Provisions Of The Turkish Commercial Code Concerning Securities
January 2012While the provisions in the New Turkish Commercial Code (“New TCC”) concerning securities maintained the basic principles, as they were set forth in the Turkish Commercial Code (“TCC”), new provisions have also been introduced aiming a robust and well-functioning system that is more business aligned. Amongst other things, with the printing requirement for bearer and registered securities upon request of minority shareholders, it will now be possible to exercise shareholding rights in a more efficient and conducive manner. Additionally a new kind of financial instrument -securities containing right to purchase or exchange-, which had not been regulated under the TCC, has been introduced to the Turkish Law with the New TCC.
Article 484 of the New TCC governs about share certificates. This article reaffirms the basic principle set forth in Article 409 of the TCC, which allows share certificates to be issued either as registered or bearer share certificates. However, the New TCC has coined a new wording with regards to the term of share certificate, and opted to use the term “share certificate” instead of “stock certificate”.
Pursuant to Article 484/2 of the New TCC, bearer share certificates may not be issued for the shares fully unpaid shares. The bearer share certificates, which have been issued contrarily to this rule are void, on the other hand, compensation rights of bona fide persons are reserved.
Pursuant to Article 485 of the New TCC, unless stated otherwise in the articles of association, the type of a share certificate may be modified by means of conversion. The relevant article brings clarification to the issue, which had been left obscure to understand by the TCC, and states that the conversion may only be realized by amendment to the articles of association. Moreover, the relevant article regulates that, in the event that the conversion is a legal requirement the board of directors’ resolution is an essential condition for the execution of conversion transaction, and it shall be reflected to the articles of association at a later stage.
Pursuant to Article 486 of the New TCC regulating the principles pertaining to the printing of share certificates, similarly to Article 412 of the TCC, share certificates printed prior to the incorporation of the company are void, however, obligations resulting from the undertakings of subscription remain valid. Additionally, those who print share certificates prior to incorporation are required to compensate the damages resulting therefrom. The second and third paragraphs of Article 486 of the New TCC contain new provisions that were not included in the TCC. Accordingly, for bearer certificates, the board of directors shall, within three months following the payment in full of the share price, print the share certificates and deliver them to shareholders. With the said provision, a printing requirement with regards to bearer share certificates has been adopted. The board of directors’ resolution pertaining to printing the bearer share certificates shall be registered and announced, and published in the web site of the company. Moreover, the relevant article regulates that interim certificates may be issued until the issuance of original share certificates and shall be subject to the same the provisions as registered share certificates..
Pursuant to Article 486/3 of the New TCC, upon request of minority shareholders, registered share certificates shall be printed and delivered to shareholders. This provision is one of the innovations brought by the New TCC. With the statutory printing requirement of registered share certificates, inconsistent share ledger problems that may arise from not updated ledger records, are staved off. A very unbecoming practice, especially in closely-held joint stock companies, that unprinted share certificates may cause considerable obstacles of proving shareholding status. In the justification of the New TCC, it is stated that in case of infringement of the said article, shareholders are endowed to initiate a lawsuit. By this way, shareholders may benefit from an efficient statutory protection.
Articles in the New TCC concerning the rules for the form of share certificates, reaffirm the relevant articles in TCC about the worn-out or defaced share certificates.
Transfer of Share Certificates
The innovations in the New TCC concerning share transfers have been examined in our article of July 2011 titled “Innovations Concerning the Transfer of Shares in the New Turkish Commercial Code”. Therefore, only the basic principles with regards to transfer of shares shall be handled in this article.
Pursuant to Article 489 of the New TCC, the basic principle concerning the transfer of ownership of bearer share certificates is that the transfer of the share is only valid with regards to the company and third persons by the transfer of possession of the share. While the relevant disposition is identical with Article 415 of the TCC, the term “delivery” was used instead of the term “transfer of possession” in the TCC. The New TCC preferred the latter term in order to describe the concept more clearly.
Pursuant to Article 490 of the New TCC governs the transfer of registered share certificates, and states that the transfer of share is realized with the convey of possession of the registered and endorsed share certificate. This article clarifies that the transfer of possession of the endorsed share certificate is a requirement for completion of legally binding transfer transaction. With this article, confusions about the statutory transfer requirement for the endorsed share certificate are prevented.
