The Uncertainty of the Boundary Between Personal Rights and Privileges in Joint Stock Companies

In non-public joint stock companies, the tendencies of the shareholders may lead to the personalization of the company. The expectations of minority shareholders in strategic positions and, in some cases, the need to establish joint control lead to the inclusion of personal elements in the corporate structure of the joint stock company. From this perspective, there is a conflict between the corporate structure established by the company's articles of association and the contractual structure established by the shareholders' agreement. In the Swiss-Turkish legal system, clear lines are maintained regarding the separation of these two structures. 

The regime set for joint stock companies in the Turkish Commercial Code is considerably strict in terms of the content of the articles of association. The mandatory rule principle conflicts with the main essentials of the concept of mandatory rule. As a part of Continental European Law the main characteristics of mandatory rule in Turkish Private Law are closely linked to the concept of contract of freedom. In this respect, the parties are free to conclude the content of their contractual arrangements, unless a mandatory rule sets prohibitions or limits. On the other hand, mandatory rule principle is formulated in a manner that the shareholders may only conclude arrangements which are clearly allowed in the Turkish Commercial Code. Some scholars interpret this principle in line with the classical concept of mandatory rule.

Personal rights may be included in the corporate structure established by the articles of association. However, these personal rights cannot be enforced through instruments specific to the partnership structure (e.g., actions for annulment, actions for liability as a matter of principle). Violations of these rights are subject to sanctions specific to the Law of Contracts such as damages or specific performance. In the practice of Turkish Joint Stock Companies Law, it is becoming increasingly difficult to include personal rights in the statutory structure. One clear example of linking personal rights to the articles of association is the reference in the articles of association to various agreements, primarily shareholder agreements. Legal practice does not allow this and Turkish legal doctrine also largely accepts that such references cannot be included in the articles of association.

In this sense, making the sanctions specific to the Law of Obligations more functional appears to be a way out for the time being. In practice, the most effective tool for this is option rights. In Turkish law, options are not considered a corporate tool in joint-stock companies; however, there is no obstacle to their inclusion in articles of association. In contrast, in limited partnerships, options are designed as corporate tools. 

The application of privileged shares in Turkish law, however, exhibits considerable diversity. Privileges may include voting rights, the right to representation in management, and certain advantages in profit distribution and liquidation of shares. Voting privileges and privileges in management representation are two specific types of privileges regulated by law. However, privileges may also be granted under rights that are not regulated by law: such as a shareholder's right to use the facilities operated by the company.

A privilege may only be regulated in the articles of association and may only be linked to shares. Since it concerns and undermines the equality and proportionality between shares, it is possible to argue that a privilege is essentially an exception. Accordingly, the existence and scope of a privilege must be clearly understood from the articles of association. The conclusion that a privilege exists cannot be reached through interpretation. Privileges should also be interpreted narrowly, in line with the principle of narrow interpretation of exceptions. Despite all these limitations, privilege is a corporate right, and its existence must be taken into account in transactions and practices carried out by company bodies. 

In Turkish law, certain uncertainties have influenced the regulation of voting privileges. In contrast to the prohibition of voting privileges in some continental European legal systems, Turkish law limits voting privileges to 15 votes per share. This limit may only be lifted by a court in cases where shares are widely distributed among many shareholders. Moreover, voting privileges do not apply to discharge resolutions and amendments to the articles of association. 

Voting privileges are not without alternatives in Turkish law. While the old system of ‘at least one vote per share’ is preserved in practice, the law also grants shareholders the authority to regulate based on the principle of ‘at least one vote per shareholder’.

The legal regulation concerning privileges in participating in management, however, enforces the principle that privileges are linked to shares. This is because the right to be represented on the board of directors can, in principle, be linked to the share group, but it can also be granted to minority shareholders or to shareholders with certain characteristics. Nevertheless, this enforcement should not be given priority: in all cases, the element to which the privilege is linked is the share.

Corporate instruments such as preferential rights and share transfer restrictions in joint-stock companies, as well as rights included in the non-substantive content of the articles of association such as personal rights, significantly alter the objective and share-based structure of the joint-stock company. This change undoubtedly shapes disputes arising from contractual relationships between shareholders. In contrast, the disputes to which the company is a party should be based on the corporate order (i.e., legal provisions, the articles of association, and corporate resolutions), rather than the contractual one.

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Anlam Altay is an Associate Professor at Galatasaray University and a Guest Professor at Koc University.

This blog is based on a paper presented at the Koç University – ECGI Conference “Corporate Constitution and Private Ordering”.  Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.