Miran Legal



Privileged Shares İn Joint Stock Companies

In Article 329 of the Turkish Commercial Code, the framework of joint stock companies has been established with the expression: "A Joint-stock company is a company whose capital is divided into certain shares and is responsible only for its assets due to its debts. Shareholders are responsible to the company only to the extend of the capital shares they have committed." . Joint stock companies have had a great share in the development of world trade to today's conditions. In order to increase the capital and protect the initial capital in the long term, privileged shares were created to protect the company's assets.


Shares in joint stock companies are subject to different classifications. By law, shares are subject to the principle of ”equality"  The rights of all shareholders such as equal treatment and equal proceedings have been protected by the legislator. This equality between the shareholders should be understood as a ‘relative’ equality; it has been stated that the owners who have the same share proportionally should be treated in the same way and that mistreatment should be prevented. We can classify shares such as; purchased shares, voting shares, ordinary shares, no-par shares, and non-premium shares. 


Privileges, on the other hand, are exceptions to the "principle of equality". We can specify privileges such as; participation in the profits, election of members to the board of directors, voting rights etc. Except in cases stipulated by law, "Privilege" is defined as a superior right that is not specified in the TCC. The general assembly is not subject to a legally required limit in granting privileges to certain shares. The general assembly may grant privileges based on the authority given in the prime contract. A prime contract that does not contain privileges may be renewed and they can be granted to the general assembly. In the event of a unanimous decision based on a prime contract that does not contain authorization, the general assembly cannot grant a privilege. In order for a privilege authority not included in the prime contract to be granted, the consent of the owners or representatives of the shares constituting at least 75% of the capital is required. Lowering the 75% minimum limit ordered by the legislator is against the law and is under protection in accordance with the regulation contained in Article 452 of the TCC. It is not possible to recognize the authority to grant privileges contained in the prime contract as an absolute authority. It is against the law to grant a privilege based on a prime contract in which the scope of the authority is not clearly stated.


An acquired right and privilege are two different concepts. In addition to privileges being rights that find a field of application with the decision of the general assembly, the general assembly has the authority to remove, limit or change privileges. On the other hand, it is not possible to eliminate acquired rights with a general assembly decision to be taken later. Article 452 of the TCC explicitly protects acquired rights. 

Privileges are only grantable to shares and it is not possible for them to be granted to a certain person or a group. They emerge as a contractual right along with granting the privilege authority contained in the prime contract to the person. Unlike a privilege granted to a person or to the shares of a joint stock company, it is not possible to eliminate acquired rights by a decision of the general assembly. While privileges are a superior right granted to the share itself, the right granted to the person is an acquired right arising from the contract. Apart from shares, privileges can also be granted to share groups. In this case, it is aimed to show that the privileged share group has different rights from the others.


The privileges granted to the shares must be different rights from those of other groups that were not granted privileges. Privileges must be superior rights that are not stipulated by law, such as dividends, liquidation shares, or voting rights. Situations such as the difference in the issue value, the fact that the capital put forward by the shareholders is in cash or in kind, the difference in the issue date, cannot be a privilege, since they do not contain a paramount right.


Types of Privileged Shares

            We have mentioned that the content of the prime contract providing the authority to issue privileges is not possible to be abstract, but that the general assembly is not subject to a limit in the use of this authority, which is in accordance with the law. The General Assembly has the right to subject the privilege to all kinds of time and usage limits with the privilege issuance authority. 


A)   Privilege in Dividend 
Dividend is paid in cash to each partner. In joint stock companies, it is defined as the share that is allocated from the distributable net period profit or free reserves for the capital share paid at the end of the period. The General Assembly is not subject to an authority limit on dividend privileges. Although there is no explicit mention of a limit;  according to article 2 of the Civil Code, article 381 of the TCC, article 19 and 20 of the Code of Obligations, it cannot be against good faith.


B)    Privileged Shares in Liquidation Shares
In order for a privilege right to be established in the liquidation share, it is necessary that a state of liquidation should occur in the joint stock company and that there should be a balance to be liquidated. Only in this case the shareholder will have the opportunity to benefit from their privilege. Although no form has been specified for the implementation of privileges in the liquidation share, it should be executed in good faith.


C) Privileged Shares in Other Matters

                    Since there is no scope for privilege rights in joint stock companies and it also covers unforeseen situations as stated in Article 478 of the Turkish Commercial Code, it is completely left to the general assembly and the prime contract and is at the initiative of the partnership. No limit has been imposed about putting this limit on newly issued shares.


1) Privileged Shares in Management

                        This privilege grants the right to nominate a group of shares or a share that has a management privilege to the whole or a part of the board of directors. It is not possible for those who have a share group to use this privilege alone, it can only be used by designated share groups.


2) New Share Purchase Privilege

                        It is made based on the prime contract for those who do not have acquired rights. It is a type of privilege that allows a new share to be pre-ordered or its purchase to be limited.


D)   Claiming Interest in the Preparatory Stage Privilege
It is clearly stated in the Turkish Commercial Code that no interest will be paid for the capital, and the right to demand interest at the preparatory stage (which arises as an exception to this rule) arises only in accordance with the prime contract. This interest covers an interest payment and maturity in accordance with Turkish Accounting Standards, covering only the preparatory stage. Such granting of interest outside the preparatory stage is not appropriate by law.


E)    Voting Right Privileges 
            It provides more voting rights according to the value of the share to be granted. In terms of a limit, a maximum of 15 voting rights may be granted to a share, but this rule cannot be applied if there is a justified reason caused by institutionalization. In order to determine the existence of this reason, it is a legal obligation to take a decision in the commercial courts of first instance, where the headquarters of the joint stock company is located. In the event that the matters caused by institutionalization disappear, this exception may be eliminated by the commercial courts of first instance.

            It is clearly stated in the law that it is not possible to use the right to make changes in the prime contract and to file a lawsuit for release and liability, as the circumstances under which the voting right privileges can be exercised may be limited depending on the prime contract. In the Capital Markets Law, it is clearly stated that all the privileges of the joint stock company must be clearly announced in the first public offering and that these privileges can be lifted by the decision of the Capital Markets Board if the company has suffered a loss in the financial statements in the last five years. The authority of the Capital Markets Board to revoke privileges does not constitute a field of application for privileges that belong only to public institutions and organizations.

            Although the use of the voting privilege is prevented by law in the event of a discharge, if the balance sheet is approved, the discharge results in evasion of law. Since the use of privileges is not prohibited at the balance sheet approval meeting, it is also possible to use it maliciously against the partners.