Shareholders agreement (“SHA”) is widely used in business transactions that include share transfers by newly established firms. Contrary to their popularity, Turkish Law does not stipulate SHAs; they are considered as a private law contracts under Turkish Law. Contents of SHAs and articles of association of a company may be similar however there are various key differences that shareholders should need to be aware of to use tailor-made solutions for their needs.
Why should I need an SHA?
Most often, rights of the shareholders are prescribed in the articles of association of a joint stock or a limited liability company. In addition, shareholders are only liable for the unpaid of amount of their share capital contribution and in accordance with the Turkish Commercial Code numbered 6102 and dated 13.01.2011, no other liability may be imposed upon the shareholders such as contributing more capital except for the very few circumstances. That’s why most often shareholders are in need of legal protections that may impose other liabilities as well as offer other rights that are not prescribed in TCC to shareholders. Most common liabilities include but not limited to: “Tag-Along”, “Drag-Along” and “Right of First Refusal”. Since abovementioned rights generally impose liabilities on some shareholders (and offer rights to other shareholders); they may be stipulated through SHAs.
Moreover, shareholders have less freedom while drafting the articles of association compared to SHAs. There are many limitations regarding the provisions of articles of association. Articles of associations in Turkey are registered to the relevant trade registry and promulgated through the Trade Registry Gazette. There are also several mandatory provisions that must be included in a articles of association. SHAs do not have such limitations as a private law contract. Freedom of contract rules apply to SHAs.
What rights and liabilities may be stipulated in a SHA?
Rights and liabilities stipulated through SHAs may be as follows:
- Rights regarding the management of the company: giving a minority shareholder right to nominate a board of directors’ member or giving a right to shareholder directly nominate the chairman of the board of directors. Although board nomination rights may also be stipulated through articles of association, they are generally stipulated in both.
- Rights and liabilities regarding share transfers: Limitations to share transfers are generally stipulated in SHAs. In accordance with the TCC, share transfers may be restricted in limited circumstances and most often just cause is required to restrict a share transfer. However, SHA may be stipulated in a way that a share transfer require a consent of a specific shareholder or shareholders.
- Rights and liabilities regarding voting rights: SHAs may be stipulated in a way that, shareholders are to vote in favor or against for profound general assembly decisions such as articles of association amendments and choosing an auditor.
- Exit and veto rights regarding general assembly resolutions: SHAs may also stipulate exit rights of shareholders and veto rights that can be used for specific general assembly resolutions. It should also be reminded that TCC provisions regarding limited liability companies prescribe such rights and exit and veto rights may also be prescribed through articles of association.
However, many other rights and liabilities may be stipulated through SHAs. Customizing the company by employing a SHAs is easier compared to articles of association.
Can the company be a party to SHAs?
Commonly, both shareholders and the company are parties to SHAs. This is usually designed this way to ensure the protection of the rights prescribed in SHAs. However, in practice its effectiveness is limited. The company would still be bound by the rules of the TCC. According to the TCC, any provisions of SHA stating that the board of directors (as its the organ representing the company) would resolve in accordance with the instructions of the shareholder(s) who is a party to the SHA would be null and void. To give an example, a provision of an SHA may state that the board of directors shall not be registered to the share ledger if the share transfer violating the SHA would be considered as null and void unless there is a just cause for the restriction of share transfer. As such, making the company party to the SHA may be quite ineffective.
What is the relationship between SHA and Articles of Association?
Most often, most provisions of SHA are also included in articles of association to ensure the protection of the shareholders who are a party to the SHA. Yet, its effectiveness is questionable. The provisions of articles of association prescribed in accordance with the provisions of TCC bind third parties and benefit from the protection provided by TCC such as reversal of general assembly decisions. However, same does not apply for SHA provisions that are also included in articles of association; third parties are not bound by such provisions and they do not benefit from the protections offered by TCC. For example, a new shareholder who are not a party to the SHA is not bound by the SHA even if its provisions are prescribed in articles of association.
What should I do if the SHA is breached?
Since SHAs are considered a sui generis contract under the Turkish Law, they would benefit from the legal remedies offered by the Turkish Code of Obligations dated 04.02.2011 and numbered 6098 (“TCO”). Parties to the SHA may claim damages, ask for specific performance and other remedial rights given by the TCO and the provisions of the SHA itself from the breaching party. However, legal remedies such as reversal of general assembly and board of directors may not be applicable for the disputes arise from the breach of SHA.
Customizing the Tech Start-up and SHA
As mentioned above, SHAs offers more options and freedom to shareholders regarding their rights and liabilities but they lack the safeguard offered by the articles of association. Still, SHAs may be drafted in a way that it reflects the aims and objectives of a new company. SHAs may also be useful after receiving equity investment and increase in the number of shareholders. A well stipulated SHA may help the further growth and health of the company by avoiding future disputes.
Author: Batuhan Ecin, LL.M.