RIGHT OF FIRST REFUSAL IN CASE OF CAPITAL INCREASE VIA CAPITAL COMMITMENT AT JOINT STOCK COMPANIES (OCTOBER 2017)

The shareholders of joint stock companies are granted right of first refusal to provide a protection regarding their capital ratio at the company in case of capital increase via capital commitment.

Right of first refusal allows the shareholder to acquire the new shares at the ratio between the current shares and the issued new shares. Right of first refusal is a subjective right which associated to share.

Principals of use of this right both at registered capital system and main capital system have been regulated under the same article, Article 461, of Turkish Commercial Code(TCC).

Board of Directors (“BoD”) of the company determines the procedure regarding use of right of first refusal via resolution. BoD provides at least fifteen days’ period to shareholders via related resolution. However, BoD is obliged to provide an appropriate period to shareholder for execution of right of first refusal in case of necessity. Registration of the related resolution of BoD before trade registry and publication in Turkish Trade Registry Gazette are obligatory. 

Right of first refusal has been strengthen in favor of shareholders via four basic principles under TCC. The mentioned principles are as follows:

  • Basically, right of first refusal cannot be restricted or removed by articles of association of company.
  • Right of first refusal can only be restricted or removed in case of justified reasons.
  • Restriction or removal of right of first refusal cannot be executed against the interest of any shareholder (i.e. changes in group shares) or cannot be executed (without justified reason) in favor of some people whether shareholder or not.
  • The decision quorum of shareholders general assembly is aggravated to restrict right of first refusal. Hence, such aggravation constitutes a minority right.

The above-mentioned principles are valid at registered capital system except the decision quorum specified here above.  

Restriction of right of first refusal is applicable via shareholders general assembly resolution regarding capital increase provided that; there must be a justified reason and shareholders general assembly shall take resolution with affirmative votes of shareholders holding sixty per cent of the total capital. For instance, acquisition of enterprises, any department of enterprises and affiliates, offer to public are stipulated as samples to justified reason under TCC. However, it is explicitly specified under TCC that, restriction or removal of right of first refusal cannot be executed in favor of or against any shareholder. As a consequence, capital increases to be executed against some of the shareholders have been prevented.

BoD determines all details regarding right of first refusal including but not limited to reasons for restriction or removal of right of first refusal within the scope of a report which is also subject to registration before trade registry and publication in Turkish Trade Registry Gazette.

Right of first refusal is assignable as per Article 461/4 of TCC. Exercise of right of first refusal cannot be prevented via articles of association due to the explicit regulation of 461/5 of TCC. Besides, restriction on transfer of registered shares within the scope of articles of association does not allow the company to restrict right of first refusal. That is to say; right of first refusal prevails to interest originated from restriction on share transfer (“privilege of right of first refusal”). Therefore, the wording “the person granted to right of first refusal” points out the owner of the right under Article 461 of TCC. Hence, only the owner of the right can benefit from the above-mentioned privilege, not the transferee of the right. 

Consequently, TTC foresees protective rules in favor of shareholder besides the procedure to be followed in case of capital increase. Especially, the decision quorum and the necessity of justified reason for restriction or removal of right of first refusal has strengthen acquisition of new issued shares by the shareholder. Addition to this, BoD is obliged to prepare a report stipulating the reasons of restriction or removal of right of first refusal. Registration and publication of the mentioned report also serves publicity of the condition.