Limitation of Pre-emptive Rights in Joint Stock Companies

Abstract

The pre-emptive right granted to shareholders in joint stock companies is a fundamental safeguard aimed at ensuring the continuity of the existing shareholding structure during capital increase processes. However, depending on the company’s financial status, investment plans, or long-term strategic objectives, the limitation of this right may arise under certain circumstances. The Turkish Commercial Code allows the limitation of pre-emptive rights only on the condition that it is based on justified grounds and that specific procedural rules are complied with. In this article, the legal grounds, conditions of application, and legal consequences of such limitation will be addressed.

Keywords: Joint Stock Company, Pre-Emptive Right, General Assembly, Board of Directors, Limitation, Removal

I. INTRODUCTION

In the narrow sense, the pre-emptive right is a shareholder right that entitles shareholders to acquire the newly issued shares in a capital increase, in proportion to their existing shareholding, before external parties.[1] Under the Turkish Commercial Code numbered 6102 (“TCC”), the pre-emptive right is defined as a privilege granted to joint stock company shareholders to preserve their existing shareholding ratios during capital increases.

With the entry into force of TCC on July 1, 2012, significant structural changes were introduced in the regulations regarding pre-emptive rights. Within this scope, the adoption of the registered capital system has been permitted also for non-public joint stock companies; and clarity has been provided regarding which corporate body is authorized to determine the duration for exercising the right to acquire new shares. Furthermore, invoking share transfer restrictions as a justification for limiting this right has been prohibited, and efforts have been made to establish a balance in line with the principle of equal treatment. Thus, with the new system, not only has the protection of shareholders’ existing share ratios been secured, but also the potential for abuse in the capital increase process has been reduced.[2]

In this article, within the framework of the aforementioned regulations, the legal grounds and application of the limitation of pre-emptive rights will be elaborated, and how such rights may be limited in a manner that protects shareholder interests, as well as under which conditions such limitations will be valid, will be examined.

II. CAPITAL INCREASE IN JOINT STOCK COMPANIES AND THE PURPOSE OF THE PRE-EMPTIVE RIGHT

In joint stock companies, the concept of capital is addressed within the framework of two different systems. While the principal capital refers to the amount of capital specified and fully committed in the company’s articles of association, the registered capital defines the ceiling amount that a company may increase its capital up to. The pre-emptive right can be exercised under both capital systems; however, by its nature, it becomes operative only in the case of external capital increases. Indeed, external capital increase refers to the process whereby new shareholders join the company with the aim of increasing the company's equity. In such cases, the shareholding ratios of existing shareholders may change. The purpose of the pre-emptive right in such capital increases is to enable existing shareholders to preserve their current shareholding ratios.[3]

III. LIMITATION OF THE PRE-EMPTIVE RIGHT

Although the pre-emptive right serves to protect shareholders’ rights, it may also prolong the capital increase process, raise costs, and hinder companies from securing capital swiftly.[4] Therefore, the limitation of the pre-emptive right may emerge as a favorable privilege for the protection of the company. In cases where the allocation of new shares to third parties takes precedence over the existing shareholders’ pre-emptive rights, the limitation of such rights may come into question.[5]

On the other hand, a disproportionate limitation of the pre-emptive right may weaken shareholders’ fundamental financial and managerial rights, such as the right to receive dividends and the right to vote at the general assembly. For such reasons, the limitation of the pre-emptive right has been explicitly and definitively regulated under the TCC system, thereby safeguarding the interests of company shareholders.

A. TYPES OF LIMITATION OF THE PRE-EMPTIVE RIGHT

The limitation of the pre-emptive right may occur in two forms: restriction or removal. As can be understood from the wording of Article 461 of the TCC, the fundamental principle is that the pre-emptive right shall not be limited. However, in exceptional cases, limitation or removal of the pre-emptive right is permitted. Yet, in order to prevent such limitation or removal from being exercised arbitrarily, the relevant procedures have been subjected to specific rules.[6]

Accordingly, limitation of the pre-emptive right may arise in such a way that only a certain portion of shareholders may benefit from the right to acquire new shares, or that some share classes may be completely excluded from this right. Full removal of the pre-emptive right means that all shareholders are deprived of the opportunity to acquire new shares and the right becomes entirely inapplicable. Both of these practices are integral parts of the capital increase resolution and must be evaluated and resolved jointly.[7]

B. COMPETENT CORPORATE BODY

TCC does not directly and explicitly regulate which corporate body of a joint stock company is authorized to limit the pre-emptive right. However, in view of the distinction made in Article 461 of the TCC, it can be stated that the capital system to which the company is subject is a determining factor in identifying the competent body. If the company is subject to the principal capital system, this decision is taken by the general assembly, whereas if it is subject to the registered capital system, the decision may also be taken by the board of directors.

