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General Overview of Pre-emptive Rights
Pre-emptive rights are essentially a shareholder right that can be exercised within the scope of capital increases. This right allows each shareholder to acquire new shares issued as a result of a capital increase from external sources, in proportion to their existing shareholding in the capital. However, the legislator has allowed for the limitation or complete elimination of this right under certain conditions.1
The Turkish Commercial Code provides various legal instruments to protect these interests of shareholders, the most important of which is the pre-emptive right. In joint-stock companies, shareholders have the priority right to acquire new shares issued due to an increase in the share capital, in proportion to their shareholding ratio.
Pre-emptive rights are essentially a concept arising from a capital increase. The right is exercised during a capital increase. Therefore, for this right to be exercised, the company must first have increased its capital.
Pre-emptive Rights in Joint Stock Companies
The fundamental provisions regarding pre-emptive rights in joint-stock companies are regulated in Article 461 of the Turkish Commercial Code (TTK). The first paragraph of this article states, "Every shareholder has the right to acquire newly issued shares in proportion to the ratio of their existing shares to the capital," thereby legally granting pre-emptive rights to shareholders. In addition to the TTK, there are also specific provisions regarding pre-emptive rights for publicly traded joint-stock companies in the Capital Markets Law No. 6362. This article will focus primarily on non-publicly traded joint-stock companies.
Pre-emptive rights are transferable (Turkish Commercial Code, Article 462/4). Since this rule is a legal regulation, it cannot be prohibited or restricted by the company.2
Article 461/5 of the Turkish Commercial Code stipulates that "The company cannot prevent shareholders to whom it has granted pre-emptive rights from exercising these rights by claiming that the transfer of registered shares is restricted by the articles of association." Accordingly, this provision aims to prevent the board of directors from attempting to prevent shareholders from exercising their pre-emptive rights in the sale of shares, particularly due to the contractual nature of the pre-emptive clause.
Limitation of Pre-emptive Rights
The main principle is not the restriction of the pre-emptive right, but its exercise. However, in some cases, the right may be restricted. According to Article 461 of the Turkish Commercial Code, restriction is possible with the existence of justifiable reasons and a 60% quorum. The term "justifiable reasons" leaves the scope open, but a general guideline is established by listing certain points. Considering the provision in the aforementioned article, which states, "In particular, initial public offerings, acquisitions of businesses, business parts, subsidiaries, and the participation of employees in the company are considered justifiable reasons," justifiable reasons are focused on legal policies, the company's interests, the company's growth strategies, social considerations, and necessities.3
Briefly examining the points listed in the article:
The public initial offering was deemed a justifiable reason. Furthermore, claims that the company did not need to go public or that the public initial offering was fraudulent do not negate this justifiable reason.4
Acquisition of businesses, business parts, or subsidiaries. In cases where pre-emptive rights are restricted for the purpose of acquisition, the joint-stock company increases its capital in order to acquire in-kind capital, and consequently, existing shareholders are not allowed to exercise their pre-emptive rights.
The recruitment of workers into a company is also among the restrictive reasons listed in the law.
The justification for the article also states that the company's financial interests and reasons such as technology acquisition are justifiable.
In joint-stock companies, the authority to decide on the limitation or elimination of pre-emptive rights generally belongs to the general assembly. Article 461/2 of the Turkish Commercial Code (TTK) stipulates that the general assembly's decision regarding a capital increase may limit or eliminate a shareholder's pre-emptive right with the affirmative vote of at least sixty percent of the share capital. Furthermore, this percentage stipulated in the law cannot be mitigated by a provision in the articles of association. Unlike limited liability companies (TTK Article 591), the provision does not explicitly state that such limitation/elimination can be made through the articles of association.
Moreover, it should be noted that there is a debate in legal doctrine as to whether the decision regarding the limitation or abolition of pre-emptive rights needs to be included in the agenda of the general assembly meeting at which it is taken.5
Apart from the rule in Article 461/2 of the Turkish Commercial Code that the decision to restrict or abolish pre-emptive rights must be taken with the affirmative vote of at least sixty percent of the capital, other rules also apply to board of directors decisions in the registered capital system.
Sanctions for Limiting or Abolishing Pre-emptive Rights in Violation of the Turkish Commercial Code
The types of sanctions that can be applied to general assembly resolutions that restrict or abolish pre-emptive rights in violation of the principles stipulated in Article 461 of the Turkish Commercial Code, or that eliminate the exercise of this right, are voidability and nullity. However, the generally accepted view is that the sanction for such a violation is voidability. In this context, a lawsuit can be filed within three months from the date of the general assembly resolution on the grounds that it is contrary to the provisions of the law or the articles of association, and especially the principle of good faith. In a decision of the Court of Cassation , it was stated that general assembly resolutions that violate pre-emptive rights are subject to the sanction of voidability, not nullity. 6 In a more recent decision, the Court of Cassation concluded that in cases where all shareholders are allowed to exercise their pre-emptive except rights for one shareholder, the principle of equal treatment is violated, and therefore the principle of equality is violated only once, not continuously, and is subject to the sanction of voidability, not nullity.
Conclusion
The right of pre-emption is not an absolute right that must be exercised by shareholders. It can be waived or restricted under certain conditions. This restriction must have a justifiable reason and be approved by the general assembly with at least sixty percent of the votes. Furthermore, the board of directors is obligated to determine the principles governing the exercise of the right of pre-emption by resolution, to register and publish this resolution, and to give shareholders at least fifteen days to exercise this right. If a shareholder fails to exercise this right within the given time, the right of pre-emption lapses. The application and restriction of the right of pre-emption must comply with the fundamental principles of company law; Otherwise, the company may face lawsuits for annulment or invalidation, or administrative and financial sanctions.
Footnotes
1. Yavuz, Mustafa, Anonim Şirketlerde Rüçhan Hakkı ile Bu Hakkın Sınırlandırılma Esasları, Gümrük Ticaret Dergisi, Haziran 2021, 12-23
2. Yavuz, Mustafa, p. 17
3. Tekinalp, Ü. (2013), Sermaye Ortaklıklarının Yeni Hukuku, Ankara, Vedat Kitapçılık.
4. Poroy, R., Tekinalp, Ü. ve Çamoğlu, E. (2017), Ortaklıklar Hukuku II, İstanbul, Vedat Kitapçılık.
5. Yıldız, Ş. (2012), "6102 Sayılı Türk Ticaret Kanunu'nda Rüçhan Hakkı Konusunda Getirilen Değişiklikler", Marmara Üniversitesi Hukuk Fakültesi Hukuk Araştırmaları Dergisi, 18(2), 809-817.
6. Decision of the 11th Civil Chamber of the Court of Cassation dated February 18, 2016, numbered E.2015/5672, K.2016/1675.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
