Share Pledges in Limited Liability Companies

June 2018 Prof. Dr. H. Ercüment Erdem
% 0

Shareholders of limited liability companies may pledge the shares of limited liability companies for their debts, debts of the limited liability company, or the debts of third parties. The subject of the pledge right established on the company"s share is partnerships rights regarding assets. Thus, the limited company share pledge is subject to the Turkish Civil Code (“Civil Code”) regulations regarding the right of pledge over receivables and other rights. In addition, the Turkish Commercial Code (“TCC”) also introduces special regulations on the pledge of shares of limited liability companies.

While examining the regulations regarding the pledge of shares of a limited company, the distinction made in TCC Article 600 shall be taken into account. Accordingly, if the share pledge is subject to the approval of the general assembly, TCC Articles 595 to 598 also apply to the pledge of the shares of a limited liability company. In cases where the shareholder’s pledge is not subject to the approval of the general assembly, only the provisions of the Civil Code regarding the right of pledge on the rights are applied.

In this article, parallel to the regulation of the TCC, the establishment of a pledge on the share of a limited company is examined by making a dual distinction according to whether or not the pledge is subject to approval of the general assembly.

The Condition where the Share Pledge is Subject to Approval of the General Assembly

The pledge of the share of the limited company is distinctly regulated under Article 600 of the TCC. Article 600(2) of the TCC stipulates that the pledge of the capital share may be subject to the approval of the general meeting of the company, and in this case, TCC provisions regarding share transfers shall also apply to share pledges.

In the reasoning of Article 600 of the TCC, it is stated that the reference to the provisions regarding share transfers includes both the provisions relating to form and approval and specific provisions concerning inheritance, property regimes between spouses, and compulsory enforcement. This reference has various results related to the establishment of pledges on shares of limited liability companies, in cases where the share pledge is subject to the approval of the general assembly.

Regarding the Prohibition of the PledgeThe pledge of a capital share may be prohibited, provided that it is explicitly stipulated in the articles of incorporation. TCC Article 595(4) stipulates that the transfer of capital shares may be prohibited by the articles of incorporation. In my opinion, the reference to the transfer provisions in Article 600(2) of the TCC allows the prohibition of the pledge.

Regarding the FormThe form requirements for the share transfer also apply to the share pledge. This regulation qualifies as a special provision regulated parallel to Civil Code Article 955/3 that stipulates that the form requirement for the transfer of a right also applies to the pledge of that right.

Form requirements regarding the transfer of the shares of a limited liability company are regulated under TCC Article 595. According to this provision, transfer of the limited liability company share, and transactions that create an obligation to transfer, shall be made in writing, and the signatures of the parties shall be approved by a notary public. As required by the references in TCC Article 600 and Civil Code Article 955(3), a pledge of the share of a limited liability company is also subject to the conditions of written form and notary public’s approval. A pledge agreement that is not made in writing, and the signatures of which are not approved by a notary public, shall not be legally valid, and shall be considered null and void from the beginning.

Regarding the Approval of the General AssemblyUnder TCC Article 600(2), establishment of a pledge on a capital share may be subject to the approval of the general assembly. In that case, provisions regarding share transfers shall apply to the share pledge.

According to TCC Article 595, in the event it is not regulated otherwise in the articles of incorporation, the approval of the general assembly of shareholders is necessary for the validity of the share transfer. However, pursuant to TCC Article 600(2), as opposed to TCC Article 595[1], the general assembly may only refrain from granting approval upon the existence of a just cause.

Under TCC Article 616(2)(c), in cases where the approval of the general assembly is necessary for the establishment of the pledge, the right of granting approval is one of the non-assignable powers of the general assembly.

In cases where the approval of the general assembly is sought, decisions are taken with the absolute majority of the votes represented in the meeting, in the event that no different quorum is stipulated in the articles of incorporation, according to TCC Article 620.

Regarding the Rules of Prohibition and Limitation of TransferRegulations regarding prohibition and limitation of the share transfers are also valid for the pledge of the shares. As explained, above, the reasoning of TCC Article 600 explicitly states that rules of prohibition and limitation of the share transfer shall also apply to share pledges. According to the reasoning, the prohibition of the share pledge is the regulation under Civil Code Article 954 and ff. as the receivable must be transferable for establishment of the pledge, according to Civil Code Article 954. According to TCC Article 596, in the event that the company does not approve the transfer of the capital share within three months after acknowledgement of the presence of the pledge, the pledge of the share that cannot be transferred shall be rendered impossible, as well.

At this point, a change in the new TCC should also be mentioned with respect to the cases in which share transfers are restricted. As the limitation regarding acceptance of a limited liability company’s own shares as pledges as regulated under the Article 526 in the former TCC is not included in the new TCC, a limited company may accept its own shares as pledges.

