Pre-emption right, also known as the right of first refusal, is a contractual right that gives existing shareholders the first opportunity to buy additional shares in a company before they are offered to outside investors. This right is commonly used to prevent unknown shareholders from joining the company. By exercising their pre-emption right, existing shareholders can maintain control of the company and prevent dilution of their ownership. This can increase the value of the company and its shares in the long run, as shareholders’ ownership remains intact and the company’s financial position is strengthened.
Stipulating Pre-emption Rights in the Articles of Association
In order to prevent share transfers that can take place without being declared to the persons who will acquire the shares and without complying with the pre-emption right, shareholders include provisions regarding the pre-emption right in the company’s articles of association. While the shareholder agreement, which includes the pre-emption right, is a contract subject to the Turkish Code of Obligations, provisions regarding pre-emption rights included in the articles of association are not considered to have a corporate nature. In other words, the inclusion of a pre-emption right in the articles of association does not create the possibility of asserting these rights against third parties.
The source of this basic opinion is the absence of a regulation regarding pre-emption rights for joint-stock companies, despite a regulation regarding pre-emption rights for limited companies being included in the Turkish Commercial Code (“TCC“). Therefore, even if agreements creating pre-emption rights regarding share transfers among joint-stock company shareholders are included in the articles of association and announced, these rights cannot be asserted against third parties.
Approval of Share Transfers Made Without Compliance with Pre-emption Rights by the Board of Directors
According to Article 492 of the TCC, “The articles of association may provide that registered shares can only be transferred with the company’s approval.” In such a case, the company’s approval will be necessary for the transfer of shares.
In the partnership structure where the pre-emption right exists, there are question marks regarding whether share transfers made without complying with this right should be approved by the board of directors. In some cases, the board of directors rejects share transfers made without complying with the pre-emption right by citing a significant reason specified in the articles of association in accordance with Article 493/1/(a) of the TCC in order to protect the establishment of the right.
In its decision numbered 2020/604 E., 2020/1311, the Istanbul Regional Court of Justice, 12th Civil Division, stated that the board of directors could not refrain from approving the share transfer on the grounds that the pre-emption right specified in the articles of association was not complied with. Therefore, it is evident that a board of directors cannot reject a share transfer that violates the preemptive right specified in the articles of association.
Conclusion: The Importance of Stipulating Pre-emption Rights
When considering the requirement for approval by the board of directors and the fact that a share transfer without compliance with the preemptive right cannot be claimed against third parties, the preemptive rights agreed upon by the shareholders may be violated in practice. The only solution to this situation is a legal amendment, as in some cases, any compensation amount may not be sufficient to cover the long-term damages caused by the alienation of the company structure.
However, in any case, the penalty clauses linked to the violation of the preemptive right in the shareholders’ agreement can be claimed. It should be noted that even in share transfers where a detailed company due diligence is not carried out, the articles of association of the companies are examined. Therefore, it is partly beneficial to include provisions on the preemptive right in the articles of association, even if they cannot be claimed against third parties, in order to remind potential buyers of the existence of this right.
In conclusion, pre-emption rights can add value to your company by preventing unknown shareholders from joining and preserving the company structure. However, due to the limitations mentioned above, it is important to consider the legal implications and potential violations of these rights in practice.