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In Turkish business life, two fundamental documents regulate the relationships between company partners: the articles of association and the shareholders' agreement. The articles of association are the founding document that determines the legal identity of the company and is binding on the corporate entity, the partners, and third parties. In contrast, the shareholders' agreement is a regulation that creates relative binding force among the partners themselves and, if applicable, with respect to the corporate entity, which often remains confidential and offers a more flexible legal framework.
In recent years, shareholders' agreements have increasingly come to the fore due to the rise in the number of investors, the development of corporate governance practices, the expansion of the entrepreneurial ecosystem, and the ability to regulate obligations and commitments that cannot be included in the company's articles of association under the relevant legislation through shareholders' agreements. However, the question of which regulation takes precedence in the event of a conflict between these agreements and the articles of association, where they stand in the hierarchy of norms, and how disputes arising in practice are to be resolved is an important issue.
In this article, we will examine the position of shareholders' agreements in the Turkish legal system, evaluate them within the framework of the hierarchy of norms, and address the main problems encountered in practice and propose solutions.
1. CONCEPTUAL FRAMEWORK
1.1. The Principle of Limited Number in Commercial Companies and the Position of the Articles of Association
Under the provisions of the Turkish Commercial Code No. 6102 ("TCC"), the types of commercial companies are determined according to the principle of limited number. Depending on the type of commercial company, it is necessary to have a memorandum of association at the establishment stage. Again, when determining the type and principles of the partnership, it is necessary to take into account the provisions of TCC, which have been regulated for each commercial partnership. If the commercial company established (also referred to as "partnership," "company," or "company legal entity") does not possess the distinctive characteristics of one of the commercial companies regulated in the TCC and is not established within this framework, it will be considered an ordinary partnership without legal personality under Article 620 of the Turkish Code of Obligations No. 6698 ("TCO") and will be evaluated within the framework of the provisions of the TCO.
The articles of association are the founding document for each type of commercial company under TCC, containing the specified elements and registered with the commercial registry to be valid against third parties. In order to establish a commercial company, it is mandatory to prepare articles of association containing the conditions stipulated in the TCC, have them signed by the founders, and submit them to the commercial registry office where the partnership will be established for registration during the establishment phase. The articles of association are a constitutional arrangement addressed to all current and future partners (whoever owns the shares of the partnership) within the aforementioned framework, and the regulations contained therein bind the partnership bodies and third parties.1
1.2. Shareholders' Agreement and Its Binding Effect
The shareholders' agreement is a private law contract that is not regulated by TCC, is not subject to any formal requirements, but is valid under the TCO and essentially gives rise to consequences in the field of contract law. The shareholders' agreement is particularly used in family companies to restrict the transfer of shares, thereby limiting the number of partners who may join the company at a later date, ensuring that only certain individuals are included in the company's management body to protect the company's management structure, allowing partners to assume additional liabilities towards the company by deviating from the principle of single liability in a joint-stock company, ensuring and protecting the balance of power within the partnership, and establishing an order within the partnership in line with the partners' own objectives. Legally, a shareholders' agreement is a relative debt contract (in the sense of contract law, binding only the persons who sign the agreement) and cannot be enforced against third parties (such as a third party shareholder who acquires the partnership share); it does not constitute a commercial company constitution like the articles of association discussed above.
2. EVALUATION FROM THE PERSPECTIVE OF THE HIERARCHY OF NORMS
2.1. The Normative Supremacy of the Articles of Association
According to Articles 1, 2, and 126 of the TCC, the hierarchy of provisions applicable to commercial companies can be established as follows;2
- Mandatory provisions in Turkish legal regulations
- The company's articles of association, provided they do not conflict with mandatory provisions
- General provisions regarding legal commercial companies in the TCC
- Provisions on ordinary partnerships in TCO
- Other commercial provisions, commercial customs and practices
- General provisions
Within the framework of the hierarchy of norms, the importance of the articles of association, which are to be applied together with mandatory provisions, is noteworthy.
2.2. Priority in the Event of a Conflict Between the Shareholders Agreement and the Articles of Association
When there is a conflict between the shareholders' agreement and the articles of association, the provisions of the articles of association shall apply under corporate law. For example, if a restriction on the transfer of shares is included in the shareholders' agreement but not in the articles of association, this restriction cannot be enforced against third parties. In one of its decisions, the Court of Cassation clearly stated that the shareholders' agreement does not bind the corporate entity of the company and that, in terms of the validity of the decisions taken by the general assembly, which is the organ of the commercial company, the articles of association of the company should be taken as the basis, not the external agreement between the partners.3 Similarly, in another decision, the privileges envisaged in the "Share Purchase and Sale Agreement" and the "Cooperation Framework Agreement" between the parties were deemed invalid because they were not regulated in the articles of association in accordance with Article 478 of the TCC.4 In other decisions along similar lines, when there was a conflict between the shareholders' agreement and the articles of association, the articles of association were given priority.5 This situation stems from the aforementioned normal hierarchy regulations and the principle of protecting the legal personality of commercial companies. The shareholders' agreement is only binding between the parties, and for it to affect general assembly decisions, it is necessary for the articles of association to contain provisions parallel to the shareholders' agreement.
