Limited liability companies are regulated as capital companies under the Turkish Commercial Code. This type of company, in which the capital element is at the forefront and the responsibilities of the shareholders in the company are limited, is the most preferred type of company due to its various advantages. Limited liability companies are new legal entities formed by one or more real or legal persons under a trade name. The capital of a limited liability company is fixed and divided into shares. The capital of the company is called "capital stock" and the shares into which this capital is divided are called "capital shares". The sum of the shares constitutes the company's capital value. The owner of the capital shares may be a single person or separate persons. Being a shareholder in a limited liability company enables the person to have partnership rights such as receiving dividends, voting in the general assembly, etc.
Limited liability company shareholders may wish to transfer their company shares to someone else. The person to be transferred may be another shareholder within the company or a third party who is completely foreign to the company. The person who wants to transfer the limited company shares must fulfil the procedure stipulated in the Turkish Commercial Code. In this article, we have made general explanations in order to answer the question of how to transfer limited liability company shares. We have also included a limited liability company share transfer agreement with sample provisions in the content of our article. However, reminding that the sample contract text and provisions are used only to give an idea and explain the subject, we recommend that the share transfer process should be carried out by obtaining professional legal support in order to avoid negativities such as invalidity and cancellation of the share transfer, and to avoid disputes regarding the sale and purchase of shares for a price other than their real value.
How Many Steps Does Limited Company Share Transfer Take?
It is possible to say that the share transfer of a limited liability company can be completed in a total of 5 steps. These are:
- Limited liability company share transfer agreement to be prepared in writing
- Notarization of the signatures on the contract
- Approval of the transfer by the decision of the board of shareholders (general assembly)
- Registration to the trade registry
- Registration in the company share ledger
Some of the steps listed above are mandatory and must be completed in order for the share transfer to be completed in a legally valid manner. Since some of the steps are declarative and explanatory in nature, the fact that these steps are not completed does not mean that the share transfer has not taken place.
Article 595 of the Turkish Commercial Code regulates how the share transfer of a limited liability company should be carried out. According to the relevant provision;
"The transfer of the shares of the capital and the transactions giving rise to the obligation of transfer shall be made in writing and the signatures of the parties shall be notarized."
As can be seen, for the transfer of a limited liability company share, a written agreement must be made, this agreement must be signed and the signatures must be notarized. If these procedures are not carried out properly, the share transfer will be invalid.
"Unless otherwise stipulated in the articles of association, the approval of the general assembly of shareholders is required for the transfer of a share of the capital. The transfer shall be valid upon this approval."
A written agreement with notarized signatures is necessary, but not sufficient, for the transfer of a limited liability company share. In addition, the share transfer must be approved by the general assembly. The validity of the share transfer depends on the approval of the general assembly. However, it should be noted that there is an exception to this rule. If there is a provision in the articles of association of the company stating that the approval of the general assembly is not sought for the transfer of shares, then the approval of the general assembly is not required. Otherwise, the transfer of shares must be approved by the general assembly. Unless otherwise stipulated in the articles of association, the shareholders may refuse to approve the general assembly without giving a reason. Nevertheless, it can be said that the general assembly should act in accordance with the rule of good faith. If the company agreement stipulates additional payment or ancillary performance obligations, the general assembly may refuse approval even if there is no provision in the company agreement, if the required collateral has not been provided because the solvency of the transferee is considered doubtful. If the general assembly does not refuse within three months following the application, the approval shall be deemed to have been granted.
Again, the company agreement may prohibit the transfer of capital shares. In this case, it is not possible to realize the share transfer. If the company agreement prohibits the transfer or the general assembly refuses to approve the transfer, the shareholder has the right to exit the company for just cause.
Which elements should be included in the Limited Liability Company Share Transfer Agreement?
