Usufruct Right on Registered Shares in Joint Stock Companies

    I. Introduction

    The right of usufruct is a real right granting its holder full power to benefit from the subject of the right. This right can be established over movables, immovables, or other rights or assets. It follows naturally that a usufruct right can be established on the company share as well. Establishing the usufruct right on company shares are regulated under Turkish Commercial Code (Law No. 6102) (“TCC”). While there are several reasons for granting a usufruct right over company shares, one commonly encountered scenario is the shareholder granting the usufruct rights to its creditors for its debts.

    Establishing a usufruct right on a company share varies according to the type of company as well as the type of share subject to usufruct. This article examines the establishment of the usufruct right on registered joint stock company shares, the most commonly encountered type.

    II. Nature of the Usufruct Right

    Usufruct right is regulated in the Turkish Civil Code No. 4721 (“Civil Code”), Article 794 et al. Unless otherwise stipulated, owner of a usufruct right has the full right to benefit from the usufruct subject, even though ownership of the subject belongs to another. The parties may, nevertheless, by agreement, narrow the scope of the usufruct right. The owner of the usufruct has the authority to possess, manage, use and benefit from the property that is the subject of the right. The usufruct holder is required to exercise due care such as that expected of a diligent manager. Accordingly, usufruct right owner cannot exercise its authorities to the extent that it will cause the destruction of the property. Since usufruct is a real right, it can be claimed against anyone, including the owner of the usufruct subject, ie. the shareholder. If there is a change in ownership, the new owner acquires the share subject to the usufruct right.

    III. Establishment of Usufruct Right on Registered Joint Stock Company Shares

    Registered share certificates constitute promissory notes. Thus, if registered share certificates are subject to a usufruct right, the disposition must be carried out in accordance with the conditions sought for the promissory notes. According to Article 795/1 of the Civil Code, the right of usufruct is established by the transfer of possession in movables and the transfer of receivables in receivables. The right of usufruct on the registered share certificate can be thus established by endorsing the share certificate for a usufruct and transferring its possession with or without delivery. It is also possible to establish this right without endorsing the registered share certificate; as it can be established with a written declaration of assignment for the purpose of usufruct and delivering the share certificate to the usufruct holder. It must be noted that endorsing a share certificate for usufruct purposes prevents the usufruct holder from claiming more rights than he has against the company and from disposing of the share certificates. A record similar to “for usufruct purposes” is sufficient to constitute a usufruct endorsement.

    Usufruct holders are recorded in the share ledger with their names, surnames, titles and addresses. This practice enables to delineate the scope of the usufruct right which is required for apportioning the right to dividends between the shareholder and the usufruct holder or determining their respective votes. A duly established usufruct is also recorded in the share ledger. In order for the usufruct holder to assert its rights vis-à-vis the company, it must be recorded in the share ledger.

    An important point of consideration for establishing a usufruct in joint-stock companies is that the articles of association of the company must permit establishing a usufruct right on registered shares. As a general rule, the registered shares may be transferred, or a right may be established over them without any restriction. The articles of association of the relevant company may nevertheless mandate the company’s approval in case of transfer or establishing a usufruct over the share. In such a case, the company’s approval must be sought.

    IV. Usufruct Holder’s Rights

    As a general rule, the usufruct holder over a share in a joint-stock company will have rights such as the right to (i) receive dividends, (ii) benefit from company facilities, (iii) receive interest for preparatory period, (iv) receive liquidation share, (v) attend the general assembly and vote, (vi) claim invalidity of the general assembly resolutions, and (vii) receive information and examine company books. As discussed earlier, the usufruct holder must exercise these rights in good faith in line with the interest of the shareholder. The shareholder may object in case the usufruct holder exercises its usufruct rights tortiously or in contravention of the usufructuary nature of the right.

    V. Termination of the Usufruct Right

    The usufruct right may be terminated according to property law as well as to company law or to negotiable instruments law. From general principles of property law, the usufruct will terminate in case the underlying subject-matter of the right ceases to exist. In case of a share in a joint-stock company, the share may cease to exist in cases such as the termination of the company or if the share capital of the company is decreased. Furthermore, the grounds on which the usufruct right may terminate may also vary from (i) the usufruct holder relinquishing its rights, (ii) the end of the usufruct term in case it was established for a certain term, (iii) the termination of the legal personality of the usufruct holder, (iv) merger of the shareholder and the usufruct holder under the same title, to (v) agreement of the usufruct holder and shareholder.

    VI. Conclusion

    Usufruct right may be established via several methods on registered shares in a joint-stock company. The usufruct right grants extensive rights to the usufruct holder such as the right to receive dividends or attend the general assembly and vote. Consequently, they constitute a useful tool in commercial life as a guarantee against the debts of the shareholder.

    Tagged withGökçe, Görkem Gökçe, Elif Aksöz, Commercial & Corporate, Joint Stock Companies

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