2.3. The Company's Legal Entity Being a Party to the Shareholders' Agreement and Its Influence on the Decisions of the Organs
There are no legal obstacles to the partnership being a party to the shareholders' agreement. In practice, the assumption of a debt by the partners towards the partnership (particularly to deviate from the single debt principle in a joint-stock company), recognition of the agreement between the partners by the partnership, influencing decisions in matters falling within the scope of the partnership's organs, and developing a sanction mechanism for disputes between the partners (for instance, preventing the transfer from being recorded in the share register in case of violation of share transfer restrictions). The effect of this party's status on the partnership's bodies is debatable. Pursuant to the rules of the hierarchy of norms, this party status will not have legal effect on matters affecting the decision-making procedure at the general assembly meeting of the partnership; the partnership shall only be liable to the persons to whom it has committed itself within the framework of the partnership agreement provisions. However, it is possible for the company's legal entity to be a party to the shareholders' agreement on matters falling within the scope of the board of directors' authority.6 The corporate entity shall remain bound by the hierarchy of norms when fulfilling its obligations under the shareholders' agreement; accordingly, the shareholders' agreement can influence the decisions of the corporate organs only through provisions validly incorporated into the articles of association, that is, provisions adopted in compliance with the TCC.7
3. ISSUES ARISING IN PRACTICE
The main issues that arise in the implementation of shareholders' agreements stem from the fact that these agreements are not always binding with respect to the internal functioning of the company or its relationships with third parties. In matters concerning voting rights, agreements stipulating that shareholders will vote in a certain manner or that certain individuals will be elected to the board of directors do not bind the corporate organs unless they are reflected in the articles of association; therefore, the validity of general assembly resolutions adopted to the contrary is not affected. Likewise, where a resolution is taken in accordance with the shareholders' agreement, but the articles of association contain no corresponding provision, such a resolution may be subject to annulment, invalidity, or nullity.8 Similarly, pre-emption, tag-along, and drag-along rights, which are frequently included in shareholders' agreements, are provisions of an optional nature that cannot be regulated in the articles of association under the TCC. Therefore, they only create obligations between the parties and cannot be asserted against third parties because they cannot be reflected in the articles of association. Such restrictions may create legal uncertainty for investors because they do not have absolute effect in the partnership law system, and most disputes may arise for this reason. A similar issue is observed in agreements concerning the determination of the structure of the board of directors; provisions granting the right to appoint members to specific shareholder groups or stipulating that only certain individuals may be elected to the board of directors are not binding on the company's organs unless they are regulated in the articles of association.
4. SOLUTION PROPOSALS AND TRENDS IN IMPLEMENTATION
4.1. Design Consistent with the Articles of Association
The provisions of the shareholders' agreement, in order to be valid in terms of company law when reflected in the articles of association and thereby enforceable against third parties (for instance, prospective shareholders who will acquire shares in the company), must be in compliance with the TCC, taking into consideration above all the principle of single obligation regulated under TCC Article 480 and the principle of "mandatory provisions" regulated under TCC Article 340. From this perspective, whether the relevant provision of the articles of association can become an element that influences the corporate structure and produce a result that may be asserted against third parties shall also be evaluated within the limits. In this context, designing the shareholders' agreement to be aligned with the articles of association to the extent possible, reviewing the non-mandatory provisions of the TCC when drafting the articles of association in order to design a structure that is consistent with the will of the parties as much as possible, and identifying the points of inconsistency and aligning the shareholders who are party to the agreement within the framework of this identification will be of importance.
Considering the limited binding effect of shareholders' agreements with respect to the corporate entity and third parties, it is evaluated that reflecting certain provisions contained in these agreements into the articles of association, to the extent permitted by the TCC, may create a stronger and more predictable structure in practice. Within this framework, it is possible to construct various mechanisms through the articles of association that may preserve the balance among the shareholders and institutionalize certain matters concerning the functioning of the management of the commercial company. For example, granting privileges in areas such as voting rights, dividend rights, or liquidation shares, provided that such privileges are stipulated in the articles of association pursuant to TCC Article 478 et seq., may allow certain rights agreed between the parties in the shareholders' agreement to be indirectly transferred into the internal corporate arrangement by recognizing them as privileges. Similarly, requiring the affirmative vote of certain share groups in the quorum provisions of the articles of association may serve to provide institutional assurance by reflecting in the articles of association the consensus stipulated in the shareholders' agreement with respect to matters such as capital changes, significant asset transactions, strategic investment decisions, or changes to the composition of the board of directors. In addition, by granting certain share groups the authority to nominate candidates for board membership within the framework of TCC Article 360, it may be possible to adapt the board structure agreed upon in the shareholders' agreement to the internal organization of the corporate entity. It may be considered that such arrangements, in cases where the corporate entity is a party to the shareholders' agreement, may support the formation of the board of directors in a manner indirectly aligned with the balances set forth in the agreement, thereby contributing to a more systematic integration of the contractual consensus into the corporate structure.
