The Concept of Privilege and Veto Right in Joint Stock Companies

ABSTRACT

Joint stock companies are companies that are based on a certain amount of capital and whose shareholding structure consists of shares. In such companies, the nominal value and ratio of the shares held by each shareholder are more important than who is a shareholder. Due to these characteristics, it is observed in practice that joint stock companies prefer to achieve these objectives by issuing certain privileged shares when they wish to increase their capital or to obtain capital inflow from third parties.

Privileged shares are a way for joint stock companies to raise capital, and when companies want to increase their capital or attract capital inflow from third parties, the current shareholders may try to maintain their control over the company by issuing privileged shares in return for the participation of new investors from outside to the company. In this study, the concept of privileges in joint stock companies, how to regulate privileges, and the legal framework and application areas of the veto right are analyzed.

Keywords: Privilege, Veto Right, Share, Joint Stock Company, Turkish Commercial Code No. 6102, Articles of Association, Golden Share

I. INTRODUCTION

Turkish Commercial Code No. 6102 (“TCC”)[1] defines joint stock companies as companies whose capital is fixed and divided into shares, and which are liable for their debts only with their assets.[2] In this context, the capital of joint stock companies consists of shares. Accordingly, a share is a part of the share capital or issued capital that is divided into a certain number of unit values.[3]

In joint stock companies, rights and obligations are linked to shares. The share constitutes the source of the rights and obligations linked to it. On the other hand, the shareholders, by owning these shares, which are a part of the capital, have the rights and debts in question.[4] Shares of equal nominal value offer rights and debts to their holders in equal content and proportion. However, with the arrangements to be made in the articles of association of the company, privileges granting superior rights to some of the shares of equal nominal value may be granted.

II. THE CONCEPT OF PRIVILEGE

A privilege can be defined as a right that provides superior, privileged rights or benefits to the person who owns it and distinguishes the privilege holder from other persons in this respect.[5]

A privilege within the meaning of the TCC is defined in Article 478 of the TCC titled “Privileged Shares”. According to the second paragraph of the Article, a privilege is a superior right granted to a share in rights such as dividends, liquidation shares, preference and voting rights, or a new shareholding right not stipulated by law. Accordingly, in joint stock companies, privileges are granted to the shares and give the relevant shares a superior right compared to non-privileged shares, in other words, ordinary shares. In this way, the shareholder with privileged shares is in a privileged position compared to the shareholders of ordinary shares due to the privilege in question.[6]

III. BASIC PRINCIPLES OF PRIVILEGE

A. Granting of Privilege by the Articles of Association

Privileges may only be granted either in the articles of association prepared at the time of incorporation or by amendment of the articles of association thereafter. It is not possible to grant privileges to certain shares by a resolution of the board of directors or a resolution of the general assembly without being regulated in the articles of association.[7]

B. Granting the Privilege to the Share

Under the provisions of Article 478 of the TCC, privileges may only be granted to shares. In this context, the main rule is that the company’s shares are divided into share groups in the articles of association of the company, and the privilege related to the share group or groups to be privileged is defined in the articles of association. In this respect, considering the relevant article and its justification, a privilege granted directly to the shareholder is not a valid privilege under the TCC. This is because the privilege must be linked to the share. Thus, it is possible for the shareholder who owns the privileged share to benefit from this privilege.

A privilege granted directly to the shareholder in the articles of association will not have a corporative effect since it will not be a privilege under the TCC. Such a privilege will constitute a contractual right under the Turkish Code of Obligations No. 6098.[8] Therefore, such a right shall not be transferred to the heirs of the shareholder or to the new shareholder who transfers the shares in the event of the death of the shareholder or the transfer of the relevant shares by the shareholder to a third party. However, in the case of a privilege granted to a share, since the privilege is attached to the relevant share, the change of the shareholder holding the relevant share for any reason will not create a change in the legal status of the privilege and the shareholder holding the privileged share will be able to benefit from the superior right provided by the privilege, regardless of who the shareholder is.[9]

There is an exception to the rule that privileges may only be granted to shares. This is explained by the provision in paragraph 3 of Article 478 of the TCC stating that “the provision of Article 360 is reserved”.[10]

Article 360 of the TCC regulates the right to be represented in the board of directors, and paragraph 1 of the Article states that “Provided that it is stipulated in the articles of association, certain share groups, shareholders forming a certain group with their characteristics and qualifications, and minority may be granted the right to be represented in the board of directors”.[11] Paragraph 2 of the Article reads as follows: “Shares entitled to be represented in the board of directors pursuant to this Article shall be deemed privileged”.[12]

In this context, the privilege to be represented in the board of directors may directly be granted to shareholders, provided that it is regulated in the articles of association of the company. Thus, contrary to Article 478 of the TCC, which stipulates that a privilege may only be granted to the share, the legislator has determined that shareholders may also be granted a privilege at the point of representation in the board of directors. This situation appears as an exception to the main rule.[13]

C. Granting the Privilege Differently from the Principle of Proportionality and Equality

In joint stock companies, the capital is divided into shares and each share has a certain nominal value. In this context, the rights regarding assets and management rights under the TCC are exercised in proportion to the nominal value of the share, in other words, according to the shareholder’s contribution to the company capital.

