following on-site visit by tax officials).  

IV. CONCLUSION

As noted above, the requirements and procedures for company incorporation in Turkey can be quite complex, especially for foreign individuals and corporations. The procedure involves the submission of numerous different documents, of which some needs to be obtained from abroad with apostille verifications. There are also certain notarization requirements for certain documents. Furthermore, the trade registry online system can be quite confusing to inexperienced applicants, especially if they are foreigners. Therefore, it is highly recommended to consult professionals before incorporating a company as any mistake made during the incorporation stage can prove to be much more difficult to rectify once the incorporation is finalized, which may cause the company to suffer certain losses and damages (including government fines, extra tax duties, extra fees for amendments to be registered and published at the registry etc.) For further information and assistance regarding the matter, please do not hesitate to contact us here.