Ercüment Erdem Att. Tuna Colgar

Veto Rights in Joint Stock Companies

August 2020

There are numerous mechanisms to provide joint control in joint stock companies, for the cases in which the shareholders hold uneven amounts of shares. One of those is to provide equal amounts of votes to the minority shareholder through privilege in voting rights. Another mechanism through which to provide joint control is to raise the thresholds in the relevant board (either general assembly or the board of directors). Raising the quorums, either to hold a meeting or to render a decision, may grant factual power for the shareholders other than the dominant shareholder. A third mechanism, which is the subject of this article, is to provide joint control for certain issues is granting veto rights for the specific shares or shareholders. This veto right might be stipulated as raising the quorums to hold a meeting or to render a decision, or as the requirement of the affirmative vote of certain share groups, in certain strategic decisions. Also, veto rights that are attached to the shareholder rather than a share group, thus not having corporative nature, might be stipulated.

A right to veto entitles one whose will would be effective in the decision, to prevent a board from rendering the referred decision.[1] As could be understood from the definition, a person who has veto right may prevent the decision by declaring their opposing will, even if the requirements as to the decision were met.[2]

The first categorization regarding the veto rights is the source of the right. Article 421(2) of the Turkish Commercial Code (“TCC”), grants every shareholder a right to veto by requiring unanimity for decisions on transferring the headquarters of a company abroad, and on raising the liability of the shareholders. Also, Article 462(3) of the TCC might be referred to above since it regulates the monetary capital increase without using the company funds. In all three cases referred to above, there is a right to veto arising from the law for each shareholder.

Aside from raising the quorums, another preferred method, in practice, is to add a provision to the articles of association saying that the quorums shall not be deemed as met unless a certain group of shares is represented or the board member representing a certain group of shares is present.

Contrary to a veto right that arises from the law, a contractual veto right is granted by a provision in the articles of association of the company or in the shareholders’ agreement. In this regard, if the will of a certain shareholder is to be decisive for a certain decision, a veto right should be granted for that specific decision, either in the articles of association, or in the shareholders’ agreement.[3]

A contractual veto right might be granted for a certain share group or a certain shareholder. However, the preferred method would affect the legal nature of the veto right. A veto right that is stated in the articles of association is to be used before the general assembly, and which is to the advantage of a certain share group, is either a privilege or a raised threshold. Contrary to a raised threshold, if a right to veto is granted for a share group by the articles of association, then the affirmative votes of the referred share group is necessary for a decision to be rendered, even if the thresholds are met.

In this regard, the share group that has the veto right has a superior right for a decision in the general assembly, since it may prevent the rendering of the decision. Thus, such veto right that is attached to a share group is defined as a privilege.

Under the TCC, a privilege shall be only attached to a share. Rights, powers, or advantages that are attached to persons, certain traits, or a title shall not be deemed as a privilege under the TCC. Thus, a veto right that is specified for a person – although it might be valid – shall not be evaluated as a privilege, and would be defined as a “contractual right.” Even if it is written in the articles of association, no corporative right arises.[4]

A veto right that is not among the real provisions of the articles of association and granted for persons is not of a corporative nature and there is only a contractual relationship between the shareholder and the company. On the other hand, if a right to veto is stipulated by raising the quorums in the general assembly or by requiring the affirmative votes of a share group through the articles of association, that veto right would have a corporative nature.[5]

The difference of the rights that are granted in the shareholders’ agreement, and which are not within the articles of association in the material sense, although they might be written in the formal sense, thus, are non-corporative rights; it is that they might be enforced under the law of obligations, but those rights do not entail any corporative enforceability. [6] In other words, in the event of a breach of a non-corporative right, due to the hardship regarding the specific performance, the right might not be enforced in kind.

The corporative provisions in the articles of associations shall be applicable for the shareholders today and tomorrow, rather than being applicable exclusively for the ones who are the current shareholders or who signed the provision.[7]  Thus, if a veto right is attached to a share group rather than a specific shareholder, and renders the right more effective and more enforceable, then that right becomes a part of corporate law.

A veto right that is attached to a share group as a privilege, is subject to the protection under Article 454 of the TCC and shall not be derogated without the affirmative vote of the shareholders having the veto right.

 A veto right for the general assembly, such as a requirement of the affirmative vote of a certain share group, and a veto right for the board of directors, such as one granted to a board member who represents the interests of one group of shareholders, shall be examined differently. Firstly, a veto right that provides the requirement of the affirmative vote of the said board member is valid as it is related to a share, or with the more accurate expression, it derives from a share.[8] This veto right has the same legal enforceability as a raised quorum. However, in the case of a raised quorum, a decision might be rendered with the sufficient percentage of votes. On the other hand, in the case of a veto right requiring a specific affirmative vote, even if the quorums are met, the affirmative from the privileged share is yet to be sought. Hence, a veto right that is stipulated as a privilege provides a higher protection when compared to the raised quorums.

 Either as a requirement of specific affirmative vote or as a raised quorum, stipulating the veto rights for certain and limited strategic issues is crucial to prevent deadlocks, and to maintain the operability of the company. With that being said, if a certain issue is of crucial strategic value, both a threshold increase and requirement of the affirmative vote of a specific share might be stipulated to increase the need for the consent of a certain share group.

To conclude, as explained above, it is possible to stipulate a veto right through different mechanisms. What is crucial is to ensure that a decision regarding a strategic issue may not be rendered without the certain group of shareholders’ will.

Both in the general assembly and the board of directors strategic decisions as to the structure of the company and its operation may be rendered. Therefore, in order to ensure the will of a certain share group is effective in a strategic decision, both a veto right for the general assembly and a veto right for the board of directors might be stipulated.

Either stipulated in the articles of association or in the shareholders’ agreement, a veto right should be drafted as valid and enforceable. If not, it would not be possible for the shareholders to protect their wills as desired.

[1] Altay Sıtkı Anlam, Anonim Ortaklıklar Hukuku’nda Sermayeye Katılmalı Ortak Girişimler, Vedat    Kitapçılık, 2009, p. 491.

[2] Altay, p. 492.

[3] Altay, p. 492.

[4] Poroy/Tekinalp/Çamoğlu, Ortaklıklar Hukuku, Cilt-I, Yeniden Yazolmış 13. Bası, Vedat Kiktapçılık, 2014, p. 566.

[5] Altay, p. 473.

[6] Okutan Nilsson Gül, Anonim Ortaklıklarda Paysahipleri Sözleşmeleri, İstanbul 2003, p. 112.

[7] Okutan Nilsson, p. 113.

[8] Altay, p. 498.