Accordingly, the rights of shareholders in joint stock companies are directly proportional to the contribution rate of their shares to the capital. In other words, each shareholder benefits from the rights in the company according to the proportion of shares it holds. This principle is called the principle of proportionality.[14]

Pursuant to the principle of proportionality, which regulates a kind of relative equality, which stipulates that the shareholder benefits from the rights in the company according to the share ratio, the same treatment shall be applied to the shareholders with the same subject matter. However, in the event that some shares are privileged, the principle of proportionality, which stipulates relative equality with a new legal situation provided by the privilege, will not be applied and the privileged shares will be evaluated differently.[15]

D. Clearly Defining the Subject and Scope of the Privilege in the Articles of Association

When granting a privilege to a share in the articles of association of the company, it is necessary to clearly describe what the privilege is, what its scope is, and how it will be applied. Because, in case of any doubt regarding the privilege or the manner of use of the privilege in case the relevant privilege is intended to be used, an internal dispute should not be caused.[16]

IV. PRIVILEGE SUBJECTS

The rights to be subject to privileges are the rights arising from share ownership. Article 478 of the TCC stipulates that a privilege may be granted for rights such as dividend, liquidation share, preference and voting rights, and a new shareholding right not stipulated in the law. The legislator has given examples of the situations that may be subject to privileges by enumeration, but has not imposed any limitation.

A. Privilege in Asset Rights

1) Dividend Privilege

Dividend privileges can be organised in three different ways, such as giving more dividends to certain shareholders, benefiting from dividends in priority, and being cumulative in nature.[17]

2) Privilege in Liquidation Shares

In this type of privilege, the privileged holders have a priority right over the net assets of the company when the company is liquidated, compared to the ordinary shareholders. However, this privilege cannot be asserted against the company’s creditors.[18]

3) Preference Privilege

Only certain shares or share groups may be granted preference rights in the articles of association at the incorporation of the company or through a subsequent amendment to the articles of association. However, it should be noted that such privilege arrangements are not favored in practice.[19]

B. Voting Privilege

As explained in detail above, shareholders generally exercise their voting rights according to the proportion of their contribution to the capital, in other words, according to the principle of proportionality. However, as an exception to the principle of proportionality, shares of equal nominal value may be granted different numbers of voting rights through voting privilege arrangements to be made in the articles of association.[20]

C. Privilege Regarding Representation in the Board of Directors

Article 360/1 of the TCC stipulates that, in accordance with the precedents of the Court of Cassation, the articles of association may grant certain share groups or shareholders the right to be represented on the board of directors. This privilege is a privilege that enables shareholders with particular characteristics or minority shareholders to be represented on the board of directors.[21]

D. Other Privileges

Apart from the privileges listed in the TCC; it is possible to establish privileges that grant a new shareholding right, such as the privilege to benefit from the facilities of the joint stock company, which may provide privileges such as priority or free of charge, the privilege to demand interest for the capital during the preparation period, which may provide the privilege to demand interest from the capital that the shareholder has put into the company, the privilege to participate in the net profit, to participate in the amount remaining as a result of liquidation or to purchase new shares to be issued, and the privilege of usufruct certificates.[22]

V. GOLDEN SHARE CONCEPT AND VETO RIGHT

The concept of golden share has emerged as a result of the fact that the governments seek to privatize the companies they own in line with economic developments, but at the same time, the governments do not want to lose their management and decision-making position in the company.

Privatization has emerged as a result of global economic developments, and this concept can be defined as the transfer of ownership or management of a publicly owned company to private sector investors through methods such as sale or lease.[23]

Golden share can be defined as a share that grants the golden share holder a veto right in the decision-making mechanisms of the company. Golden shares are similar to the privileged shares regulated under the TCC in terms of providing various privileges to the person who owns them; however, they differ from the privileged shares in that they grant privileges to the person who owns them to an extent exceeding the privileges such as direct veto right and they can also be established independently of the share.[24] For this reason, golden shares can also be referred to as special privileged shares.

