Voting Agreements under Turkish Law

May 2017 Ecem Çetinyılmaz
% 0

Introduction

In principle, shareholders exercise their right to vote in general assembly meetings in accordance with the ratio of the total nominal value of their shares to the company’s share capital. Each shareholder is entitled to one vote, even if it has only one share. Shareholders who do not possess a sufficient number of shares to have a meaningful role in the company’s management need the support of the other shareholders, which they can provide by means of voting in the same vein as such shareholder, in general assembly meetings. In order to secure such other shareholders’ voting support, a voting agreement is usually entered into between these parties. A voting agreement can be defined as an agreement that contains an undertaking as to vote in a certain direction or via a specific representative, not to vote completely or partially, or to give abstaining vote in the general assembly meeting(s) of a company[1]. This Newsletter article examines the legal characteristics, types, validity and limits of voting agreements, as well the consequences attached to the failure to comply with the provisions thereof.

Legal Characteristics and Types of Voting Agreements

Voting agreements are subject to the provisions of the law of obligations. As it is not possible to burden the shareholders with any obligation other than the payment of the share value and the related premium, if any, as per Article 480 of the Turkish Commercial Code numbered 6102[2] (“TCC”), it would not be appropriate to regulate a voting agreement under the articles of association[3].

Voting agreements are usually classified by legal scholars in several groups in terms of obligations of the parties, capacities of the parties to the agreement, and continuity of the voting undertaking[4]:

  • In terms of obligations of the parties:
  • Unilateral voting agreements: Only one party gives an undertaking as to its voting right.
  • Reciprocal voting agreements: Both parties give an undertaking to each other as to voting in a certain direction.
  • Multilateral voting agreements: Two or more shareholders give an undertaking as to voting in a certain direction.
  • In terms of capacities of the parties:
  • Voting agreements between the shareholders
  • Voting agreements between the shareholders and third parties
  • Voting agreements between the shareholders and the company
  • In terms of continuity of the voting undertaking:
  • Non-continuous (one-time) voting agreements: Parties give a voting undertaking for a specific general assembly meeting or a specific agenda item of a general assembly meeting.
  • Continuous voting agreements: Parties give a voting undertaking not limited to a specific general assembly meeting or a specific agenda item of a general assembly meeting. Such an undertaking is usually given for a limited period of time.

Validity and Limits of Voting Agreements

Voting agreements are not subject to any statutory condition as to form. Limits of the freedom of agreement determine the validity of voting agreements[5]. As per Article 27 of the Turkish Code of Obligations numbered 6098[6] (“TCO”), voting agreements that are in violation of the mandatory provisions of the laws, ethics, public order, personal rights, or those that contain a subject matter which is impossible to achieve, are null and void.

It is possible to enter into voting agreements for the votes attached to all or a part of a shareholder’s shares. As the right to vote is attached to the share, itself, but not the shareholder, the shareholders are free to cast each of their votes in different directions and, therefore, provide a voting undertaking in relation to their certain shares.

Certain types of voting agreements are examined, below, in terms of their validity:

  • Voting Agreements for an Indefinite Period of Time: Some legal scholars are intended to deem the voting agreements made for a very long period, or an indefinite period of time, as invalid on the grounds of violation of personal rights[7]; while others believe that a long period would not automatically render the agreement invalid, the agreement must, at the same time destroy or substantially limit the economic freedom of the subject shareholder in a given specific case[8].
  • Voting Agreements regarding the Votes to be cast in Board of Directors/Managers Meetings: There are differing views of legal scholars on voting agreements regarding the votes to be cast in board of directors meetings of joint stock companies and board of managers meetings of limited liability companies. According to Çamoğlu, votes of the members of boards of directors cannot be subject to voting agreements, as the representation agreement between the member of the board of directors and the company, as well as the diligence and loyalty obligation of the board of directors member, constitute an obstacle against such undertakings[9]. On the other hand, Moroğlu argues that both the voting agreements and the votes cast by members of boards of directors in violation of the diligence and loyalty obligation are valid, yet lead to the contractual liability of the relevant member of the board of directors towards the company[10].
  • Voting Agreements between the Shareholders and the Company: A voting undertaking from the shareholder of a company to the company, itself, means that the company’s legal entity participates in, and affects, the constitution of its own will through voting agreements. This situation creates a violation of the principle of separation of powers between the decision and management bodies of the companies. Therefore, voting agreements between the shareholders of a company and the company itself should be considered invalid[11].