In the articles of association of a limited liability company there should be;
- Identifying information of the transferor and transferee such as name, surname, title, identity number, tax identification number, address
- Information about the company whose shares are transferred (title, headquarters, registered trade registry office, registration number, tax identification number),
- How many shares were transferred, the value of the shares, the type of shares,
- How the consideration for the share transfer was paid,
- Records on how to complete the registration procedures in the trade registry and share ledger
- Additional payment and fringe benefit obligations,
- If the prohibition of competition is aggravated or extended to all shareholders, this matter shall be considered,
- Proposal, pre-emption, repurchase and purchase rights,
- Conditions for the contractual penalty,
- Notarized signatures of the parties
The fact that the Turkish Commercial Code specifically states that if additional payment and ancillary performance obligations and the prohibition of competition are aggravated or extended to all shareholders in the share transfer agreement, this issue, the conditions regarding the right to be the subject of the proposal, pre-emption, repurchase and purchase rights and the contractual penalty should also be written, means that if the contract does not include these issues, it will not be possible to request them later. Therefore, it is necessary to be careful when drafting limited liability company share transfer agreements and not to neglect essential issues. Otherwise, irreparable consequences and loss of rights are likely to occur.
Another issue to be reminded is the determination of the real value of the shares. In cases where the law or the company agreement stipulates the real value of the shares, if the parties cannot agree, this value shall be determined by the commercial court of first instance in the place where the company headquarters is located upon the request of one of the parties. The decision of the court in this case is final.
LIMITED LIABILITY COMPANY SHARE TRANSFER AGREEMENT EXAMPLE
1. PARTIES
The parties to a limited liability company share transfer agreement may be real persons or legal entities. If the transferor and transferee is a real person, the name, surname, identity number and address must be specified; if the party to the contract is a legal entity, the title, trade registry number, tax identification number, headquarters, which registry it is registered in, etc. must be specified in the contract. Address information is especially important for correspondence and notifications between the parties.
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Example Provision: This share transfer agreement is entered into between the parties named below; TRANSFEROR; .......................................................... TRANSFEREE; .......................................................... NAME: ......................................................................... NAME: ......................................................................... SURNAME: .................................................................. SURNAME: .................................................................. IDENTITY NO: ............................................................. IDENTITY NO: ............................................................. ADDRESS: ................................................................... ADDRESS: ................................................................... Example Provision: This agreement has been signed between........... LTD ŞTİ located at the address of and................ registered in the ............ registry with the registration number ......... on one side as the TRANSFEREE party and...........LTD ŞTİ located at the address of and................ registered in the ............ registry with the registration number......... on the other side as the TRANSFEROR party. |
2. INFORMATION ON THE SUBJECT OF THE AGREEMENT/THE COMPANY WHOSE SHARES ARE TRANSFERRED AND THE SHARES
In this part of the agreement, it should be explained which company's shares are transferred. For this reason, information such as the title of the company whose shares are subject to transfer, the trade registry directorate with which registry number it is registered, tax identification number, headquarters, address should be included. Issues such as the total number of shares subject to the share transfer, the type of shares, and the transfer price should also be stated here.
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Example Provision: The subject of this agreement is the transfer of the capital rights and shares of ..............LTD ŞTİ, registered in the ............ trade registry with the registration number ................., of .........................TL against the existing registered ............... shares. |
3. TRANSFER FEE / PAYMENT METHOD AND TIME
The transfer of shares in a limited liability company is basically a sales contract. This is because the person who owns shares in a limited liability company sells the rights attached to the shares to the transferee for a transfer price. In fact, if there is a gap in the share transfer agreements, the provisions of the Turkish Code of Obligations regarding the sale of movable property are applied immediately after the Turkish Commercial Code. Therefore, as in every sales agreement, one of the most important elements of the share transfer agreement is undoubtedly the transfer price and how this price will be paid.
The parties have the freedom to determine the transfer price and the timing and form of payment. For example, it is possible to sell the shares for a price lower than the real value of the shares, or the free will of the parties is valid in deciding whether to pay the sale price in cash or by another means (real estate transfer, government bonds, share certificates, etc.). In any case, there is no market value of limited company shares. The transfer price is determined and accepted by the expert analysis or mutual negotiation of the parties. However, since the law will not protect collusive transactions, we would like to remind you that share transfers made for the purpose of evasion of property are at risk of being ruled invalid in the event of a lawsuit, and it is possible for the share transfer to be canceled by the court. For this reason, we believe that it would be beneficial to include a covenant clause regarding collusion, specifying the responsibilities of the parties in the event that the share transfer agreements are invalidated due to collusion.
