Squeeze-Out, Sell-Out And Exit Rights in Joint Stock Companies

Att. Leyla Orak Celikboya, February 2013


The partnership between a joint stock company and its shareholder will cease, in principle, upon the transfer of shares by the shareholder. A holder of joint stock company shares may cease its partnership relationship voluntarily by transferring its shares to a third party.
Nevertheless, voluntary share transfer may not always be the answer to the specific needs. From the company’s perspective, it may be necessary to sever its partnership with a shareholder causing perturbation in the company, even in the absence of the shareholder’s will, by resorting to other means. For these reasons, a company’s right to squeeze-out shareholders is significant. Similarly, a non-controlling shareholder in a company may not want to be bound by the consequences of decisions in which they did not participate and may want to end the partnership, even in the absence of a prospective purchaser for its shares. For these reasons, the sell-out right of shareholders to sell their shares to another shareholder, and the exit right requiring the company to purchase their shares are very important.
In this article, the statutory provisions regarding squeeze-out, sell-out and exit rights will be analyzed.

Provisions of the TCC

The Turkish Commercial Code No. 6102[1] (“TCC”) regulates the squeeze-out of shareholders from a joint stock company for the first time. The TCC further regulates the sell-out right granted to shareholders who do not have control over companies that are members of group companies, under certain circumstances.

Squeeze-Out Right of the Company

Abrogated Turkish Commerical Code No. 6762 foresaw the annulment of shares in the event shareholders failed to fulfill the obligation to fully pay up the share capital subscription. This is preserved under the TCC. However, through this mechanism, the shareholder shall be deprived only of shares whose subscription he failed to fully pay. For instance, a shareholder who fully paid the subscription value of its then-current shares, who subscribed for newly issued shares but defaulted on their payment may only be deprived of the newly issued shares as a result of the capital increase. Annulment, therefore, does not always result in the cessation of partnership with a shareholder.
The squeeze-out of shareholders from joint stock companies is therefore an important innovation introduced under the TCC. Pursuant to the TCC, squeeze-out is granted under three circumstances.
The first is that companies party to a merger transaction may, under the merger agreement, grant shareholders the right to acquire shares or to just receive consideration without obtaining any shares. The TCC allows merger agreements to only grant consideration to shareholders, accordingly such persons may not acquire any shares in the merged (or acquiring) company. However, pursuant to TCC Art. 141, in the event the merger agreement only contains a provision of consideration and not shareholding for the existing shareholders, this agreement must be approved by the transferor/acquired company with an affirmative 90% of the total votes in that company.
The second circumstance whereby squeeze-out is allowed is specific to group companies. The mother company in a group, which owns at least ninety percent of the shares of its subsidiary, may squeeze-out the remaining minority, if such minority violates the good faith principle, causes trouble or acts recklessly, by purchasing its shares in the company. The squeeze-out right provided for here may only be exercised in the presence of just cause. The legislative justification of TCC Art. 208 regulating the squeeze-out under these circumstances states that it serves to end the disturbing actions of shareholders who continuously object to the decision making of the company for various reasons and to ensure peace within the company.
The third circumstance where squeeze-out is possible is regulated along with the right of shareholders to request dissolution of the company due to just cause under TCC Art. 531. The minority shareholder may initiate a lawsuit for the dissolution of the company where there is just cause (such as constant violation of minority rights, right to information or similar rights). The judge of the civil court of first instance may decide on the squeeze-out of the shareholder from the company by paying the plaintiff shareholder the share price, instead of deciding to dissolve the company. However, it should be noted that this article does not provide a squeeze-out right for the company. Pursuant to this article, the shareholder may only be squeezed out if a lawsuit for the dissolution of a company is filed and upon a court decision.

Sell-out Right of the Shareholder in Group Companies

The TCC foresees certain consequences of unfair exercise of dominance under its provisions governing group companies. Certain provisions grant shareholders of subsidiary companies the right to sell-out under certain conditions.
Pursuant to the TCC, the controlling company may not exercise dominance over its subsidiary which results in loss in the subsidiary, unless such loss is counterbalanced in the given activity year or without specifying the timeframe within which counterbalance will take place. Pursuant to TCC Art. 202/1/b, in the event the company fails to counterbalance the loss, the shareholders of the subsidiary may request the controlling company to compensate the damages incurred by the subsidiary. In such an event, the judge may decide on compensation, on the purchase of the shares of the plaintiff shareholder by the controlling company or on another convenient measure. However, the abovementioned provision also grants the shareholder the right to request from the court that the controlling shareholder purchase his shares. Therefore, the shareholders are granted a right to request to sell-out.
In the event the subsidiary company engages in transactions such as merger, spin-off, type conversion, issuance of securities and amendments to its articles of associations, and if such transaction is made only as a result of dominance, without an apparent justification from the subsidiaries point of view, another sell-out right may arise. Pursuant to TCC Art. 202/2, shareholders voting against a general assembly resolution, who record their objections in the minutes, or who object in writing to board resolutions governing such material transactions may, within two years as of the date of the relevant decision, request from the courts that the controlling undertaking purchases its shares with a minimum value equivalent to the market price, actual price or the price to be determined by a generally accepted calculation method.

