Companies may issue different types of shares (e.g., ordinary shares or privileged shares) and different rights can be attached to these distinct types of shares for a variety of purposes. This article aims to illustrate the two common types of shares issued by companies and the various rights that could be attached to them.
Ordinary shares may be defined as shares providing equal rights to the shareholders unless otherwise agreed and specified.
Privileges that may be attached to privileged shares under the Turkish Commercial Code (“TCC”) are defined either as a right that is granted to the share for the dividends, liquidation shares, preemptive rights, voting rights and similar rights, or as a new type of share ownership which has not been previously prescribed by the TCC.
Conditions for Granting Privileges
The general principle for benefitting from the rights attached to the shares is the principle of proportionality, which states that the benefits must be in line with the ratio of the share of capital. Therefore, granting a privilege is considered to be an exception to the principle of proportionality, and there are certain conditions that must be fulfilled for granting privileges to shares in accordance with the TCC.
Privileges may only be granted by the articles of association. It has been regulated under the relevant provision of the TCC that certain shares may be assigned privileges by the initial articles of association or by amending the articles of association afterwards.
The subject matter and the scope of the privilege must be explicitly stated under the articles of association. Accordingly, the subject matter of privileged shares may comprise rights with management or property ownership characteristics, such as the right to vote, the right to be represented at the board of directors, the right to receive the dividend, right to receive the liquidation balance, and the right of preemption.
According to a decision of the Turkish Court of Appeals, a company’s selection of the members of the board of directors among the shareholders who represent 50.5% of the shares under the articles of association shall not be considered as a privilege. A phrase such as “the shareholders which represent 50.5% of the shares” under the articles of association is considered to be too vague for determining the group of shareholders who hold the privilege.
Subject Matters of Privilege
The privileges may be granted as (i) a property ownership, (ii) a share, and (iii) the right to be represented at the board of directors.
(i) Privilege regarding property ownership
Privileges regarding property ownership may be granted in one of three ways: (1) privileges on the dividend, (2) privileges on the liquidation share, and (3) privileges on the right of preemption.
Furthermore, there are three ways that the privilege on the dividend may be granted: (1) receiving a higher share of the profit, (2) benefitting primarily from the dividend, and (3) cumulative privilege on the dividend.
Privilege on the liquidation share may be granted by providing preemptive rights with regard to the corporate estate upon the completion of the company’s liquidation, prior to the holders of the ordinary shares.
In practical terms, privilege on the right of preemption may not be implemented frequently. However, it may be granted by amending the articles of association following the establishment of the company. Affirmative consent (i.e., votes) of the shareholders who own 75% of the capital (or the representatives of such shareholders) must be obtained in order to grant the privilege on the right of preemption.
(ii) Privilege on the share
As per the TCC, the privileged shares may be assigned increased voting rights even though the shares have equal nominal value.
(iii) Privilege regarding the right to be represented at the board of directors
The right to be represented at the board of directors was not enumerated as a privilege according to the former Turkish Commercial Code No. 6762. Nevertheless, the right to such representation at the board has long been considered and treated as a privilege according to the precedents of the Turkish Court of Appeals. Hereinafter, the TCC regulates that privileges regarding the right to be represented at the board of directors may be granted to certain share groups and shareholders that constitute a defined group with specific characteristics or to minority shareholders, provided that this privilege has been established and regulated under the articles of association.
Comparison between Ordinary and Privileged Shares
As explained above in detail, a privileged share generally provides greater rights and benefits compared to the ordinary shares in terms of the following: (1) voting rights, (2) dividend payments, (3) dividend rate, (4) right to receive accumulated dividends from previous years, and (5) repayment of capital upon the liquidation of the company.
Additionally, as per the TCC, there exists a special mechanism for the protection of such privileges. According to the relevant provision of the TCC, in case a resolution regarding the amendment of the articles of association that infringes on the rights of the holders of the privileged shares is proposed by the general assembly of shareholders, such a resolution shall not be approved without the consent of the holders of the privileged shares, which must be obtained at a special meeting of the privileged shareholders.
This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in September 2017. A link to the full Legal Insight Quarterly may be found here.