Recent Court of Cassation Decision on “Renting” Company Shares

The subject of this Newsletter is the analysis of the Decision by focusing on different transactions regarding shares of a capital company. Firstly, the transactions, to which a share may be subject to, will be briefly explained, and then the Decision of the 11^th Civil Chamber of the Court of Cassation dated June 2022 will be analyzed.

Transactions Regarding Company Shares and Shareholder Rights

First of all, it is important whether the transactions, the subject matter of which is a company share, grants an absolute right or a contractual right of claim (right of receivable) in terms of the rights grant. This is especially critical in terms of the effects and remedies of such transaction. For instance, while assignment, usufruct and pledge grant the counterparty a right in rem over the share, a voting agreement grants the parties merely contractual rights. Also, as per the Turkish Code of Obligations numbered 6098 (“TCO”), the assignee of a receivable may assert its right to receivable directly against the debtor, while the tenant in a movable rent may, as a rule, only assert its contractual (inter partes) rights against the counterparty.

Below, before going into the Decision and the Court of Cassation’s opinion regarding the “rent agreement” on company shares, the transactions which are accepted regarding a capital company share by the scholars, other than the share transfer are briefly explained.

Usufruct Right

The provisions of the Turkish Commercial Code numbered 6102 (“TCC”) on joint stock companies and limited liability companies stipulate that usufruct rights, which are limited rights in rem, may be established over company shares. In joint stock companies, Article 432(2) of the TCC regulates the voting right of the usufruct right owner, Article 492(2) of the TCC regulates the usufruct right and the transfer limitations, and Article 499 of the TCC regulates the registration of the usufruct right owner in the share ledger. For limited liability companies, the establishment of usufruct rights on shares is regulated under Article 600 of the TCC. All these legal regulations reveal that the share may be subject to usufruct right in capital companies.

The benefits of the usufruct right to the right holder may be listed as being entitled to the dividend which is allocated for distribution,^[2] being entitled to the interest for the preparation period,^[3] benefiting from the company facilities,^[4] being entitled to the liquidation share,^[5] being entitled to the redemption price^[6] and exercising the voting right pursuant to Article 432(2) of the TCC.

Pledge

A pledge, which is a limited right in rem like usufruct, is mainly regulated under the Turkish Civil Code numbered 4721 (“CC”). The shares of a capital company may be attached to a promissory note, or they may be in the form of naked shares (not attached to a promissory note). In both cases, the provisions of the CC regarding the establishment of the pledge shall apply. Article 955 of the CC, titled “For receivables attached or not attached to a promissory note”, stipulates that a written agreement is required for the establishment of a pledge on the naked share. With respect to the shareholding attached to a promissory note, the doctrine states that a pledge may be established pursuant to either Article 955(1) or 956(2) of the CC. Accordingly, the establishment of a pledge requires either a written pledge agreement and delivery of the promissory note or delivery of the promissory note endorsed with a pledge endorsement to the pledgee.^[7]

Articles 955-960 of the CC governs the effects of the pledge. Pursuant to these provisions, as a rule, dividend receivables that are yet to become due fall within the scope of the pledge. However, the right of representation in the general assembly does not pass to the pledgee; it belongs to the shareholder.

Voting Agreement

It is also possible to subject the shares to contractual relations without establishing a right in rem on the shares. One of the main examples of this is voting agreements, which include the shareholders’ undertakings to exercise their voting rights.^[8] With a voting agreement, the shareholders may undertake to cast their votes in a certain direction or not to cast their votes at all in the general assembly resolutions that are agreed in advance within the scope of the voting agreement or to be determined in accordance with the agreement.^[9]

Shareholders may conclude voting agreements among themselves or may also enter into such an undertaking with third parties.^[10] Among the scholars, cases when voting agreements are executed with third parties are exemplified as the voting agreements concluded with the financial institution from which the loan is used or with the parent company,^[11] and the agreements concluded between the seller and the prospective buyer regarding the decision to be taken in the general assembly to be held before the sale of the shares.^[12]

