Turkish Law Blog
Share Transfers in Turkey – Part II The Role of Company Share Ledgers
In Part-I of the corporate law and share transfer series, we reviewed the general rules and procedures relating to share transfers in joint-stock companies (JSC) in Turkey. Although the general procedures were reviewed in detail for all types of share transfers, the limitations on share transfers and restricting provisions set forth at the law were not included in that article. Therefore, the second part of the series will focus more on the role of shareholders ledgers for share transfers and the importance of recording share transfers into the ledgers in JSCs.
II. Company Share Ledger & Shareholder Status
As explained in detail in Part-I, the principle of transferability shall be applicable to shares of JSCs, meaning that as a rule, JSC shares can be transferred freely to third parties. Due to this principle, one might assume that a simple transfer of a share in a JSC (as per the rules and procedures outlined in Part-I) shall be sufficient to claim the shareholder status in any JSC. Unfortunately, this is not the case, as the Turkish Commercial Code (TCC) includes several other provisions that set forth additional procedures to be followed in order to be deemed as a shareholder before a JSC.
a. The Problem of Attaining Shareholder Status in a JSC
Owning shares in a JSC and claiming the shareholder title before the company is two different things. This may be kind of confusing, as, in order to become a shareholder of a specific company, one must first acquire shares of that company. Without shares, there can be no shareholder status. However, the simple act of acquiring shares will not be enough to claim shareholder status before a company.
The issue arises from the definition and the role of the share ledgers of JSCs. Article 499 TCC sets forth that, only those who are recorded at the share ledger as shareowners shall be deemed as official shareholders of the company. As a consequence of such procedure, shareowners who are not recorded at the company share ledger will not attain the shareholder status within the company, even if they acquired the shares lawfully. Hence, if a shareowner cannot claim shareholder status before the company, then that shareowner will not be able to exercise his/her rights arising from the shares towards the company. Meaning, the shareowner will not be able to cast votes as a proper shareholder at the company’s general assembly.
b. The Legal Standing of Share Ledgers & Notice of Record
According to Article 375 TCC, the share ledger is a company book kept by the company’s board of directors, and it is one of the compulsory company books noted in Article 64 TCC. Meaning, all JSCs and therefore their board of directors, are required by the law to duly keep a share ledger and record the shareholders of the company into that ledger. Furthermore, the board of directors have an obligation to keep the records of the share ledger in a truthful and lawful manner and shall be liable for any discrepancies within the records.
It is important to note that a share transfer can only be recorded into the share ledger if it can be definitively proven that it conforms to all rules and procedures set forth at the law. This means that share transfers cannot be recorded into the share ledger if they are not duly executed. This seems like a pretty straightforward procedure. However, as an indirect consequence of this rule, it is accepted that the board of directors of a JSC cannot record a share transfer ex officio, unless the share transfer transaction is notified to the company. Therefore, it is important to submit a notice to the relevant company informing the share transfer along with a request to record such share transfer into the share ledger. This notice can be done in various ways (mails, e-mails, official notices etc.) as the Law does not provide specific procedures for such notifications.
III. Board’s Refusal to Record Share Transfers
In connection with the above-noted mechanism, a company’s board of directors have the right and duty to inspect and review a share transfer notified by the relevant shareholders, as per Articles 499 and 686. In order to determine whether or not the notified transfer is lawful, the board will have to first review the transfer procedures and documents, and then determine whether the transfer conforms to the rules and procedures set forth by the law. Therefore, this inspection procedure ties into the above-mentioned obligation of the board to not record a share transfer if that transfer is not duly executed.
Accordingly, the board of directors of a JSC may refuse to record the share transfer between a former shareholder of the company and a third party, if it finds upon inspection that such transfer transaction was not executed properly and in accordance with the procedures set forth at the law. In case the board refuses to record the share transfer into the share ledger the new holder of the relevant shares (the party that acquired the shares) shall not be able to claim shareholder title and therefore shall not be able to use the voting rights attached to the shares (as noted above at section II.a). However, it is important to note at this point that the records in the share ledgers do no effect the validity of the share transfers, but only effect whether such share transfers bestows the shareholder status before the company.
IV. Remedies Against Board’s Refusal to Record
As mentioned above, the board of directors of a JSC may refuse to record the share transfers into the share ledger. Such refusal may be based upon a justifiable reason in cases where the transfer procedure is not executed properly and in accordance with the rules and procedures set forth by the law. However, it is also possible for the board to refuse to record a share transfer without any justification (even if the share transfer procedures were duly executed). Such refusal by the board will, of course, be deemed as an unlawful action. Unfortunately, since the daily management of the company is handled by the board of directors, the board is the body solely responsible for keeping the company books. Therefore, the only way to force the board to record a duly executed share transfer is to file a lawsuit at the competent commercial court. If the commercial court accepts the claims and rules for the share transfer be recorded at the company ledger, such decision by the board shall be deemed as a board of directors decision.
As also outlined in Part-I, share transfers in JSC are quite complex procedures with numerous rules and procedures. Recording such transfers into the company’s share ledger is one of such procedures, if not one of the most important ones. It has implications for both the new shareholder and the members of the board of directors. Without such records in the share ledger, it will not be possible for a shareowner to claim shareholder title and use the voting rights attached to the shares at the general assembly meetings. As for the liabilities of the board of directors members, the board have a duty and obligation to inspect and verify the share transfers and to refuse to record such if they are not duly executed. If the board wrongfully records a non-conforming share transfer into the ledger, then the board members shall be liable for the damages arising from that wrongful recording. It is therefore highly important to execute the share transfers in accordance with the law and to inspect such transfer with the utmost care in order to avoid any possible complications.