Shareholders' agreements are used to regulate the rights and obligations of shareholders and determine corporate issues and matters that are not regulated under the company's articles of association.
The Commercial Code does not explicitly regulate shareholders' agreements. Parties may enter into a shareholders' agreement under any terms in the framework of freedom of contract, providing that its provisions do not conflict with the company's articles of association or the Commercial Code. As a result, shareholders' agreements create only a binding contractual relationship between their parties, impose no obligations and grant no rights to any third parties or future shareholders (unless they become parties to the agreement), with the exception of provisions which may be freely reflected in a company's articles of association pursuant to the Commercial Code.
Shareholders' agreements will usually govern the following matters:
- a company's shareholding structure and share groups;
- the company's scope of business; and
- corporate governance matters, including:
- the composition of the board;
- the election of a chair;
- meeting and decision quorums at shareholder and board level;
- reserved matters;
- veto rights;
- the determination of annual budgets and business plans;
- capital increases;
- the distribution of dividends;
- share transfer restrictions and share options;
- deadlock and exit provisions;
- information rights;
- non-compete and non-solicitation provisions; and
- representations and warranties.
The enforceability of share options is one of the most controversial issues in this area. Call/put options and tag/drag options and the right of first refusal are valid and binding under Turkish law. These options are a contractual obligation on the obligor to the beneficiary. There are two crucial issues regarding the enforceability of such options:
- whether they will as a general rule be enforceable against third parties acquiring the shares subject to an option unless it can be proved that the third party acquired the shares with the intention of harming the beneficiary; and
- whether the courts award monetary damages and will be reluctant to impose a remedy of specific performance to require the transfer of shares.
The widely used solutions to improve the enforceability of the above options include the following.
Inserting share options provisions into articles of association
Articles of association are registered with the trade registry and are public. Inserting the terms of share options into a company's articles of association will put third parties on notice as a warning. However, if a beneficiary wants to issue proceedings against the third party, it would have to prove that the third party intended to cause harm in acquiring the shares.
Inserting provision into articles of association stating that the board cannot register transfer of shares to a third party
Pursuant to the Commercial Code, a board may refuse to approve the transfer of registered shares for 'justifiable reasons'. Share options may be incorporated into articles of association as a 'justifiable reason' for the board to approve or refuse a transfer of shares. Accordingly, if a third party acquires shares in violation of share option provisions, the board cannot register the acquirer as a shareholder of the company and the holder of the shares may not benefit from its rights as a shareholder.
Inserting transfer restrictions on share certificates
Inserting a statement on registered share certificates that shares are subject to transfer restrictions would put third parties on notice. A third party may validly acquire shares despite such notice, as the contractual share restriction cannot be asserted against a third party even if they are aware of its existence.
Penalty clauses are valid and binding unless payment thereof bankrupts the obligor; accordingly, a high penalty could be imposed for sale to a third party in breach of share options.
Parties may enter into escrow arrangements and company share certificates may be deposited with an escrow with blank endorsement. Escrow can release share options with the written instruction of beneficiaries thereof.
Establishing a holding company outside Turkey
Shareholders may establish a company in a jurisdiction where:
- there is greater legal certainty on the enforcement of share options;
- shareholding arrangements would operate at the holding company level; and
- the holding company can hold the shares of a Turkish company.
In this context, strategic and financial buyers should negotiate and discuss all terms of a shareholders' agreement and ensure that its provisions are enforceable before making an investment.