The pledging of shares in joint-stock companies is not specifically regulated by the Turkish Commercial Code (“CTC”). For this reason, it will be necessary to refer to the Turkish Civil Code (“TCL”) for the pledging of shares in joint-stock companies. In this context, the provisions between articles 954 and 961 of the TCL are applicable for the pledge of the shares of joint stock companies. According to the articles mentioned, the pledge of shares in joint-stock companies differs depending on whether the shares are represented by a share certificate or not. In this article, we will focus on the specifications of stock pledges according to the different types of shares in joint-stock companies in Turkey.
II. Types of shares and share certificates
Article 484 of the TCC provides that a share in a joint stock company can be either (i) a registered share, or (ii) a bearer share.
These two types of shares can be represented by share certificates. Indeed, for bearer shares, article 486 of the TCC provides for an obligation to issue share certificates. According to this obligation, in the event that the shares are bearer, the board of directors must issue bearer share certificates within three months of the full payment of the contribution corresponding to these shares. In addition, the board of directors is also required to announce the issuance of these share certificates and to register the resolution of the board of directors taken for the issuance of these certificates with the commercial register. In other words, it is mandatory to issue share certificates to represent bearer shares.
On the other hand, it is not compulsory to issue share certificates to represent registered shares, but share certificates can be issued if the minority shareholder so requests. Registered share certificates are negotiable instruments which have the qualification of a promissory note issued in the name of a specific person. In accordance with article 490 of the TCC, unless otherwise provided by law or the articles of association, registered shares may be transferred without limitation.
III. Pledge on different types of shares
According to article 954 of the TCL, transferable claims and other rights may be the subject of a pledge. Also under Article 955 of the TCL, shares can be pledged by means of a written pledge agreement, whether or not these shares are represented by share certificates.
If a share is an uncertified share, the signing of the pledge contract is mandatory. The pledge agreement must be in written form for the agreement to be valid. On the other hand, in accordance with article 956 of the TCL, the constitution of the right of pledge is regulated differently in registered and bearer securities.
Bearer share certificates are those in which it appears from the text of the certificate that the bearer is the shareholder. According to article 956 of the TCL, the delivery of securities to the pledgee is sufficient for the pledge of bearer securities. However, the parties must agree on their will. In other words, the parties must agree that possession of bearer securities is transferred for the purpose of collateral.1 If the parties do not have the same will regarding the transfer of possession due to the pledge, the right of pledge will not established even if the creditor has acquired possession of the certificates. Another condition for establishing the pledge is that the pledge must have the power of disposition, and in the absence of the power of disposition, the right of pledge cannot be mentioned.2
According to the Communiqué on the Notification and Registration of Bearer Share Certificates with the Central Registration Agency (“Communiqué”), bearer shareholders and bearer share certificates must be notified and registered with of the Central Registration Agency (“ARC”). According to article 5 of the Communiqué, in the event of transfer of bearer securities, notification must be made to the ARC by the assignee to whom effective possession of the bearer security is transferred. This notification can also be made by the company which issued the bearer securities. Therefore, in pledging the bearer share certificate, it will be necessary to notify the CRA due to the transfer of possession of the share certificate.
On the other hand, in order to establish the right of pledge on registered securities, in accordance with article 956/2 of the TCL, the transfer of possession as well as a written declaration of transfer or an amendment for the pledge are required. . In the event that the registered share certificate is pledged with a written transfer declaration bearing the signature of the pledge, instead of the collateral endorsement, the establishment of the pledge must be understood within the meaning of the declaration. Collateral transfer may be written on the share certificate or on a separate sheet of paper.
It should also be noted that, in a joint-stock company, after attachment of the share to the certificate, the rights held by the shareholder cannot be claimed or transferred independently of the share certificate4. Thus, if there is a share certificate representing the share, then the certificate would also become a part of the pledge transaction.
In order to pledge the shares, the board of directors would pass a resolution. In said resolution of the board of directors, the company may specify the number of shares of par value that will be pledged and the board may decide to enter the pledge of shares in the share book. The registration of the right of pledge in the share book is important for the notification and proof of the pledge to the third party.