Dividend Right Certificates
Provisions concerning dividend right certificates are set forth in Articles 502 and 503 of the New TCC. Pursuant to Article 502 of the New TCC, the general assembly may, in accordance with the articles of association or by amending the articles of association, decide on the issuance of dividend right certificates in favor of the shareholders whose shares have been extinguished by legal provisions, creditors or persons related to the company. In the relevant article, the basic principle laid down under Article 402 of the TCC is repeated. However, unlike the TCC, the New TCC regulates that the dividend right certificates may be issued as payable to bearer or payable to order of specified person.
Article 503 of the New TCC contains dispositions similar to Article 403 of the TCC. Pursuant to the said article, holders of dividend right certificates cannot be granted with shareholding rights; however, they may be granted with other rights; to participate to net profit, to the remaining amount after liquidation, to acquire newly issued shares.
Debt Instruments and Securities Containing Right to Purchase and Exchange
Article 504 and following articles of the New TCC regulate debt instruments and securities containing right to purchase and exchange which were not regulated under the TCC.
Upon the exercise of the right to purchase or right to exchange of the holders of the said rights, the company’s capital increases in proportion to these rights. The capital increase upon the exercise of the right to purchase or right to exchange occurs automatically, without further operation. Right to purchase and right to exchange are creative positive rights. Therefore, the relevant declaration generates its consequences once it is received by the other party, it cannot be revoked and it cannot be bound to a specific condition.
Pursuant to Article 504 of the New TCC, debt instruments – bills of exchange and commercial bills, securities- containing right to purchase and right to exchange and every kind of securities may be issued upon the resolution of general assembly, unless stated otherwise by legal provisions. Article 504 of the New TCC makes reference to Article 421/3 and 421/4 with regards to the resolution of general assembly to be adopted. Pursuant to the said provisions, these resolutions should be adopted by the votes of shareholders holding at least seventy five percent of the capital or their representatives. In the event that this quorum is not reached in the first general assembly meeting, the same quorum should be obtained for the following meetings. However, a provision on the contrary may be embodied to the articles of association (New TCC Article 504). Pursuant to the justification of the articles of the New TCC, it is possible to increase or decrease the quorum provided by the relevant article.
The general assembly resolution pertaining to issuance of security is required to contain all relevant terms and conditions of securities.
The security certificates issued in accordance with Article 504 of the New TCC may be payable to the bearer, payable to order of specified person by bearer with nominal value. The general assembly and, in case it is authorized, the board of directors are competent bodies for determination of the nominal value. The last sentence of Article 504 contains a provision which regulates only debt instruments. Accordingly, the payment method of debt instruments should be in cash and it should be paid at the time of delivery.
Pursuant to Article 505, unless otherwise regulated by law, the general assembly may authorize the board of directors with regards to issuance of security, determination of the terms and conditions related thereto and appointment of the operation auditor for a maximum term of fifteen months. In the justification of the articles of the New TCC, it is stated that the provision of a maximum term has been introduced for convenience purposes. Reference is made to Articles 421/3 and 421/4 with regards to quorums which shall be applied to resolutions pertaining to authorization of the board of directors. Accordingly, the resolutions shall be adopted with the votes of shareholders holding at least seventy five percent of the capital or their representatives and in the event that this quorum is not reached in the first general assembly meeting, the same quorum should be obtained for the following meetings.
Article 506 of the New TCC provides a limit concerning the total value of the debt instruments to be issued in accordance with the articles above. This value shall not exceed the sum of the company’s capital and reserve funds which appear on the balance sheet. Pursuant to Article 506/2 of the New TCC, provisions of the Capital Market Law are reserved.
As detailed in the above while the provisions in the New TCC concerning securities maintained the basic principles set forth in the TCC, new provisions aiming at eliminating the problems arising in the application of the TCC have been adopted. In brief the term “share certificate” is used in the New TCC instead of “stock certificate”; with the printing requirement for bearer and registered securities upon request of minority shareholders, shareholders will be able to exercise their shareholding rights in a more efficient manner; with the securities containing right to purchase or right to exchange, a new type of security not regulated under the TCC has been adopted with the New TCC. With these innovations, the New TCC aims to prevent the obstacles that used to occur with the implementation of TCC, and to establish a better functioning system.