We recommend that the agreement should include a provision on the date of payment of the share transfer price. In this way, if there is a penalty clause stipulated in the agreement to be paid in case the transfer price is not paid on time, it will be easier to determine the date on which the penalty clause will become due.
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Example Provision: The parties have agreed on the transfer of the capital rights and shares of ..............LTD ŞTİ, located at...........address and which is registered in the ............ trade registry with the registration number ................., subject to this agreement, .........................TL against the existing ............... shares registered to the person named ..........................., who entered the company as a partner from outside, with all its assets and liabilities at its nominal value as of today's date. The transfer price has been paid by the transferor to the transferee in cash and in advance today, which is the date of signing the agreement. The transferor agrees and declares that it has received the transfer price and has no further receivables from the transferee; and the transferee agrees and declares that it has collected the transfer price. Example Provision: With this agreement, the transfer of................. shares, which are all of the total ..................... shares belonging to the transferor in the company titled ......................Ltd Şti, to the transferor with all its rights and debts in exchange for the transfer price determined in ................ this agreement has been realized. The transferor party has declared and certified that it will not claim any rights on the shares subject to the transfer as of the date of transfer and that there is no right to any receivables. |
4. ADDITIONAL PAYMENT OBLIGATIONS / FRINGE BENEFIT OBLIGATIONS
In limited liability companies, the main and usually the only obligation of the company shareholders are to pay the capital debt that they have undertaken to put into the company. However, the Commercial Code allows for additional payment obligations to be imposed on the shareholders in addition to the capital debt in the event of financial distress of the company. Additional payment obligations must be stipulated in the articles of association of the company, and the shareholders may be required to fulfill this obligation only in certain cases specified in the law.
Additional payment obligations are determined depending on the capital share. For example, it is possible to set an additional payment obligation as 20% of the capital share. Since it depends on the share, the person under additional payment obligation is the owner of that share. Since the shareholder changes in the transfer of shares, if there is an additional payment obligation attached to the transferred share, a provision regarding this should also be included in the agreement. The basic rule is that if a share of the share capital, i.e. a company share, is transferred, the transferor shareholder is released from the additional payment obligation that has not yet been paid; the party that must fulfill the additional payment obligation will now be the party that transfers the share. However, in order to protect third parties from collusive transfers, the transferor party is also required to continue for a certain period of time.
It is quite possible that the aforementioned additional payment obligations may be the subject of dispute between the parties in the post-transfer process. In the post-transfer phase, the transferee may sue the transferor on the grounds that the transferor did not fulfill the additional payment obligation, the transferee may claim that it was not aware of the additional payment obligation, or there may be disputes between the parties regarding the existence of bad faith in transfers made solely to avoid the additional payment obligation. For this reason, we recommend that the existence of the additional payment obligation, the amount of the additional payment obligation, and the liability for the additional payment obligation in the post-transfer process should be regulated in detail in the share transfer agreement.
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Example Provision: The transferee has been informed by the transferor that there is a 20% additional payment obligation related to the shares subject to the transfer. Since the conditions stipulated for the fulfillment of the additional payment obligation did not arise until the date of transfer, the transferee will be responsible for the additional payment obligation related to the share as of the date of transfer. The joint and several liability of the transferor party have also been accepted for a period of 2 years together with the transferee, effective from the date of transfer. |
5. NON-COMPETITION/TRADE SECRETS/CONFIDENTIALITY PROVISIONS
In limited liability companies, the prohibition of competition is only foreseen for the managers who are the management body of the company. Shareholders, on the other hand, as a rule, do not have a non-competition clause. However, with a provision to be added to the articles of association of the company, non-competition may also be stipulated for the shareholders. This is because it is possible for the shareholders to be privy to the trade secrets of the company, to learn the confidential information of the company, and to use such information against the company and for their own benefit. Therefore, we recommend that the transfer agreement should include a non-competition clause for the transferor shareholder, and a provision stipulating that failure to comply with this prohibition will result in liability for damages.
