Freezing of Voting Rights in Joint Stock Companies

July 2020 Yağmur Zeytinkaya Öztürk
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The general assembly, one of two organs of a joint stock company pursuant to Turkish Commercial Code numbered 6102 (“TCC”), declares its will on company’s management through voting rights, which are used in the general assembly meetings. Among crucial matters, in that the shareholders have a right to vote, appointment or dismissal of the board members, appointment of auditors, resolving on the distribution of dividends, and the liquidation of the company shall be noted. Pursuant to Article 434 of the TCC, each shareholder has at least one voting right; the shareholder has only one share. (For detailed information regarding voting rights, please refer to.)[1] However, there are certain circumstances in which the voting right is blocked: Lack of voting right and freezing of voting right. In this newsletter article, freezing of voting rights, and the causes for such freezes are examined. The grounds for freezing of voting rights, which are regulated outside of the TCC, fall outside of the scope of this article.

Freezing of Voting Rights under the TCC

Under the TCC, certain cases of conflicts of interest are remedied with the “freezing” of voting rights, which is the most effective power of a shareholder regarding the management of a company. As an obvious outcome of freezing of voting rights, the shareholders cannot use their voting rights. Also, such shares shall not be taken into account in the calculation of the quorums for general assembly meetings. Thus, such share becomes “invisible” before the company and, in certain ways, it is left outside of the game. Another principle on the freezing of voting rights is its permanent nature. Contrary to the lack of voting rights, frozen votes are not frozen for a certain item on the general assembly meeting’s agenda. The shareholder, which holds the share with frozen voting rights, cannot use their right to vote until the issue, which has caused the freeze, disappears. Freezing is effective for the occurrence of the cause of freeze until the disappearance of such cause.

Additionally, another reflection of the freeze is that it strengthens the power of the remaining shares in the general assembly. Disregarding the frozen rights while calculating the quorums means that such shares shall be set-off from the total shares that represent the capital and thereof, the quorums shall be calculated through the remaining shares. In other words, the shares with frozen voting rights will be deemed as non-existent, and the total share amount will decrease.[2] Therefore, the power of one vote will increase proportionally.

As an example for the calculation, if 500 shares in a joint stock company, which is represented by 1000 shares in total, freeze; the meeting and decision quorums shall be calculated by taking 500 shares into account and the general assembly meeting can be convened without any announcement, provided that all 500 shares which have not been frozen are present.[3] The power of a share increases from 1/1000 to 1/500.

Grounds for Freezing of Voting Rights

Failure to Make the Notification under Article 198 of TCC

If a company (the "Notifying Company"), directly or indirectly, acquires shares representing 5%, 10%, 20%, 25%, 33%, 50%, 67% or 100% of the share capital of another company (the "Target Company"), or the Notifying Company"s shareholding ratio in the Target Company falls below the above-mentioned thresholds, the Notifying Company must inform the Target Company of such transaction, in writing, within ten days following completion of the share transfer, which is also widely known as the “198 Notification.” The notifications shall be made in writing and shall be both registered and announced.

Pursuant to Article 198/2 of the TCC, all rights deriving from the relevant shares shall freeze, including the voting rights, until the registration and announcement has been completed. The details regarding the notifications are regulated under Article 107 of the Trade Registry Regulation. Pursuant to the sixth paragraph of the relevant Article, if an application for registry and announcement is not submitted to the relevant directorate within the legal time period, all rights deriving from the relevant shares shall freeze, including the voting rights. Therefore, it is possible to state that other rights, such as the right to dividends or preemptive rights, also freeze. Since Article 198/2 of the TCC states that such rights shall remain frozen so long as the notice, registration, and announcement obligations are fulfilled, there is an opinion in the doctrine, which defends that such rights cannot be used from the moment of acquisition until the moment of notice.[4]

Although under certain provisions it is explicitly regulated that the shares subject to the freezing of voting rights shall not be considered for quorums (please see Companies’ Acquisition of its Own Shares and Cross Shareholding), Article 198 of the TCC remains silent on this issue. The prevailing opinions in the doctrine is that the rights subject to the freezing of voting rights should not be considered for the quorums. Thus, it could be evaluated that the shares subject to the freezing of voting rights would not be regarded for both meeting and decision quorums.[5]

Companies’ Acquisition of its Own Shares

Pursuant to a contrario meaning of Article 379 of the TCC, the company may acquire its own shares, so long as it does not exceed 10% of its original or issued capital, and by providing other conditions. Pursuant to Article 389 of the TCC, the acquired shares (…) shall not be taken into account in the calculation of the meeting quorum of the general assembly meeting.

