Turkish Law Blog

Share Transfers in Turkey – Part III – Restrictions on Share Transfers

Ali Yurtsever Ali Yurtsever/ ASY LEGAL
30 January, 2020
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I. Overview

In the previous parts of the corporate law and share transfer series, we reviewed the general rules and procedures relating to share transfers in joint stock companies (JSC) and the role of company share ledgers in such transfers. The third part of the series will focus more on the possible restrictions that may be imposed upon share transfers that will also be binding in terms of the Turkish Commercial Code.

II. The Meaning of Restrictions on Share Transfers

As thoroughly examined in Part-I and Part-II, transferability is the default rule for JSC shares.  As a result of this rule, JSC shares can be freely transferred to third parties without any prior approvals from any other shareholders and/or the company itself. The only restrictive rule here is the requirement for the share transfer be recorded into the company share ledger in order to claim shareholder status before the company. However, this requirement does not affect the validity of the share transfer itself, but rather affects whether or not the new holder of the shares can claim to the shareholder title before the company (please refer to Part-II for further details).

This is an important distinction to make, as it can be confusing to fully understand the meaning of it at first glance. The most crucial aspect of this rule is that not recording a transfer in the ledger will not invalidate the share transfer itself, and there are certain recourses that the new shareowners can apply to remedy this (i.e. filing a lawsuit to change the share ledger). Therefore, this requirement to record at the ledger cannot be deemed as a restriction imposed on share transfers.

So, in order to impose a restriction on a share transfer, the imposed rule should tie the validity of the transfer of the relevant share to a specific action (such as an approval/consent), and in the absence of such action, should deem the transfer transaction invalid. The presence of such a rule creates a different type of share called Restricted (tied) Shares. 

III. Restricted (TIED) Share Certificates and Their Legal Standing

As noted in previous sections, the core principle in JSCs is anonymity. A JSC, by definition, provides anonymity to its shareholders with loose share transfer regulations. Principle of transferability is the rule and share transfers are not subject to registration and announcement at the trade registry. This allows shareholders of a JSC to easily transfer their shares to third parties without ever giving a formal notification to any third party, and as a result, the only way to effectively determine the current shareholders of any JSC is to physically review the company’s share ledger. 

However, this anonymity and the ease of transferability of shares poses a different kind of problem for certain JSCs, especially closed and family-owned ones. In such companies, the number of shareholders is quite small, and the company is controlled by a small group of individuals with close ties to each other. Therefore, cooperation among shareholders is of paramount importance for these companies to function. In such cases, this anonymity and ease of transferability may create a problem, as any shareholder can transfer his/her shares to an unrelated third party, which may effectively cripple the company, disrupting the close relationship and understanding between the shareholders. To prevent this, the law allows for certain restrictions that can be imposed upon share transfers, where the share transfers will only be deemed valid if certain conditions are met. Shares that are subjected to such conditions are called restricted shares, and if these shares are tied to a registered share certificate, then they are called restricted registered share certificates (RRSC).

The provision allowing for such restrictions to be placed upon share transfers in JSCs in noted in Article 490/1 of the TCC, which states that registered shares may be transferred freely unless a restriction is imposed upon such transfer by the law or by the articles of association. Article 492/1 further sets forth that the articles of association may impose that the registered shares may only be transferred with the approval of the company. According to these two provisions, such restrictions may only be imposed upon registered shares of JSCs, which actually makes sense considering the nature and legal standing of bearer shares (see Part-I for further details on bearer shares).

It should be noted here that the presence of a restriction and therefore RRSCs, does not change the legal standing of registered share certificates as securities. These shares should still be transferred in accordance with the rules and procedures mentioned in Part-II. The only difference in the transfer of an RRSC is that there is an additional procedure/rule that must be satisfied in order to ensure the transfer is valid. 

IV. Transfer of Restricted Shares and Possible Issues

a. Procedures for Transfer

As noted above, RRSCs are essentially registered share certificates with and additional restriction imposed upon. Therefore, the transfer of RRSCs will still be subject to the general rules and procedures for the transfer of registered shares, meaning that a full endorsement should recorded on the relevant share certificates to be transferred and the actual physical certificate should be handed over (as note in Part-I), and the share transfer should be recorded into the company’s share ledger (as noted in Part-II). However, since these shares are restricted as per Article 490 and 492, the approval of the relevant company should also be obtained in order to finalize the transfer. Accordingly, once the endorsement is recorded and the RRSC is handed over to the new owner, both the transferor and the transferee of the shares should submit an application to the company’s Board of Directors for the approval of this share transfer and the subsequent recording of it to the share ledger.

b. Board’s Refusal to Approve the Transfer

Before the new Turkish Commercial Code was implemented, the old TCC allowed the company (and therefore the company’s BoD) to refuse the transfers of RRSCs without justification. This, unsurprisingly, created a lot of problems where the BoDs refused to approve share transfers arbitrarily. With the changes in the new TCC however, the BoD may only refuse a RRSC transfer based on a substantial reason set forth at the company’s articles of association, or the BoD may offer to buy the relevant RRSCs on behalf of the company, the other shareholders or third parties.

It should be noted here that the phrase “substantial reasons” is not clearly defined in the TCC and is open to interpretation. The important thing here is that such substantial reasons (whatever they may be as determined by the company) should be set forth in an exhaustive manner at the company’s articles of association (these will be reviewed in detail in separate article). 

V. Legal Ramifications of BoD’s Refusal

As mentioned above, in order to impose a restriction on a share transfer, the imposed rule should tie the validity of the transfer of the relevant share to a specific action (such as an approval/consent), and in the absence of such action, should deem the transfer transaction invalid. So, if a JSC’s articles of association contains a provision stating that the transfer of registered shares shall be subject to the approval of the company as per Article 490 and 492 of the TCC (by also defining the “substantial reasons” where the company may refuse a share transfer), this will constitute a valid restriction on share transfers.

In such a case, if the BoD of the relevant company refuses to approve the transfer of RRSCs due to one of the reasons noted in the articles of association, then the ownership of the shares and the associated rights will not be transferred from the transferor (the seller) to the transferee (the buyer), and therefore both the ownership and the associated rights of these shares will continue to vest in the transferor, as per Article 494 of the TCC. In more simpler terms, unless the BoD approves the transfer of RRSCs, the transfer transaction will be deemed invalid and will have no legal consequences.

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