To better understand the rationale for this distinction, it is necessary first to examine which corporate body is authorized to make capital increase decisions. This is because the exercise or limitation of the pre-emptive right is directly linked to the capital increase process.

In the principal capital system, the decision to increase capital is made by the general assembly. Therefore, in this system, the decision to limit the pre-emptive right also falls within the competence of the general assembly. However, the situation differs in the registered capital system. In this system, the company’s capital is increased, when needed, by a resolution of the board of directors. This authority must be based on an express authorization clause included in the company’s articles of association.[8]

The protection of the pre-emptive right is, in principle, guaranteed under the TCC, and limitation or complete removal of this right is allowed only in exceptional cases. In order for such an exception to apply, the legislator requires the fulfillment of two fundamental conditions simultaneously:

(i) the general assembly must adopt the decision with an increased quorum (affirmative vote of at least 60% of the principal capital), and

(ii) the relevant limitation or removal must be based on justified grounds

Nevertheless, the fulfillment of these conditions does not permit the limitation or removal to be exercised arbitrarily. Furthermore, no person shall be unjustly benefited or harmed through the limitation or removal of the pre-emptive right.[9]

In cases where the articles of association grant the board of directors the authority to limit or fully remove the pre-emptive right, the board is obliged to prepare a detailed report that sets out the justified grounds upon which the decision is based, the reasons for issuing the new shares with or without a premium, and the basis for determining the applicable premium amount. The registration and announcement of this report in the trade registry is also mandatory, in order to ensure transparency toward shareholders and to allow for legal scrutiny of the decision.[10]

C. PRINCIPLES TO BE FOLLOWED IN LIMITING THE PRE-EMPTIVE RIGHT

In the preamble of Article 461/2 of the TCC, it is stated that the provision is based on four fundamental principles aimed at protecting shareholders and strengthening the right to acquire new shares. These principles are listed as follows:

(i) The pre-emptive right cannot be limited through the articles of association,

(ii) The right can only be limited upon the existence of justified grounds,

(iii) The limitation cannot be carried out for the purpose of benefiting specific persons or causing loss to certain shareholders,

(iv) The right can only be limited through a resolution adopted with an increased quorum, and thus it constitutes a minority right.[11]

According to these principles, which are clearly stated in the preamble of the article, one of the most important points to be considered in the limitation of the pre-emptive right is that this process must not be carried out arbitrarily.

The law, by stipulating that the pre-emptive right may only be limited on the basis of justified grounds, aims to prevent the abuse of this right. The justified grounds for the limitation of the right must be linked to the actual needs of the company and commercial necessities. For instance, situations such as a public offering or a strategic merger may be considered justified grounds. However, it is not possible to limit this right solely based on the personal or group interests of any shareholder. This is of utmost importance for the protection of the equal rights of shareholders and the adoption of a fair governance approach. Moreover, since the limitation of the pre-emptive right may only be affected with the approval of a qualified majority, it must be ensured that such decisions are made in line with the interests of the company and all shareholders.

IV. CONCLUSION

The pre-emptive right stands out as a fundamental right aimed at maintaining internal corporate balance during capital increases by allowing shareholders to preserve their existing shareholding ratios. However, in light of economic and structural necessities, the limitation of this right may, in certain cases, become a requirement for the benefit of the company.

In this context, this article has addressed the relationship of the pre-emptive right with external capital increases, its applicability under the registered and principal capital systems, the legal grounds for its limitation, and the impact of arbitrary and disproportionate limitations on shareholder rights. The types of limitation and the principles to be followed in their implementation have also been explained. As a result, the balance between the pre-emptive right and the interests of the company is a matter that must be carefully considered in each concrete case, and decisions concerning the limitation of this right must be assessed in both procedural and substantive terms in accordance with the principle of the rule of law.

REFERENCES

1.    Burak Adıgüzel, “Anonim Şirketlerde Rüçhan Hakkının Sınırlanması veya Kaldırılması”. Ankara Hacı Bayram Veli Üniversitesi Hukuk Fakültesi Dergisi 18 2014

2.    Mustafa Yavuz, “Anonim Şirketlerde Rüçhan Hakkı ile Bu Hakkın Sınırlandırılma Esasları”, Gümrük Ticaret Dergisi, 2021, p.13.

3.    Nihan Değirmencioğlu Aydın, “Anonim Şirketlerde Rüçhan Hakkı.”, On İki Levha Yayıncılık, 2021, p. 215.

4.    Ömer Korkut, "Anonim Şirketlerde Şirket Menfaati Kavramının Somutlaştırılması”, Çukurova Üniversitesi İİBF Dergisi, 2007, p 2.