Key Insights from the Constitutional Court: Share Transfer Legitimacy in Joint Stock Companies

image representing the constitutional court ruling and its impact on share transfers in joint stock companies in Turkey

In a time of heightened scrutiny over its authority, the Turkish Constitutional Court rendered a landmark decision on 14.09.2023, significantly impacting commercial and corporate law, and especially the share transfers in joint stock companies in Turkey. Central to this ruling are the measures applicable to legal entities and critical interventions in property rights, with a particular focus on the transfer of shares in joint-stock companies. The heart of the debate revolves around whether endorsement and delivery alone suffice for transferring shares. This decision, notably impacting share transfers and property rights, is poised to have extensive repercussions in the realms of commercial and corporate law.

This article aims to dissect the Constitutional Court’s pivotal ruling concerning YK Law Partnership and its partners. We delve into the decision’s ramifications on property rights, the nuances of share transfer in joint-stock companies, and its alignment with the Turkish Commercial Code. A thorough understanding of the involved parties’ claims, judicial approaches, and the Court’s assessments is crucial in grasping the depth and breadth of this decision’s influence on Turkish legal jurisprudence. We will explore the decision’s structure and key themes to provide a comprehensive analysis.

I. The Constitutional Court’s Decision: Context and Legal Background

This landmark case before the Turkish Constitutional Court arose from the tumultuous aftermath of the July 15th coup attempt. Central to the dispute are allegations of property rights violations during the transfer of shares in a joint-stock company, specifically, Karbon Yıldırım Consulting Services Joint Stock Company, linked to YK Law Partnership partners C.Y. and M.K. The focal point is a prime real estate in Istanbul’s Astoria building, owned by this company.

The controversy began with the purchase of this real estate by the Applicant, executed through acquiring shares in the aforementioned company. According to a decision dated 07.04.2016 by the company’s board, these shares were endorsed and delivered to the Applicant and his sister, ostensibly transferring ownership of the company.

Following a request by the Istanbul Chief Public Prosecutor’s Office on 22.07.2016, the Istanbul 9th Criminal Peace Judgeship issued arrest warrants for M.K. and C.Y. on charges of affiliating with a terrorist organization. This led to a significant turn of events, including a change in the company’s name to Karabulut Yıldırım Consulting Services Inc. and a reshuffle in its Board of Directors, with the Applicant and his sister stepping in with the extraordinary general assembly decision dated 28.09.2016, which was published in the official gazette dated 10.10.2016.

The coup attempt’s aftermath saw a range of measures imposed on the company, including asset confiscation and the appointment of trustees. These developments underpinned the Applicant’s appeal to the Constitutional Court, claiming a breach of property rights. This case has thus garnered significant attention within the Turkish legal community, raising critical questions about the protection of property rights and the legal framework governing share transfers in joint-stock companies.

II. Overview of the Applicant’s Claims

In the pivotal case before the Constitutional Court, the Applicant argued the legality of share transfer within Karbon Yıldırım Consulting Services Joint Stock Company. He maintained that the transfer of shares to himself and his sister in 2016 was conducted in strict compliance with the provisions of the Turkish Commercial Code. This transfer not only shifted all of the company’s shares to them but also led to a consequential change in the composition of the company’s Board of Directors.

The Applicant further contended that the subsequent measures enacted upon the company, including asset seizure and administrative control, were in direct violation of constitutional safeguards protecting property rights. He asserted that since the share transfer and board restructuring were executed lawfully, the imposition of these measures was not only unwarranted but also unjust, particularly towards the new shareholders – himself and his sister.

III. Perspective of the Ministry

The Ministry, in its submission to the Constitutional Court, presented a contrasting viewpoint to the Applicant’s assertions. Central to the Ministry’s argument was the legitimacy and necessity of the actions taken against the assets of Karbon Yıldırım Consulting Services Joint Stock Company. These actions, including the assignment of the Savings Deposit Insurance Fund (TMSF) as the company’s trustee, were framed as crucial measures within the broader scope of investigating the activities of FETÖ/PDY.

Furthermore, the Ministry underscored that the pivotal changes in the company’s name and its board of directors occurred post-July 15th coup attempt. This timing raised questions about the authenticity of the share transfer to the Applicant and his sister, as there was no prior official record validating this transfer. This absence, according to the Ministry, rendered the transfer illegitimate, undermining the Applicant’s claim to victim status in this context. By highlighting these factors, the Ministry sought to challenge both the legal basis of the Applicant’s relationship with the company and the validity of the share transfer under Turkish law.

IV. The Constitutional Court’s Analysis: Assessing the Validity of Share Transfers in Joint Stock Companies

The Constitutional Court undertook a comprehensive review of the share transfer transactions and their implications on alleged property rights violations. Central to the Court’s analysis was the timing of the Extraordinary General Assembly’s decision on September 28, 2016. The Court noted that this decision, as well as the legal documentation of the share transfer, materialized after the July 15th coup attempt, indicating no prior legal record of the transaction..