As explained, above, the general assembly is one of the organs that builds a company’s future. If the company makes resolutions regarding its management through the acquired shares, this may cause a worrying result in regard to the balance between the organs. There is also an opinion, which evaluates that due to the misusage of the voting rights of the acquired shares by the company management, the balance of power may change in favor of the board of directors.[6]

The main result of freezing due to the companies’ acquisition of its own shares is that the related voting rights cannot be used. Another result is that such shares shall not be taken into account in the calculation of the quorums for the general assembly meeting. Additionally, another result of the acquisition is that such shares do not offer any shareholding rights to its shareholders. As explained, above, the main idea behind the freezing of such voting rights is to prevent the company from determining its own future and to protect the power balance between two organs of the company (for detailed information regarding a company’s acquisition of its own shares, please refer to.[7])

Acquisition of the Parent Company by the Sister Company

The acquisition of the parent company by the sister company is regulated under Article 389 of the TCC. As explained above, the parent company’s shares that have been acquired by the sister company shall not be taken into account in the calculation of the quorums for the general assembly meeting. The voting rights of the parent company’s shares that have been acquired by the parent company shall be also frozen.

Cross Shareholding

Cross shareholding may be simply defined as the participation of two companies to each other’s capital. Pursuant to Article 197 of the TCC, stock corporations that hold at least one fourth of each other’s share are cross shareholding.

Pursuant to Article 201 of the TCC, a stock corporation that knowingly gets into a cross shareholding situation by acquiring the shares of another stock corporation can only use one-fourth of its total votes arising from the shares subject to participation and of its other shareholding rights; all other shareholding rights, except for the right to acquire the gratis shares, shall be frozen. Such shares shall not be taken into account in the calculation of the general assembly meeting. 

Pursuant to Article 201/2 of the TCC, such limitation shall only apply if the acquired share is not the parent company, and it shall not be applied if the parent company acquires the shares of the sister company, or if both companies are parent companies of each other. Therefore, it is reasonable to conclude that the voting rights may be used by the sister company if the shares of the parent company are acquired. However, as explained below, in case of the Acquisition of the Parent Company by the Sister Company, all rights regarding the acquired shares by the sister company shall freeze. Thus, there is an opinion in the doctrine which defends that Articles 201/2 and 389 do not comply with each other.[8]

Conclusion

The TCC regulates the freezing of voting rights under certain cases of conflicts of interest. Apart from the lack of a voting right, freezing is a permanent state, and the relevant voting rights cannot be used until the reason for the freezing is removed. Additionally, such shares shall not be taken into account in the calculation of the quorums for general assembly meetings.

Source
  • Erdem, ErcümentRecent Developments on Voting Rights under the new TCC Erdem & Erdem Newsletter, August, 2011.
  • Yanlı, VeliyeOkutan Nilsson, Gül: Prof. Dr. Hamdi Yasaman"a Armağan: Türk Ticaret Kanunu’nun 198. Maddesi Uyarınca Bildirim Yapılmamasının Anonim Şirketteki Oy Haklarına Etkisi, On İki Levha Yayıncılık, İstanbul, 2017, p. 779.
  • Yanlı; Okutan Nilsson, p. 779
  • Okutan Nilsson, Gül: Türk Ticaret Kanunu Tasarısı"na Göre Şirketler Topluluğu Hukuku, On İki Levha Yayıncılık, İstanbul, 2009, p. 527.
  • Yanlı; Okutan Nilsson, p. 777.
  • Çapa, Mehmet Sadık: Anonim ve Limited Şirketlerin Kendi Paylarını İktisap Etmesi, On İki Levha Yayıncılık, İstanbul, 2013, p. 107.
  • Sevinç Atılganer, Melisa: Certain Shareholder Rights in Companies’ Acquisition of its Own Shares,” Erdem & Erdem Newsletter, June, 2020.
  • Kendigelen, Abuzer: Yeni Türk Ticaret Kanunu: Değişiklikler, Yenilikler ve İlk Tespitler, On İki Levha Yayıncılık, İstanbul, 2016, p. 183.


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