4.2. Establishing Appropriate Enforcement Mechanisms in Shareholders' Agreements
Since it is not possible to insert into the articles of association a provision that is contrary to the mandatory provisions of the TCC, it is not always possible to ensure full parallelism between the shareholders' agreement and the articles of association. Therefore, it is important to establish appropriate sanction mechanisms in the shareholders' agreement to be prepared. Although the sanctions that may be applied in the event of a breach bind only the shareholders who are parties to the shareholders' agreement, their effectiveness in practice generally increases because these shareholders often also hold positions in the corporate organs (attribution of fault, the duty to exercise the power and authority within the organs). In particular, the inclusion of appropriate penalty clause provisions in the agreement, the identification of the areas in which specific performance may be demanded and the structuring of specific performance mechanisms in accordance with this identification, as well as the creation of compensation provisions by shifting the burden of proving the damage, emerge as important sanction mechanisms.
4.3. Choice of Arbitration and Alternative Dispute Resolution Methods
The fact that the provisions in shareholders' agreements require specialized expertise and that expert arbitrators and speed come to the fore in arbitration proceedings has popularized arbitration as an alternative dispute resolution method. Arbitration is one of the mechanisms that can be agreed upon in these jurisdiction agreements, and the prerequisite for its agreement is that the subject matter of the potential dispute is arbitrable. Aptitude for arbitration means that the dispute is of a nature that can be resolved through arbitration and, in this respect, is an essential condition for the validity of the arbitration agreement.9 Article 408 of the Code of Civil Procedure No. 6100 states that disputes arising from real rights over immovable property or matters not subject to the will of both parties are not suitable for arbitration. When adding an arbitration clause to a shareholder's agreement, it must be assessed whether the provisions in the agreement satisfy the condition of arbitrability, and the mechanism must be structured within this framework.10 An arbitration clause added within this framework will play an important role in the rapid and effective resolution of disputes.
5. CONCLUSION
Shareholders' agreements are important tools that provide flexibility in modern partnership structures. However, when they conflict with the articles of association, they take a backseat due to the hierarchy of norms. Therefore, the most sound approach for investors and trading company partners is to ensure that the two documents are as consistent as possible, to strengthen the articles of association with critical provisions, and to establish clear sanction mechanisms for breaches of agreement.
Footnotes
1. Okutan Nilsson, Anonim Ortaklıkta Hissedarlar Sözleşmesi sayfa (s.) 157
2. Poroy/Tekinalp/Çamoğlu, Ortaklıklar Hukuku 1, s. 15 (15.Baskı)
3. Yargıtay 11. Hukuk Dairesi, E. 2016/1275 K. 2016/8000 T. 11.10.2016
4. Yargıtay 11. Hukuk Dairesi, E. 2019/3178 K. 2020/3373 T. 01.07.2020
5. Yargıtay 11. Hukuk Dairesi, E. 2017/4658 K. 2019/1463 T. 25.02.2019, Yargıtay 11. Hukuk Dairesi, E. 2023/4839 K. 2024/6413 T. 16.09.2024, Yargıtay 11. Hukuk Dairesi, E. 2023/1083 K. 2024/4577 T. 03.06.2024, Yargıtay 11. Hukuk Dairesinin 17.06.2020 tarih, 2019/4971 E., 2020/2971 K., 11.10.2016 tarih, 2016/1275 E., 2016/8000 K. sayılı ilamları
6. Okutan Nilsson, Anonim Ortaklıkta Hissedarlar Sözleşmesi s. 312-315
7. Yargıtay 11. Hukuk Dairesi, E. 2023/1084 K. 2024/4695 T. 05.06.2024
8. Yargıtay 11. Hukuk Dairesi, E. 2015/2094 K. 2015/3465 T. 13.03.2015, Yargıtay 11. Hukuk Dairesi, E. 2015/10287 K. 2016/3834 T. 07.04.2016
9. Ziya Akıncı, Milletlerarası Tahkim, İstanbul 2016, s. 267 vd.; Ercüment Erdem, "Tahkim Anlaşması", Prof. Dr. Hamdi Yasaman'a Armağan, İstanbul 2017, s. 255.
10. Yüksel, Sinan H. "Pay Sahipleri Sözleşmelerinden Kaynaklanan Uyuşmazlıkların Çözümünde Tahkim." Şirketler Hukuku Uyuşmazlıkları ve Tahkim, 2018, s. 150-153
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