In its deliberation, the Court affirmed that until the official announcement in the Turkish Trade Registry Gazette on October 10, 2016, M.K. and C.Y. were recognized as the sole shareholders in all public records. The critical question, therefore, revolved around the legitimacy and the effective date of the transfer of share certificates to the Applicant and his sister.

The Court clarified its limited jurisdiction in this matter, asserting that its role does not extend to adjudicating the precise methods of transferring shares in joint-stock companies or the validity of specific share transfers. Instead, its focus was on assessing the arbitrariness of public authorities’ interpretation of these transactions.

In its arbitrariness review, the Constitutional Court, referring to the fact that the legal documents showing the change of partnership were dated after the coup attempt and that there was no official share transfer agreement prior to this date, concluded that the public authorities’ belief that M.K. and C.Y. were the sole shareholders of the company was not arbitrary or baseless.

The Constitutional Court highlighted contradictions in the Applicant’s assertions. The Court observed that although the company’s share certificates were endorsed and logged into the share ledger as early as 07.04.2016, there was a significant delay—nearly six months—before convening the general assembly. Furthermore, the Court found it incongruous that the individuals, known to be under arrest, maintained their roles in the company’s management for an extended period. These inconsistencies raised questions about the authenticity of the share transfer process and the validity of the Applicant’s claims.

Given these observations, the Court entertained the possibility that the share acquisition by the Applicant and his sister might have been a facade, which did not constitute an arbitrary application of measures by public authorities. The Court underscored the contrast between the formal requirements for real estate transactions and the less stringent norms for share transfers, indicating the impossibility of retroactively validating real estate transactions and noted the following:

“it is necessary to consider that while the real estate promise of sale agreement must be conducted at the notary and the real estate sale agreement at the land registry office, on the other hand, the transfer of shares can be conducted outside official authorities through endorsement, thus the aforementioned first transactions (sales and sales promise) cannot be retroactively arranged”

In conclusion, the Constitutional Court conducted an in-depth evaluation of the validity of the share acquisition by the Applicant and his sister and its implications on property rights. The Court ultimately determined that the Applicant’s property rights were not unjustly violated, upholding the legality of the public authorities’ actions..

V. Implications of the Constitutional Court’s Decision on Share Transfer Validity and Evidentiary Burdens

The Constitutional Court’s ruling provides crucial insights into the legal validity of share transfer transactions within joint-stock companies and underscores the judicial scrutiny required, particularly concerning the burden of proof. This judgment serves as a pivotal guideline in addressing potential fictitious transactions in the context of share transfers.

As we have examined in detail in our previous articles, the Turkish Commercial Code (TCC) defines the legal framework for the transfer of shares in joint stock companies. The TCC enshrines the principle of transferability as a cornerstone for share transactions, allowing shareholders to freely transfer their shares to third parties without prior approvals, subject to legal limitations delineated in the TCC (refer to our detailed analysis on these restrictions)

Under TCC regulations, the transfer of share certificates is effectuated through endorsement by the seller and physical delivery to the buyer. This transfer must be recorded in the company’s share ledger for the acquirer to officially assume shareholder status (for an in-depth review of share ledger registration processes, see our dedicated article).

Given these TCC provisions, the Constitutional Court’s decision is poised to significantly influence the legitimacy and scrutiny of share transfer transactions, particularly in terms of evidentiary obligations. The Court’s verdict implies that, while share transfers in joint-stock companies are generally executed via endorsement and delivery, these transactions may be subject to invalidation by judicial and public authorities if deemed to be fictitious.

This ruling underscores the criticality of conducting share transfers in the presence of a notary public as a safeguard against allegations of fictitious transactions and legal disputes. Although not mandated by law, executing a share transfer agreement in a notarial setting and registering this document in the trade registry is paramount for establishing the transfer’s authenticity and date.

V. Conclusion: A New Paradigm in Share Transfer Legitimacy

The Constitutional Court’s verdict offers a seminal interpretation in the domain of share transfer transactions within joint-stock companies. It provides a much-needed clarification on the legal validity, evidentiary challenges, and the necessary safeguards against possible fictitious transactions in share transfers.

The Court’s decision articulates that while the standard procedure for share transfers in joint-stock companies typically involves endorsement and delivery, the judiciary is justified in casting doubt on such transactions if there are reasonable suspicions of them being fictitious. This implies a heightened evidentiary responsibility for parties asserting the legitimacy of transfers executed solely through endorsement and delivery.

This landmark ruling emphasizes the critical importance of formalizing share transfer agreements in the presence of a notary public, thereby reinforcing legal security and transparency. This decision is poised to be a pivotal reference point in Turkish legal jurisprudence, shaping the future discourse and praxis concerning the legal validation and evidential requisites in share transfer transactions.

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