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Enforceability of Exit Provisions in a Shareholders Agreement Under Turkish Law

Updated: Aug 26, 2021

What is a Shareholders Agreement?

Shareholders Agreement (SHA) is an arrangement among shareholders of the company, which contains rules that govern the contractual rights and obligations of the shareholders towards each other and even the company itself, and how the company should be operated. SHA is not necessarily an agreement merely between the shareholders. Third parties, including the target company itself, who are not shareholders can also be a party to the agreement.

Besides, it does not have to be concluded following a share transfer. Investors may become shareholders through purchasing the new shares issued following an increase of capital.

Even though Turkish Commercial Code numbered 6102 (hereafter referred as “TCC” or “Code”) does not require the shareholders to conclude a Shareholders Agreement, it is often entered into by the investors when investing in a Turkish company due to restrictive nature of Articles of Associations (AoA).

Exit Rights of the Shareholders

Most investors, particularly private equity or venture capital firms, invest in the companies with an expectation to ultimately sell the purchased shares for profit, which basically defines an “exit”. Investors become a shareholder to the target company to ultimately achieve a smooth exit when their purchased shares have gain value.

An initial public offering (IPO) is a frequent way to exit from a company. It is, however, strictly regulated. There are various other contractual mechanisms for a shareholder to exit from the company. As a common practice, drag along and tag along rights, share buy-back rights and call-put options are the exit provisions frequently contained in SHAs in Turkey.

Drag along rights enable an investor to force other shareholders to participate in the sale of the company. In this scheme, investor that wish to exit finds a purchaser who's willing to offer the same price and terms for each share of each shareholder –including the investor. Most buyers would be attracted to companies with unproblematic minority shareholders, thus, it helps create a better market value for the company.

Tag along rights provide the minority shareholders with the right to join the transaction along with the majority shareholders.

Call options basically provide the investor with the right to purchase shares from other shareholders at a pre-determined price. In this scheme, investor who wish to exit does not necessarily wait for a third-party buyer interested to purchase the shares. It requires, however, the determination of what the value of the company will be in a distant future.

Put options are rights that give the other shareholders an obligation to purchase back the shares when put forth by the investors at a predetermined price. It is frequently used in venture capital deals.

Finally, share buy-backs are also one of the ways to exit the company. It basically provides the shareholder with the right to sell their shares to the company itself. Under the Turkish law, privately held companies are allowed to purchase their own shares, not exceeding %10 of its issued capital. This method often used as a tool for removing of problematic shareholders from the company.

Rules Governing Shareholders Agreement under Turkish Law

SHAs are not regulated under Turkish Commercial Code. They are often used as an alternative to Articles of Association (AoA), which is public and subject to certain limitations and registration requirements. Particularly, the rules governing the AoA has become stricter with the entry into force of Turkish Commercial Code in 2012.

Article 340 of TCC provides that provisions of AoA of Joint Stock Companies cannot diverge from TCC unless explicitly permitted in the Code and the relevant legislation –regardless of whether the company is a public or privately held company. For example, the AoA cannot contain share transfer restrictions which are heavier than conditions set forth under TCC. Provisions under TCC that regulates the governance and inalienable duties and powers of the bodies of the company are also mandatory rules that cannot be diverged unless clearly permitted by the Code. Rights of the minority shareholders are also regulated as mandatory provisions under TCC, which cannot be diverged in the AoA.

Pursuant to the reasoning of the Article 336 of the Code, agreements between shareholders, with contractual characteristics, are excluded from company law. Thus, contractual rights such as exit rights cannot be included in the AoA. In the event, such rights are contained in the AoA somehow, those shall not be binding upon third parties, yet, shall be binding between parties of the agreement.

Despite the restrictive nature of an AoA, in which only corporative rules are permitted; an SHA is governed by the law of obligations and subject to freedom of contract, which makes it a practicable tool in terms of flexibility and confidentiality. Especially for the ancillary arrangements which are considered necessary to the shareholders, however, cannot be regulated under AoA, entering into a shareholders agreement is the best option.

Furthermore, since SHAs are not regulated under TCC, it is not subject to any compulsory content in contrary to the AoA.

Sole Obligation Principle under Turkish Commercial Code and Enforceability of Exit Rights

Legal ground of an SHA and an AoA are completely different. SHA is an arrangement governed by the rules of law of obligations, thus, shall not be binding upon third parties –even the company itself is considered as a third party unless made a party to it – as per Article 480 of the Code, which states that shareholders shall not be liable for any additional obligations other than the payment of the committed price of their shares. Accordingly, the agreements which are in contradict with the principle shall not be applicable directly to new shareholders in the event of share transfer transaction on the ground that right and obligations merely arise out of the agreement between parties and no other person is bound with it. Therefore, non-corporative rights and obligations contained in the SHA that exceed the limitations set forth under TCC shall only bind the parties of the contract in correlation with the will of the legislator in the reasoning of the Article 336 of the Code.

As the result of sole obligation principle, breaches of the provisions of SHA that force the shareholders to sell or buy shares shall not be subject to remedies and penalties set forth under TCC. Thus, in case of a breach of such obligations, the only remedies available are the ones provided in the provisions of the agreement itself and the Turkish Code of Obligations –such as specific performance, compensation or termination of contract. Even in that case, some of those remedies may still be inapplicable to that particular dispute. For example, remedy of specific performance most likely will not be applicable in the case of a breach due to the sole obligation principle. Likewise, other provisions of SHA that exceed the mandatory rules and principles set forth in the TCC, accordingly, will not be subject to specific performance due to reason that TCC and SHA are in different fields of law.

Mechanisms to Ensure the Enforceability of Exit Rights

Enforceability of the exit rights such as options, however, is a gray area due to the absence of specific regulations and the precedent. As mentioned afore, the remedies provided by the law of obligations are applicable to the extent that they do not interfere with the corporative field.

In Turkey, it is also a common practice to include penalty clauses in the SHAs due to the absence of specific performance remedy.

Delivery of the bearer shares or registered shares issued on the name of the investor to the escrows at the time of signing are also two other practicable solutions to overcome this hurdle. At first, use of bearer shares may appear as the easiest option, compared to use of registered shares, transfer of which requires the execution of a set of procedures by the Board of company. Recent Amendments (with the Law No: 7262) introduced to Turkish Commercial Code (to enter into force as of 4th of April, 2021), however, make it obligatory to notify the issuance, ownership and transfer of bearer shares to Central Securities Depository of Turkey (Merkezi Kayıt Kuruluşu-MKK) –which prolong the process for the issuance and transfer of bearer shares.


[1] The Law No. 7262 on Preventing the Proliferation of Financing Weapons of Mass Destruction

[2] Turkish Commercial Code numbered 6102 and the reasoning thereof. see:


Av. Ferhan Yıldızlı

Av. Gizem Uzunoğlu

Stj. Av. Mert Dilmen

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