In accordance with the Rules of Procedure and Principles of Meetings of the General Assembly of Joint Stock Companies and Ministry Representatives Participating in Such Meetings (“Rules”), all shareholders included in the list of those who may attend the meeting of the general assembly prepared by the board of directors have the right to attend the general assembly. However, according to article 18/3 of the regulations, in order for bearer shareholders to attend general meetings, in addition to their names or titles in the organization chart provided by the CRA, they must also justify to the board of directors that ” they are in possession of the bearer share certificate before attending the general meeting. Article 18/4 of the Regulation also provides that the person holding the bearer share title by reason of a pledge, a lien, a custody contract or a loan agreement for use and Similar agreements may attend the general meeting and vote if authorized by the shareholder in accordance with the provisions of these Regulations. Here, it should be noted that according to provisional article 3 of the regulations, if the general meeting is convened until December 31, 2021, bearer shareholders who have requested the company to be notified to the CRA but who do not have not yet been notified, will also appear on the list of persons able to attend the general meeting.
In accordance with article 379 of the CCT, a joint-stock company may acquire its own shares or accept them as a pledge, for a consideration, as long as they do not exceed 10% of the principal or issued capital of the company. However, for the acceptance of the company’s own shares as a pledge, the general meeting must authorize the board of directors. This authorization can be given for a maximum period of five years and in this authorization, the general meeting must determine the total nominal value of the shares by setting the lower and upper limits of the amount to be paid.
Article 385 of the TCC also mentions that if the shares are not constituted as collateral in accordance with the regulations specified in article 379 of the TCC, the pledge of the shares must be lifted at the latest within six months from the date of their acceptance as a commitment.
IV. Effect of pledging of shares on shareholders’ rights
According to the TCC, it is the shareholders’ right to receive a dividend, so the pledgee does not have such a right in principle. However, in accordance with article 959 of the TCL, whether the dividend falls within the scope of the collateral will change depending on whether the shares are represented by share certificates or not. In this regard, if the company has registered or bearer securities, a separate pledge must be made on the share in accordance with the legal form requirements for the dividend to be pledged. On the other hand, if there is an undeliverable share, the dividends not yet due at the time of foreclosure of the pledge will be included in the pledge.
It is also specified that in the event of liquidation of the joint-stock company, the right of pledge will be equivalent to pledging claims on the liquidation part. This question is not clearly regulated by law, but article 798/2 of the TCL applies by analogy.
In financing transactions, creditors often ask for collateral to secure performance and one of the most preferred collateral in Turkish practice is the establishment of a stock pledge on the stock that the debtor owns. The right of pledge would not automatically assign the right of ownership to the shares; however, it grants the right of disposal to the owner. Since there are different types of shares in joint stock companies, the right of lien will also differ depending on the types of shares in question. The shares are divided into two registered or bearer shares and may be represented by share certificates. It is not compulsory to sign a written pledge agreement to constitute a pledge on the bearer shares, the delivery of the certificates to the pledgee is sufficient. On the other hand, to establish the right of pledge on registered shares, the transfer of possession of the share certificate as well as a written declaration of transfer or endorsement for the pledge are required.
Regardless of the type of share of the joint-stock company, it is not necessary that the right of pledge be entered in the company’s share book or be notified to the company. However, the registration of the right of pledge in the share book is important for the notification and proof of the pledge to the third party. In the event of transfer of bearer share certificates, notification must be made to the ARC by the assignee to whom effective possession of the bearer share certificate is transferred. This notification can also be made by the company which issued the bearer securities.
When pledging a company stock, the existing agreements of the shareholder granting the pledge should be reviewed to see if there are any restrictions on the pledge, so that if there are any restrictions on the collateral. in the agreements, then the consent of the parties involved in the agreements should be required. In addition to all this, it should be noted that a joint stock company can also acquire its own shares or accept them as a pledge, for a consideration, provided that they do not exceed 10% of the capital or issued capital of the society. It should also be noted that the pledging of shares in joint-stock companies also affects the rights of shareholders in terms of receiving the dividend and the liquidation portion.
(First published by Mondaq on September 21, 2021)