Provisions of the CML

Capital Markets Law No. 6362[2] (“CML”) regulates the mandatory share purchase bid (mandatory bid/appel), which was regulated with communiqués by the Capital Markets Board (“CMB”) issued pursuant to a general provision of the Abrogated Capital Markets Law No. 2499. However, in addition to this provision, the CML further regulates the squeeze-out, sell-out and exit rights in public joint stock companies. Thus, in addition to the provisions of the TCC, which were briefly addressed above, the CML provides new possibilities to public companies and their shareholders. Below, the squeeze-out, sell-out and exit rights granted under the CML will be assessed.

Squeeze-Out and Sell-Out Rights

Pursuant to Art. 27 of the CML, either as a result of a mandatory offer, or through other means such as acting together, in the event the total number of shares held exceeds the percentage to be determined by the CMB, the persons holding such shares shall have a right to squeeze-out/sell-out the shares of the minority shareholders. From the wording of the article, it is understood that the term minority will not be construed as the technically defined term under the TCC, but as the shareholders who form the minority in comparison with the persons holding shares exceeding the percentage to be determined by the CMB. Currently, there are no regulations specifying this percentage.
Shareholders who have a squeeze-out right may, within the timeframes to be determined by the CMB, request that the company nullify shares held by minority shareholders, to issue new shares representing the capital held by such minority and to purchase such shares. Reference is made to Art. 24 of the CML, with regards to the share price. The article regulating the exit right, which is analyzed below, states that the share price shall be specified in the agenda of the relevant general assembly meeting. The CMB shall regulate the principles and procedures with regards to the determination of shares not listed on the stock exchange.
This article governing the squeeze-out right states that, in cases where the squeeze-out/buy-out right arises based on the percentages determined by the CMB, the minority shareholder shall also have a sell-out right. Pursuant to this provision, the minority shareholders may, within the timeframes to be determined by the CMB, request the shareholders holding shares exceeding the percentage to be determined by the CMB to purchase their shares in exchange for a fair value. Thus, the sell-out right of shareholders holding a specified percentage of the shares and the sell-out right of minority shareholders is regulated as a whole.
This article expressly holds that Art. 208 of the TCC, which is among the provisions governing group companies, shall not be applicable to public companies. Said article, analyzed hereinabove, governs the squeeze-out of the minority causing trouble in a subsidiary of a group. The legislative justification provided by the CML states that the two provisions regulate similar matters, and given a specific provision is present in the CML, an exception to TCC Art. 208 is foreseen.

The Exit Right

Pursuant to the provisions of the TCC governing group companies, the shareholder exercises its right to leave the company by requiring the controlling company, or the controlling undertaking, to purchase its shares. CML Art. 27 discussed above also grants the shareholder the right to sell its shares to other shareholders whose shares exceed a specific percentage. These rights are referred to as the sell-out rights of the shareholders. However, the CML further provides for the right of the shareholder to sell its shares directly to the public company to which it is a shareholder. This right granted under the CML is referred to as the “exit right”.
The exit right is granted to shareholders in the event a public company makes important decisions. Pursuant to CML Art. 23 merger, demerger transactions, type conversions, decisions to dissolve, transfer of all or a material portion of its assets, establishing of a right in rem over or leasing all or a material portion of its assets, materially or completely amending the scope of activities, granting privileges and amending the scope of existing privileges and delisting decisions are considered among the important decisions of a public company. Exit rights may also emerge for companies which became ipso jure public due to the number of their shareholders, however, which do not want to be subject to the CML. Pursuant to CML Art. 33, companies deemed public for having over five hundred shareholders may opt out from the scope of the CML through a general assembly resolution to be adopted with the votes of at least two thirds of the total number of shareholders, and which may not be less than three fourth of all votes in the company in the event the company does not want its shares to be traded on a stock exchange.
Shareholders participating in the general assembly resolutions where the abovementioned transactions are discussed, who cast negative votes and who record their objection in the meeting minutes may exit the company by selling their shares to the public company. In the event a shareholder is unjustly deprived of the right to participate in the general assembly meeting or if the invitation or announcement of the agenda is not duly made, the prerequisites of casting a negative vote and recording the objection shall not be applicable in order to grant the exercise of the exit right.
It is disputed whether the share buy-back limits of companies regulated under the TCC shall apply in the event of an exit right. The principles and procedures of the exit right shall be determined by the CMB.


The squeeze-out right of a company is a right introduced with the TCC, which also is subject to specific provisions under the CML. Additionally, these recently adopted codes grant the shareholder sell-out and exit rights which may be used to sever partnership with a company. These rights serve to fulfill needs that arise in practice.
The procedures and principles regarding the squeeze-out, sell-out and exit rights regulated under the CML shall be clarified in the secondary legislation to be issued by the CMB.

[1] Official Gazette, 14 February 2011, No. 27846. TCC entered into force on 1 July 2012.
[2] Official Gazette, 30 December 2012, No. 28513. CML entered into force on its publication date.