The Condition where the Share Pledge is not subject to Approval of the General Assembly

If a share pledge is not subject to the approval of the general assembly, a pledge of the share of the limited liability company shall be subject to the general provisions under the Civil Code. Pledges on receivables and other rights are regulated under Civil Code Articles 954 to 961. As limited liability company share pledges qualify as “pledges established on rights”, these regulations that are related to the establishment of pledges on rights shall apply to pledges of the shares of limited liability companies.

Regarding the Form. According to Article 955(3) of the Civil Code that stipulates that the pledge of rights shall be subject to the form prescribed for their transfer, the share pledge is subject to the form requirements of share transfers, also if the pledge is not subject to approval of the company. Therefore, the pledge contract must be made in writing, and the signatures must be approved by a notary public. This is a condition for validity of the establishment of a pledge.

Regarding the Approval of the General Assembly. It is debated whether the condition of approval of the general assembly shall be sought for share pledges, as per Article 955(3) of the Civil Code that regulates that the pledge of rights shall be subject to the form prescribed for their transfer. In the doctrine, it is generally accepted that as there is no requirement that relates to form, the requirement of general assembly approval cannot be treated under Civil Code Article 955(3)[2]. Moreover, as the legislator specifically regulates the conditions where the establishment of a pledge is subject to approval of the general assembly, and made reference to the provisions regarding the transfer for this condition, it can be argued that general assembly approval is not evaluated within the conditions of transfer and, thus, general assembly approval for the establishment of pledges are specifically regulated. Therefore, in cases where pledges are established in accordance with Civil Code Article 955(3), approval of the general assembly is not necessary.

Registration of a Right of Pledge in the Share Ledger

The pledge rights of limited company shares must be registered in the share ledger. In accordance with the provision of Article 594 of the TCC, the company keeps a share ledger regarding the capital shares. The names and addresses of the shareholders, the number of the capital shares that each shareholder has, the transfers and transitions, the nominal values and groups of the capital shares, the usufruct and pledge rights on the capital shares, and the names of the holders of these rights are recorded in this ledger.

Under this provision, establishment of the right of pledge on the shares of the limited liability company shall be registered in the share ledger. However, the registry of the share ledger is of a declaratory nature, not of constituent nature.[3] The removal of the regulation in the old TCC that stipulates that the transfer of the share shall take effect with registration in the share ledger in the new TCC, also promotes this argument. It is necessary to accept that the registration in the share ledger is explanatory in the face of this regulation, which ends the disputes regarding whether or not the registration in the share ledger is of a constituent nature. Registration in the share ledger is important for the allegation of the claims of the parties that arise from partnership law.

The Effect of Issuance of Share Certificates on the Establishment of Pledges

Under TCC Article 593(2), capital share certificates can be issued as proof certificates or registered certificates. According to this Article, limited liability company shares may be certified.

If share certificates are issued as proof certificates, it is clear that they do not qualify as negotiable instruments. Thus, in that case, the transfer of certificates is not necessary for the establishment of pledges. Only in the event that a transfer of the share certificates is stipulated as an additional requirement in the articles of incorporation, transfer of the certificates shall be necessary for the establishment of a pledge.

The debate surrounds whether share certificates are qualified as negotiable instruments in the event they are issued as registered certificates. In the reasoning of the TCC, it is stated that: “Issuance of a registered share certificate shall not facilitate transfer and thus circulation of the share. Provisions in Articles 595 and ff. of the Draft Law shall continue to be valid and prohibitions and limitations shall remain to exist. This possibility neither converts the share of the limited liability company into a joint-stock company share nor does it approximate it to a joint - stock company share. It only provides conveniences regarding proof and transfer of the share when there is a need (within the scope of provisions regarding limited liability company). Provisions that have to be written on the registered share under the second paragraph clearly demonstrate the dependence of the certificate on the articles of incorporation.” Even though in the event that the limited liability company share is issued as a certified share, the certificates shall not qualify as negotiable instruments in light of this reasoning, and there is no clear explanation stipulating otherwise in the text of the article. Therefore, there is diversity of views in the doctrine whether limited liability company shares shall qualify as negotiable instruments in the event they are issued as registered certificates.

Conclusion

Share pledges in limited liability companies are subject to regulations under the TCC and Civil Code. Depending on the approval of the general assembly, a dual separation is made in the pledge of the limited company shares. In the event of seeking approval of the general assembly for share pledges, they are subject to the TCC regulations regarding share transfers in accordance with TCC Article 600(2). In cases where approval of the General Assembly is not sought, the general provisions of the Civil Code regarding pledge of rights shall apply.

[1] Under TCC Article 595, in the event the opposite is not stipulated in the articles of association, the general assembly of shareholders may not grant an approval to a share transfer without giving justification.

[2] Biçer, Levent; Hamamcıoğlu, Esra: “Limited Ortaklıkta Esas Sermaye Payının Rehni”, Kadir Has Üniversitesi Hukuk Fakültesi Dergisi, Ed. Aysun Altunkaş, Issue: 2, December, 2013, 59-88. Access: https://jurix.com.tr/article/4243.

