SHAREHOLDERS’ AGREEMENT

In this article, we will discuss the shareholders’ agreement.

Introduction

The Shareholders’ Agreement, also known by its English name Shareholders Agreement (SHA), is a type of contract that falls within the scope of the Law of Obligations under the principle of freedom of contract, although it is not specifically regulated in the Turkish Commercial Code. Although not specifically regulated in the Law of Obligations, it is evaluated in accordance with general provisions. The shareholders’ agreement is quite similar to a partnership agreement in a simple partnership in terms of being concluded between shareholders and regulating the relationship between shareholders. In fact, according to a view in doctrine, the shareholders’ agreement concluded by the shareholders of commercial companies constitutes a second simple partnership structure between the parties. Before moving on to the effects of the Shareholders’ Agreement on shareholders and the company and the consequences that these effects may have, it is beneficial to examine the definition and structure of the agreement.

What is a Shareholders’ Agreement?

The shareholders’ agreement is a contract between shareholders that regulates their relationship, the principles they establish for the management of the company, the relationship of the shareholders with the company, and many issues related to shareholding that are not regulated in the Law. As it is not regulated in the Turkish Commercial Code, this type of contract, which is subject to the Law of Obligations, has emerged in line with the principle of freedom of contract.

The most important factor in the formation of these contracts is that they provide flexibility to the shareholders by giving them the authority to regulate areas not covered by the Articles of Association. In this way, many issues not regulated in the Articles of Association can be regulated by the shareholders through the Shareholders’ Agreement, providing flexibility to the shareholders in the management of the company according to their wishes and will.

In addition to this flexibility, the Shareholders’ Agreement also helps to prevent possible disputes by regulating the relationships between shareholders, thus serving the interests of the company.

In conclusion, the shareholders’ agreement can be defined as a contract concluded between the shareholders/future shareholders of a company, aiming to regulate the internal relations of the shareholders or their relations with the company, providing flexibility in the practices of the company.

What is the Legal Aspect of the Shareholders’ Agreement?

In our law, there is the principle of freedom of contract with the Turkish Code of Obligations. A contract can be concluded by the mutual and corresponding statements of will of the parties without being subject to any form in areas where there is no form regulation in the laws. As a rule, the contract is concluded by the mutual and corresponding statements of will of the parties. Without being subject to any other condition, the concurrence of the open or implicit wills of the parties is sufficient to establish a contract. Since the shareholders’ agreement is also not a contract specifically regulated by the law, it is considered to be concluded by the concurrence of the wills of the shareholders. In this respect, the Shareholders’ Agreement is consensual contracts.

In addition to being a consensual contract, the Shareholders’ Agreement is also a contract that creates obligations. It can be concluded as a contract that imposes obligations on both parties by burdening mutual obligations on the shareholders, or it can be concluded as a contract that burdens only one shareholder by burdening a debt on one side. The important thing here is how the shareholders want to establish an internal relationship with each other. If one of the shareholders is in a dominant position over the other shareholders for any reason in their internal relations, a Shareholders’ Agreement can be concluded only by burdening the other shareholder with debt.

Finally; these contracts are not subject to any form under Article 12 of the Turkish Code of Obligations. However, in practice, these contracts can be drawn up in writing between the parties for the purposes of binding and proving, and even in an official form through a notary.

Scope of the Shareholders’ Agreement

As mentioned above, the scope of the Shareholders’ Agreement can be freely determined by the parties in accordance with the principle of freedom of contract. In other words, shareholders can create a contract in the scope they want by determining the areas they want to regulate in their internal relations, their relations with the company, and their practices in the company. However, the exception to this is the areas regulated by the law and the company contract.

Joint stock companies are established with Articles of Association. In joint stock companies, where the Articles of Association are regulated and can only be regulated by the Articles of Association, an agreement between the shareholders that deviates from the Articles of Association will not have a valid result. Unlike the Shareholders’ Agreement, the Articles of Association are regulated by the Law and require a form requirement for validity. In other words, the written form of the Articles of Association and the approval of the signatures of all founders by a notary public or the signing of the Articles of Association in the presence of the Trade Registry Director or deputy are required.

Article 339 of the TCC lists the elements that must be included in the Articles of Association. According to the relevant provision, the following elements must be included in the Articles of Association:

  • The trade name of the company and the place where its headquarters will be located.
  • The business purpose of the company, specified and defined in detail.
  • The nominal amount of the company’s capital, the number of shares, their nominal values, if any privileges, and the groups of shares.
  • The names, surnames, titles, and nationalities of the directors who are authorized to sign on behalf of the company.
  • The form of announcements to be made by the company.
  • The types and amounts of capital shares pledged by the shareholders.
  • The accounting period of the company.

In the Articles of Association, which is the main document, the areas that can be regulated differently by a Shareholders’ Agreement are limited. The Articles of Association are the main document, and the Articles of Association are based on the company.