Assignment of the Dividends

Pursuant to Article 507 of the TCC, right to dividend, which is considered as the primary financial benefit of the shareholders from the company, is granted to each shareholder in proportion to their shares, principally. However, the scholars analyze two different perspectives of this right: (i) dividend right in the narrow sense and (ii) dividend as a receivable.^[13] The dividend right in the narrow sense, which is considered among the shareholders’ rights and which cannot be transferred separately pursuant to the unity theory, is regulated under Art. 507 of the TCC and the following provisions. Whereas the dividend as a receivable, which becomes a receivable right for the shareholder upon the distribution decision, is a receivable right subject to the provisions of the TCO.

Pursuant to Article 184 of the TCO, the assignment of the dividend receivable by the shareholder requires a written agreement between parties. Upon notification of the assignment to the company, pursuant to Article 186 of the TCO, the company is obliged pay the relevant dividend payment to the assignee, not to the shareholder. The protections provided under the TCO for the debtor of the assigned receivable also apply to the company. These protections are namely, being released of its obligation upon payment made with good faith before the assignment notification and being able to assert the defenses against the assignee that may be brought against the shareholder.

Decision of the 11th Civil Chamber of the Court of Cassation

In the Decision,^[14] the subject of dispute is a contract concluded between a limited liability company partner and a third party, the subject of which is the “arrangement and leasing of the rights and receivables arising from the ongoing partnership relationship” in the limited liability company. It is stated in the text of the Decision that the wording of the agreement regulates the lease of 25% of the shares of the limited liability company partner. In the dispute arising from the request for collection of the rent receivable, the court of first instance dismissed the case by stating that (i) the lease agreement may only be concluded in relation to tangible assets, (ii) it is impossible for the company share to be subject to a lease agreement, and therefore (iii) the agreement is invalid. Also, the regional court of appeal, rejected the appeal on the grounds that the TCC and the TCO do not regulate the rent of company shares and company shares are not assets that can be subject to rent under the TCO.

The Court of Cassation, further determined that “principally, it is not possible to rent the company shares”, however, pursuant to Article 19 of the TCO, the real and common will of the parties should be regarded while in determining the true content of the contract, and in the examination of the contract in the dispute, the real will of the parties was to transfer the dividend right arising from the 25% share of the limited liability company for a consideration. The court ruled that the contract which was interpreted to be on the assignment of the dividend for consideration, was not invalid, and therefore, the decision to dismiss the lawsuit was erroneous. Thus, the 11th Civil Chamber Court of Cassation unanimously reversed the decision and sent the file back to the court of first instance.

The fact that, all three of the court of first instance, the regional court of appeal and the 11th Civil Chamber of the Court of Cassation accepted that the company share may not be the subject of a lease agreement, is thought-provoking. Because, neither the court of first instance nor the Court of Cassation has commented further regarding on the opinion first instance court, being subject matter of a rent agreement may only be tangible assets (movable and immovable property), pursuant to the TCO. The fact that the all three courts, while concluding that it is “not possible” to execute a rent agreement regarding company shares, did not made any discussion regarding the distinction between “ordinary rent agreement” and “product (revenue) rent”, which is the main distinction in the law of obligations on rent agreements. Therefore, rationale of all three courts stands as a radical interpretation.

Conclusion

It is commonly accepted that a share of a capital company may be subject to share transfer, establishing limited rights in rem (i.e. usufruct rights and pledge), executing a voting agreement and assigning dividends. However, neither the TCO nor the TCC regulates the transactions that may or may not be subject to capital company shares, particularly rent agreements. In a recent decision of the 11th Civil Chamber of the Court of Cassation, it is stated that limited liability company shares may not be subject to a rent agreement. The Court of Cassation interpreted the “rent” agreement, which regulates the rent of 25% of the shares of the limited liability company shareholder, in accordance with Article 19 of the TCO, and concluded that the will of the parties was the assignment of the dividend receivable in return for consideration.