VI. THE POSITION OF THE GOLDEN SHARE IN THE REGULATIONS

A. Regulations

Although regulations on golden shares in joint stock companies were included in the preliminary draft of the TCC, the relevant regulations were removed later and were not enacted into law. The TCC does not regulate the golden share or veto right in joint stock companies. However, unlike joint stock companies, the legislator has included regulations on the right of veto in limited liability companies in the TCC. In this direction, it is argued that the fact that the legislator has not included the issues regulated in limited liability companies for joint stock companies is characterized as a conscious silence and that regulations on golden share and veto right cannot be made for joint stock companies.[25]

In addition, as explained above, privileges in joint stock companies must be granted to the share, and there are some opinions that the granting of a veto right directly to the shareholder by justifying the expression “or it is a shareholding right not stipulated in the law” in paragraph 2 of Article 478 of the TCC would result in circumvention of the provision of the article.[26]

B. Practice Areas

Although the right of veto cannot be directly regulated in the articles of association of joint stock companies, it is possible to regulate mechanisms that will lead to results equivalent to the use of the right of veto in various ways.

Article 418 of the TCC stipulates that companies may regulate in their articles of association that decision quorums may be increased. This provision allows shareholders holding shares above a certain percentage to exercise an indirect veto right over the decisions of the general assembly. If the articles of association recognize voting privileges for the shares held by the relevant shareholders, the shareholder will have a privilege almost equivalent to a veto right.[27]

However, there are different opinions on the validity of regulating the veto right, which is not explicitly regulated in the TCC, indirectly in the articles of association through privileges, and thus giving the veto right a kind of corporative effect.[28]

VII. CONCLUSION

In joint stock companies, whose capital is fixed and divided into shares, and which are liable for their debts only with their assets, it is possible to be granted privileges regarding the shares. Most of the time, these privileges are granted on the shares held by the shareholders in order to protect and strengthen the position of the main shareholders in the company. In addition, it is also seen that privilege arrangements are made due to the relations between the shareholders.

Privileges must be granted to the shares, be clearly regulated in the articles of association and be different from the principle of proportionality, which is a principle in joint stock companies. In this way, a privilege granted to a share grants privileges to the holder of that share compared to ordinary shares. These privileges may be in the form of dividend privilege, liquidation share privilege, preference share privilege, voting privilege, representation privilege in the board of directors, which are explicitly regulated in the TCC, or in the form of a right arising from the shareholding, which is not stipulated in the TCC.

The concepts of golden share and veto right are concepts that emerged with the privatization of government-owned companies and can be defined as special privileges. Golden shares give the holder a direct veto right in the decision-making mechanisms of the company.

The TCC does not regulate the right of veto and golden shares in joint stock companies. Since this right, which is regulated in limited liability companies, is not regulated in joint stock companies, it is considered that regulations regarding the right of veto cannot be made in the articles of association of joint stock companies. In addition, the fact that the veto right can be granted not only to the share, but also to the shareholder itself, is contrary to the privilege regulations stipulated in the TCC. However, in practice, it is possible to cause the shareholder of a share to have almost a veto right with the privileges to be regulated for a share in the articles of association through various mechanisms. Considering the provisions of the TCC, this issue may be the subject of discussions on the validity of such a privilege.

References

1. Candemir Baltalı, “Anonim Şirketlerde Yönetim Kurulunda Temsil Edilme İmtiyazı”, On İki Levha, 2019

2. Poroy/Tekinalp/Çamoğlu, “Ortaklıklar Hukuku I”, Vedat Kitapçılık, 2021

3. Prof. Dr. Hasan Pulaşlı, “Şirketler Hukuku Şerhi”, Adalet, 2022

4. Abuzer Kendigelen, “Anonim Ortalıkta Yönetime Katılmada Haklarında İmtiyaz”, Beta, 1999

5. Dr. Çiğdem Yatağan Özkan, “Anonim Şirketlerde Altın Paylar”, On İki Levha, 2016

6. Murat Besen, “Anonim Ortaklıklarda İmtiyazlı Paylar”, On İki Levha, 2018

7. Dr. Öğr. Üyesi Emek Toraman Çolgar, “Halka Açık Anonim Ortaklıklarda İmtiyaz Tesisi Yoluyla Yönetim Kontrolünün Sağlanması”, 2022 https://nasamer.ku.edu.tr/halka-acik-anonim-ortakliklarda-imtiyaz-tesisi-yoluyla-yonetim-kontrolunun-saglanmasi/