[3] Durgut, Ramazan: “Limited Şirket Esas Sermaye Payı Üzerinde Rehin Hakkı Kurulması,” Türkiye Barolar Birliği Dergisi, 2013(108), 123-138, p.134; Demirkapı, Ertan: Ticaret Kanunu ve Ticaret Kanunu Tasarısına Göre Limited Ortaklıkta Payın Devri, İzmir, 2008, p. 378.

All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.

Other Contents

Newsletter Articles
Carriage of Goods by Road under the Turkish Commercial Code

Turkey ratified the Convention on the Contract for International Carriage of Goods by Road (“CMR”) in accordance with Act No. 3939 dated 7 December 1993, and the CMR entered into force in Turkey on 31 October 1995. In accordance with Article 1 / 1 of the CMR, the carriage of goods by road...

Commercial Law August 2017
Newsletter Articles
Ordinary Partnerships

Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”). An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal...

Commercial Law April 2014
Newsletter Articles
Nationality Of Legal Entities
Commercial Law October 2012
Newsletter Articles
Board Members’ Financial Rights in the Context of Disguised Profit Transfers

The concept of disguised profit transfer in joint stock companies, in its broadest meaning, covers the transfer of company assets to related parties and may occur in different ways. This concept is regulated in detail under capital markets legislation...

Commercial Law February 2022
Newsletter Articles
Newsletter Articles
Newsletter Articles
General Assembly Summons Lawsuits
Commercial Law August 2021
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Actual Carrier in Carriage of Goods by Sea
Commercial Law February 2021
Newsletter Articles
Newsletter Articles
Newsletter Articles
Freight Forwarder Contract under Turkish Law
Commercial Law September 2020
Newsletter Articles
Veto Rights in Joint Stock Companies
Commercial Law August 2020
Newsletter Articles
Newsletter Articles
Ship Hypothéque under Turkish Law
Commercial Law May 2020
Newsletter Articles
Newsletter Articles
Newsletter Articles
Legal Liability of Limited Company Managers
Commercial Law January 2020
Newsletter Articles
Employer’s Remedies under FIDIC Silver Book
Commercial Law October 2019
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Transfer of Seized Shares
Commercial Law July 2019
Newsletter Articles
Newsletter Articles
Newsletter Articles
Corporatization of Football Clubs
Commercial Law April 2019
Newsletter Articles
Newsletter Articles
2016 York Antwerp Rules
Commercial Law March 2019
Newsletter Articles
Newsletter Articles
Amendments on Capital Loss and Insolvency
Commercial Law September 2018
Newsletter Articles
Foreign Currency Payment Ban
Commercial Law September 2018
Newsletter Articles
Newsletter Articles
Installment Sales Agreements
Commercial Law July 2018
Newsletter Articles
Newsletter Articles
Arrest of Ships under Turkish Law
Commercial Law May 2018
Newsletter Articles
Share Pledges in Joint Stock Companies
Commercial Law May 2018
Newsletter Articles
Newsletter Articles
Updated FIDIC Contracts
Commercial Law April 2018
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Features of Joint Venture Contract
Commercial Law October 2017
Newsletter Articles
Newsletter Articles
Stock Option Plans in Turkey
Commercial Law June 2017
Newsletter Articles
Voting Agreements under Turkish Law
Commercial Law May 2017
Newsletter Articles
Newsletter Articles
Pre-emptive Right in Joint Stock Companies
Commercial Law April 2017
Newsletter Articles
Holding Company Structure under Turkish Law
Commercial Law January 2017
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Loss Of Capital in Joint Stock Companies
Commercial Law September 2015
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Non-Compete Obligation Of The Commercial Agent
Commercial Law December 2014
Newsletter Articles
Right To Request Special Audit
Commercial Law October 2014
Newsletter Articles
Special Committee Of Preference Shareholders
Commercial Law October 2014
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Conditional Capital Increase
Commercial Law March 2014
Newsletter Articles
Newsletter Articles
General Communiqué On Electronic Books
Commercial Law December 2013
Newsletter Articles
Domination Agreements
Commercial Law January 2014
Newsletter Articles
Newsletter Articles
Representation in Joint Stock Companies
Commercial Law December 2013
Newsletter Articles
Squeeze-Out in Group Companies
Commercial Law November 2013
Newsletter Articles
Shareholder Agreements
Commercial Law November 2013
Newsletter Articles
The Regulation On Private Health Insurance
Commercial Law October 2013
Newsletter Articles
Newsletter Articles
Newsletter Articles
Freedom of Settlement of Foreign Companies
Commercial Law September 2013
Newsletter Articles
Branches And Liaison Offices
Commercial Law August 2013
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Conversion of the Commercial Enterprise
Commercial Law April 2013
Newsletter Articles
Newsletter Articles
Trade Registry Regulation
Commercial Law January 2013
Newsletter Articles
Newsletter Articles
Financial Leasing Agreements
Commercial Law December 2012
Newsletter Articles
Newsletter Articles
Newsletter Articles
Advance Dividend
Commercial Law September 2012
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles

For creative legal solutions, please contact us.