In limited companies, the Company Agreement is regulated in Article 575 et seq. of the TCC. The form requirement for the Company Agreement is that it must be made in writing and signed by the founders in the presence of a person authorized by the Trade Registry Directorate. A Company Agreement that is not made in accordance with the form requirement will not have legal effect. As in the case of the Articles of Association, certain issues that must be included in the Company Agreement are listed in the Law. These are;

  • The trade name of the company and its registered office,
  • The business purpose of the company, specified and defined in detail,
  • The nominal amount of the capital, the number of shares, their nominal values, if any privileges, the groups of capital shares,
  • The names, surnames, titles, and nationalities of the directors,
  • The form of announcements to be made by the company, which must be included in the Company Agreement.

The mandatory elements mentioned in the Articles of Association and the Company Agreement cannot be regulated or changed by a Shareholders’ Agreement. The Articles of Association are essential, and the Articles of Association are based on the company.

What are the commonly encountered issues in the scope of Shareholders’ Agreements?

In joint-stock companies, issues such as rights to purchase and sell shares, right of first refusal and also right to compel joint sale, pre-emption and priority rights, competition restriction arrangements, buy-sell options are frequently encountered in the scope of Shareholders’ Agreements.

Can Shareholders’ Agreements Decide on Shareholders Receiving a Salary from the Company?

In a limited company, as a rule, partners cannot be paid a salary. Salary payment can only be made as part of profit distribution. Article 394 of the Turkish Commercial Code stipulates that in joint-stock companies as well as limited companies, it is possible to pay directors, as long as the amount is determined by the Articles of Association or a general meeting decision, from the profit, huzur hakkı (attendance fee), salary, bonus, premium, and annual profit share, but the payment of a salary to shareholders of the company is not foreseen.

Instead, in accordance with corporate governance principles, it has been envisaged in Articles 537 and following of the TCC that profit sharing should be carried out in a certain procedure and principles. Implicit profit distribution is prohibited in companies. Payment to partners as shareholders under names such as salary, bonus, and wages without a profit distribution decision is in the nature of implicit profit distribution. For all these reasons, payment can only be made to shareholders as part of profit distribution.

Who is Bound by the Shareholders’ Agreement?

The most important feature that distinguishes the Shareholders’ Agreement from the Articles of Association and the Company Agreement is its binding nature. The Shareholders’ Agreement is a contract concluded between shareholders and is not binding on the company. In other words, the Shareholders’ Agreement is only valid between the parties to this agreement, who are the shareholders. It does not create an obligation for third parties or the company. Therefore, any responsibility arising from the agreement cannot be claimed against the company or its organs.

What are the Rights of Shareholders in Case of Non-Compliance with the Shareholders’ Agreement?

The sanctions provided for shareholders in the Turkish Commercial Code will not be applicable within the scope of the Shareholders’ Agreement. These sanctions are provided for in the law for situations specified by the law and are only valid for these situations. For this reason, the sanctions that can be applied in case of violation of the Shareholders’ Agreement by the other party will not be applicable. As mentioned above, the Shareholders’ Agreement should be evaluated within the scope of the Turkish Code of Obligations. Therefore, in case of violation of the contract, the provisions of the Turkish Code of Obligations will also be applicable. The sanctions that can be applied under the Turkish Code of Obligations are; performance in kind, compensation, withdrawal from the contract, or termination of the contract for just cause.

The violated provision of the contract is also important in determining the sanction to be applied. For example, violations committed by a Shareholder who no longer wishes to be bound by the Shareholders’ Agreement due to violations committed by the other party will not constitute grounds for the other shareholder to withdraw from the contract or terminate the contract.

In terms of deterrence, the inclusion of a penalty clause in the contract may increase the commitment to the contract for both parties. When preparing such contracts, the relationship between the parties, potential disputes, types of sanctions, should be carefully examined on a case-by-case basis for each contract, and a separate evaluation should be made for each contract.

IN GENERAL, WHAT IS SHAREHOLDERS’ AGREEMENT FOR?

The Shareholders’ Agreement, considered under the Law of Obligations, provides flexibility by regulating areas not covered by the Articles of Association or the Company Agreement, to meet the needs of company shareholders in practice.

In accordance with the principle of freedom of contract, this contract provides shareholders with a wide range of possibilities to regulate areas not regulated by the Law, allowing shareholders to determine their relations with each other and the company’s management. Also, with the addition of provisions such as purchase, sale, pre-emption, joint sale, it can serve to protect the share integrity in the company.

It should be noted that the Shareholders’ Agreement is a contract concluded among shareholders. In other words, since the Shareholders’ Agreement is concluded among the Shareholders, it has a relative effect. This contract, which only affects the shareholders who have signed the contract, cannot be appealed to the Company and its organs.

Finally, in case of a violation of the Shareholders’ Agreement, sanctions for breach of contract are applied in accordance with the provisions of the Turkish Code of Obligations. However, as mentioned above, in order for these sanctions to have a deterrent effect, the contract should be prepared in such a way that it can create this effect in each concrete situation. Therefore, it is important to work with expert lawyers in the field of Contracts Law to ensure the rights of Shareholders.

If you have any question about shareholders’ agreement, it would be beneficial for you to seek the assistance of a İzmir Turkish lawyer experienced in the field of corporate law in order to reach remedies available to you.

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Legal Intern Esra KURT

Att. Harun Ümit EREN

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