Issuing Privileged Shares (PSs) for Public and Private Companies in Turkey
Privileged shares (or preferred shares) in Turkey are shares that give their holders certain special rights or advantages compared to holders of ordinary shares. These privileges can be related to voting rights, dividends, liquidation proceeds, or other aspects of the company’s governance and financial structure. The concept of PSs is governed by the Turkish Commercial Code (TCC), and they can be included in the Articles of Association of a company when the company is being incorporated or during subsequent amendments.
Here’s a detailed look at PSs:
1.What are PSs?
PSs are a class of shares that grant the shareholder certain advantages or preferential treatment over other shareholders. These advantages can take various forms and are typically outlined in the company’s Articles of Association. The privileges associated with these shares are decided by the company’s founders or shareholders and must comply with the general principles of corporate governance under Turkish law.
2.Common Types of Privileges for PSs
The privileges attached to PSs can vary significantly from one company to another, depending on what is agreed upon in the Articles of Association. Common privileges include:
a.Dividend Priority
- Preferred shareholders may be entitled to receive dividends before ordinary shareholders. In some cases, they may also receive fixed or guaranteed dividends.
- These shareholders often have the right to receive dividends at a higher rate than ordinary shares.
b.Voting Rights
- PSs may have enhanced voting rights. This could mean a shareholder with PSs has more than one vote per share or the ability to vote on specific issues such as the election of directors, changes to the Articles of Association, or other key decisions.
- Conversely, PSs may also come with limited or no voting rights. This is a decision made by the company and must be stipulated in the Articles of Association.
c.Liquidation Preference
- PS shareholders may have a right to receive proceeds from the sale or liquidation of the company before ordinary shareholders. This means they are prioritized in the event that the company is wound up or sold, even if it results in liquidation.
d.Conversion Rights
- In some cases, PSs may be convertible into ordinary shares after a specific period or upon certain conditions being met. This gives the holder the opportunity to switch to regular shares that may have more rights in terms of voting or dividends.
e.Pre-Emptive Rights
- In the case of issuing new shares, PS shareholders may have pre-emptive rights over ordinary shareholders, allowing them to purchase new shares before ordinary shareholders to maintain their proportional ownership.
f.Rights to Participate in Special Decisions
- Sometimes, holders of PSs are granted the right to participate in specific decisions made by the company, such as matters involving mergers, acquisitions, or asset sales, that could significantly affect the future of the company.
3.Legal Requirements for PSs
PSs are regulated by the Turkish Commercial Code (TCC), particularly under the provisions related to corporate governance and capital structure. The following legal considerations apply:
a.Issuance of PSs
- The Articles of Association must specifically outline the privileges associated with a particular class of shares, including the rights of PS shareholders.
- Privileges cannot be arbitrarily granted; they must be clearly defined and comply with the overall structure and purpose of the company.
b.Voting on Privileges
- PSs must be voted on and approved by the General Assembly (shareholders’ meeting), and the necessary majority is required. For more significant changes in privileges (e.g., creating new classes of shares or changing existing privileges), a supermajority vote may be needed.
c.Restrictions on Privileges
- Restrictions on PSs: Certain privileges cannot be granted in ways that violate the rights of other shareholders or result in discriminatory practices. For example, preferred dividends cannot be structured in a way that excessively disadvantages ordinary shareholders.
- Non-Voting Privileges: In some cases, the holders of PSs may not have the right to vote in the General Assembly unless a certain threshold is met. However, this needs to be stipulated in the Articles of Association and must comply with the general legal framework governing Turkish Corporate Law.
4.Voting and Rights of PS Shareholders
When a company issues PSs, the Articles of Association will outline the specific rights attached to those shares. Here are a few aspects that may be included:
a.Voting Power
The voting power of PSs can vary. For example:
- Enhanced voting rights: A PS shareholder may have the right to cast multiple votes per share (e.g., 10 votes per share for PSs vs. 1 vote per share for ordinary shares).
- Limited voting rights: In some cases, PSs may have no voting rights in General Assembly meetings, except on specific issues (e.g., matters affecting the privileges themselves).
b.Dividends and Distribution
- Holders of PSs typically have priority in dividends, meaning they are entitled to receive dividends before ordinary shareholders. This is especially true for cumulative preferred shares, where if the company does not declare dividends in a given year, the unpaid dividends accumulate and must be paid out in future years before any dividends are paid to ordinary shareholders.
- In addition to priority in dividends, PSs can have a fixed dividend rate that is higher than that of ordinary shares.
c.Liquidation
- PSs often have the right to receive a portion of the company’s assets before ordinary shareholders in the event of liquidation. The amount the PS shareholders are entitled to receive is usually stipulated in the Articles of Association.
5.Types of PSs
Companies typically issue PSs in the following ways:
a.Preferred Shares
- These shares provide specific privileges but may or may not grant voting rights. Preferred shares often prioritize dividends and liquidation proceeds over ordinary shares.
- Preferred Shares can be further classified into:
- Cumulative preferred shares (unpaid dividends accumulate).
- Non-cumulative preferred shares (dividends do not accumulate).
b.Convertible Preferred Shares
- These shares can be converted into ordinary shares at a later date, often at the discretion of the preferred shareholder or upon meeting certain conditions outlined in the Articles of Association.
6.Advantages of PSs
For investors, PSs offer several benefits, including:
- Preferential treatment in dividends: Investors can benefit from fixed, guaranteed, or prioritized dividends.
- Priority in liquidation: If the company is dissolved or liquidated, PS shareholders will receive their share of the proceeds before ordinary shareholders.
- Enhanced control: Some PSs offer increased voting power or influence over company decisions.
For companies, issuing PSs can help:
- Attract capital from investors who want more secure returns or greater control over the company’s decision-making process.
- Protect existing shareholders by allowing the company to issue additional shares without diluting the voting power or rights of key stakeholders.
7.Disadvantages of PSs
While advantageous for some investors, PSs can have downsides, including:
- Dilution of ordinary shareholders’ power: When PSs have enhanced voting rights, ordinary shareholders may feel their power is diluted.
- Financial burden on the company: If PSs carry guaranteed dividends or higher payouts, this can increase the company’s financial obligations.
- Complexity in governance: Having multiple classes of shares with different privileges can create governance complexity and potential conflicts among shareholders.
PSs are a powerful tool for companies to attract investors while offering specific financial and governance advantages. However, they need to be carefully structured and clearly defined in the Articles of Association to ensure compliance with the Turkish Commercial Code and fairness to all shareholders. Companies must balance the benefits of PSs with the potential risks and legal implications, ensuring that these shares do not lead to unfair or discriminatory treatment of other shareholders. If you’re considering issuing PSs, it is highly advisable to consult with legal professionals to ensure that all terms and conditions are clearly defined and legally sound.
Privileged shares in Turkey should be considered carefully before issuing. Please feel free to contact us for more information and further inquiries about our unique services. You can also subscribe to Tacirsoft Hukuk Bilgi Sistemi, that is Turkey’s only Corporate Law and Organized Industrial Zones Law database.