If the prohibition of competition is aggravated or extended to all shareholders, this should also be stated in the share transfer agreement.
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Example Provision: The transferor agrees and undertakes not to compete with the company in which the transferee is a shareholder after the transfer. In addition, the transferor agrees and undertakes not to use all company-specific information and elements such as trade secrets, technical information, customer secrets and customer environment, which it has acquired during the period when it was a shareholder of the company, against the company and for its own benefit. The transferor shall be fully liable for the damages incurred by the company as a result of its breach of these obligations. |
6. RIGHT TO PREEMPTION
We find it useful to include a statement in the share transfer agreement stating that the shareholders with pre-emption rights were offered to take over the shares before the transfer, but that the shareholders do not want to exercise their pre-emption rights. This is because, if the shareholders with pre-emption rights were not offered to take over the shares before the share transfer, the shareholder with pre-emption rights may cancel the share transfer.
7. PENALTY CONDITION
A penalty clause refers to a sum of money agreed to be paid in the event that the obligations imposed on the parties in a contract are not fulfilled at all or as required. As penalty clauses can be included in almost all types of commercial contracts, it is also possible to include a penalty clause / penalty provision / contractual penalty in company share transfer agreements. In contracts with penalty clauses, the parties are forced to perform properly and on time. The party who knows that he/she will pay compensation if he/she fails to fulfill his/her obligations acts earlier and more carefully in paying his/her debts. The penalty clause may be of a general nature or may be specifically regulated by specifying which contractual provision will be paid when it is not fulfilled. For example, the parties may agree that if the transfer price is not paid to the transferor on time, a certain amount of money shall be paid for each day of delay or the total amount shall be specified. However, in practice, it is witnessed that penal clauses of a general nature are mostly stipulated.
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Example Provision: The parties to this contract are deemed to have accepted in advance that if they do not fulfill any of the provisions of the above contract, a penal clause of .................TL will be paid to the other party. Example Provision: In the event that the transfer price agreed upon in this agreement is not paid by the transferee, the parties agree that a penal clause of .............TL will be paid to the transferor. |
8. REGISTRATION
We recommend that a clear date be set in the agreement as to when the agreement will be registered in the trade registry. In addition, since it will be checked whether the agreement contains the mandatory elements stipulated in Article 595 of the Turkish Commercial Code during the examination to be made at the trade registry, it is important to prepare the agreement meticulously in order to avoid any problems at this stage. The stipulation that the transferor will be liable for the damages arising from the failure to realize the registration procedures at all or on time is also among the methods we prefer.
9. SIGNATURES
Since company share transfer agreements must be in writing, the agreement must be signed by the parties. The signatures may be signed by persons authorized for the transfer or through their proxies. However, if the signatory is a proxy, the power of attorney must contain special authorization for the transfer of company shares. The signatures in the agreement must also be approved by a notary public. When a notary public is applied for approval, the notary public conducts a formal examination as to who the signatories are and whether the signatory is the person whose name is actually written in the agreement and, if appropriate, certifies the signatures.
Conclusion
The share capital of limited liability companies is fixed and divided into shares. Shareholders may wish to transfer their shares to someone else for various reasons. This transaction, which can be called as a kind of "share sale", appears as the transfer of the company's shares for a price. However, the transfer of shares in limited liability companies cannot be realized with such an easy transaction. A certain formal requirement is stipulated for the transfer of shares. Accordingly, the transfer procedure, which involves more than one stage, includes a written agreement, the signatures of which are notarized, the approval of the general assembly of the company and the registration in the trade registry and the registration in the company's share ledger. Despite the seeming complexity, with the help of a specialized legal expert, all transactions can be completed smoothly and quickly in a short period of time.
In this bulletin, we have only made general explanations on how the share transfer agreement of a limited liability company should be drafted. The sample provisions we have given are only to give an idea and to explain the subject better and do not make sense individually. We would like to remind you that each agreement should be drafted in a holistic manner and in accordance with the needs of the parties.
Please contact our team for more information and consultancy on limited liability company share transfer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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