Consequences of Failure to Comply with the Provisions of Voting Agreements

Failure to comply with the provisions of the voting agreements does not lead to any consequences in terms of the law of corporations, regardless of whether or not such provisions are regulated under the articles of association, as well. Breach of the provisions of the voting agreements cannot be alleged against the subject company; the votes cast are valid, despite violating the voting agreement; and the cancellation of the decision of the general assembly meeting taken, based on such votes cannot be requested[12].

In terms of the law of obligations, in the event of a breach by a shareholder of its voting undertaking, the counterparty will be entitled to seek compensation in accordance with the general provisions of the law of obligations, either material, or spiritual, or both, subject to the legal conditions of each such compensation.

Whether or not the beneficiary of the voting undertaking can request specific performance of the undertaking to vote in a certain direction is a problematic issue. Despite the view that the beneficiary can request specific performance, and request the court to allow it to fulfil the obligation, itself, as per Article 113/1 of the TCO[13], a counter-view argues that no option is available other than compensation as either the subject matter of the obligation becomes impossible to achieve in the event of one-time voting agreements, or it is unknown as to what direction the subject shareholder will cast its vote in the following general assembly meetings, in the event of continuous voting agreements[14]. There is no precedent that has become subject to a decision of the Courts of Appeal in Turkish practice.

Conclusion

In practice, voting agreements are entered into by the shareholders of a company usually with the other shareholders or third parties, whereby the shareholder(s) undertake(s) to vote in a certain direction for various objectives. Voting agreements are subject to the provisions of the law of obligations, and failure to comply with the provisions, thereof, does not lead to any consequences in terms of the law of corporations, regardless of whether or not such provisions are regulated under the articles of association, as well. Voting agreements are usually classified by the legal scholars in several groups in terms of the obligations of the parties, capacities of the parties to the agreement, and continuity of the voting undertaking. In the event of a breach by a shareholder of its voting undertaking; whereas, it is clear that the counterparty will be entitled to ask for compensation in accordance with the general provisions of the law of obligations, whether or not it can request specific performance of the undertaking to vote in a certain direction is still a much-debated issue.

[1] Erdoğan Moroğlu, Oy Sözleşmeleri, Gözden Geçirilmiş ve Güncellenmiş 5. Baskı, p. 3; Çamoğlu (Poroy/Tekinalp), Ortaklıklar Hukuku I, Yeniden Yazılmış 13. Bası, İstanbul 2014, p. 507.

[2] TCC (Official Gazette 14.02.2011, No. 27846) has entered into force on July 1, 2012.

[3] Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, Değişiklikler ve İkincil Düzenlemelerle Güncelleştirilmiş 4. Bası, p. 372.

[4] For more information on the types of voting agreements, please see Moroğlu, p. 34 ff.

[5] Çamoğlu (Poroy/Tekinalp), p. 508.

[6] TCO (Official Gazette 04.02.2011, No. 27836) has entered into force on July 1, 2012.

[7] Çamoğlu (Poroy/Tekinalp), p. 509.

[8] Moroğlu, p. 77.

[9] Çamoğlu (Poroy/Tekinalp), p. 507.

[10] Forstmoser/Meier Hayoz/Nobel, Schweizerisches Aktienrecht § 31 N. 36-40 (p. 360-361), cited from Moroğlu, p. 31-32.

[11] Moroğlu, p. 62.

[12] Gül Okutan Nilsson, Anonim Ortaklıklarda Paysahipleri Sözleşmeleri, İstanbul 2004, p. 289.

[13] Moroğlu, p. 108 ff.

[14] Çamoğlu (Poroy/Tekinalp), p. 509.

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
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
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
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.