Innovations in The New Turkish Commercial Code Concerning Voting Rights
Prof. Dr. H. Ercüment Erdem, August 2011Voting rights in joint stock companies are of significant importance, since they enable shareholders to participate in the management of the company. Shareholders may have a voice in the activities of the company through the exercise of their voting rights, such as appointment of members to corporate boards, supervision of the said members and exercise of minority rights. Privileges such as right of access to information, convocation of the general assembly and right to demand the annulment of the decisions aim to guarantee that the voting right is exercised more efficiently. The New Turkish Commercial Code (“New TCC”) provides different principles than the Turkish Commercial Code (“TCC”) with regard to voting rights. Swiss Code of Obligations is taken as basis for the said provisions of the New TCC. New provisions concerning the initiation of the voting right, its exercise and general issues concerning voting rights have been adopted in order to establish shareholders’ democracy. In line with these provisions, voting rights now have more effective compliance regime for substantive corporate governance principles.
Exercise of the voting right in the General Assembly and its attachment to the shareholder
Pursuant to Article 434 of the New TCC, shareholders exercise their voting rights in the General Assembly (“GA”). This provision is similar with Article 360 of the TCC, which includes the same principle. On the other hand, the last sentence of Article 434/1 reserves the provision of GA meetings held via electronic means. As it is possible to attend GA meetings via electronic means pursuant to Article 1527 of the New TCC, the voting right may be exercised via electronic means as well. The relevant article refers to this provision by stating that “Paragraph five of Article 1527 is reserved.” The exercise of voting rights via electronic means has the same consequences as attending the GA physically, and voting at the GA. In order for this provision to be applied, the articles of association shall contain a provision concerning the possibility of holding the GA via electronic means. The alternative concerning the GA via electronic means is an example for the effort of the New TCC with regards to conforming to the technologic innovations. In this way, the companies whose shareholders are not in the same physical environment will be able to organize the GA meetings in a more efficient way.
The New TCC, which made a preference in favor of the attachment of the voting right to the shareholder, adopted a different principle than the TCC in this matter. The principle within the TCC with regards to the voting right is its attachment to the share, and not to the shareholder. Article 373/1 of the TCC regulates that each share certificate grants at least one voting right. Additionally, the statement “…the number of voting rights granted by share certificates is determined by the articles of association.” in this article means that the voting right is attached to the share itself. Unlike the TCC, the New TCC adopted a system, based on the attachment of the voting right to the shareholder, and not to the share. Article 434/2 of the New TCC includes the statement “Even though the shareholder holds only one share, he is entitled to at least one voting right.” With this provision, the shareholder is taken as basis in the provisions concerning the voting right. This new rule is an important exception to the rule which provides that the share is the key element of the rights in joint stock companies.
Exercise of the voting right in proportion to the nominal value of the share
Article 373/1 of the TCC states that “Each share certificate grants at least one voting right.” Because of this statement, it can be asserted that equal shares give equal rights to their holders, without taking into consideration their nominal values. However, as each share may have a different nominal value, it has been defended by the doctrine that voting rights should be in proportion to the nominal value of the shares.
The New TCC, through Article 434, regulated that shareholders would exercise their voting rights in proportion to the total nominal value of the shares they hold. Therefore, the system in the TCC based on the share has been abandoned, and the system based on the total nominal value of the shares held by a particular shareholder has been adopted. As a result, the principle of taking part in the management in proportion to the capital has been emphasized in the joint stock companies, which are private equity companies.
Principles concerning the voting right granted in favor of the shareholder
Pursuant to Article 432/1 of the New TCC, in the event that there is a co-ownership concerning the share, the voting right may only be exercised by a joint representative. This provision is in line with the TCC. Pursuant to Article 432/2 of the New TCC, in the event that the share is subject to usufruct, the voting right shall be exercised by the holder of the usufruct right, except agreed otherwise. However, the usufructuary should act equitably, considering interests of the shareholder. Otherwise he shall be liable to the shareholder. This provision is in line with Article 360/5 of the TCC. New TCC brings a different provision and allows the owner to exercise the voting right with regards to an agreement concluded between the parties.
The New TCC regulates, through Article 434/2, that each shareholder shall hold at least one voting right even if he holds only one share. The principle of “no shareholder without voting right” is maintained in New TCC. However, shares without voting rights set forth under Article 14/A of the Capital Markets Law (“CML”) are the exception to this rule. Pursuant to CML, joint stock companies may issue shares without voting rights by providing a privilege of dividend under condition to have a provision in the articles of association and they may offer the share certificates representing those shares to the public.
Pursuant to the second sentence of Article 434/2 of the New TCC, number of votes to be granted in favor of the shareholders having more than one share may be limited by the articles of association. Thus, the issue which was controversial under TCC regarding the limitation of voting rights on the basis of shareholder has been clarified. Within this framework, having the majority of shares shall not be equal to having majority of voting rights, and an exception may be adopted by the articles of association.
Emergence of the voting right
Pursuant Article 435 of the New TCC, the voting right emerges upon the payment of the minimum amount provided by law or by the articles of association. This provision is a new provision that was not regulated under the TCC. Pursuant to this provision, in line with Article 344/1 of the New TCC, the shareholder acquires the right to vote upon the payment of twenty five percent of the price of the shares subscribed in cash, or the price stipulated under the articles of association, if this price is higher. In the event that a higher price is not stipulated under the articles of association, the payment of twenty five percent is sufficient for the emergence of the voting right.
Provisions concerning preference in voting rights
Pursuant to Article 478/2 of the New TCC which regulates preference shares, the preference in voting rights is also mentioned among the preferences that may be granted in favor of shareholders. Voting preference shares are regulated separately under Article 479. According to this provision, voting preference may be granted by designating different number of voting rights to the shares having the same nominal value. Therefore, under the New TCC, voting preference may not be granted by designating the same number of voting rights to the shares having different nominal values.
Another innovation provided by the New TCC concerning voting preference shares is the limitation of the voting right that may be granted in favor of a per share. The TCC does not provide any limitation on this matter. Pursuant to Article 479/2 of the New TCC, the maximum number of voting rights granted in favor of per share is limited to fifteen votes.
Additionally, the limit set with regards to voting preference shares shall not be applied in case the corporate governance principle requires, or in the presence of a valid reason. The request to set aside the upper limit of voting preference shall be addressed to the commercial court located at the place of registered office of the company. The court should evaluate the corporate project and decide to set aside the upper limit rule for preference shares. The New TCC regulates that the court may withdraw the decision concerning the omission of the limitation rule in the event that the corporate project appears as non-applicable, or the valid reason ceases to exist.
Article 479/3 of the New TCC lists the resolutions for which the voting preference right can not be applied. These resolutions are the resolution concerning the amendment of the articles of association, appointment of operation auditor and resolutions concerning the discharge and claims based on the responsibility of directors. Besides being important resolutions, the aforesaid resolutions may result in some shareholders to gain control over the company. This provision of the New TCC aims to prevent the abuse of preference shares in order to gain control over the company.
New TCC brings important modifications regarding voting rights. The principle of exercise of the voting right in GA is strengthened by including the online GAs within this scope. The voting right is attached to the shareholder and the obligation to grant at least one voting right to each shareholder is regulated. The voting right shall be exercised proportionally to the nominal value of the shares. The emergence of the voting right shall be subject to different rules under the New TCC. Provisions regarding voting preference shares are regulated pursuant to the corporate governance principles.