Introduction:

The leave or exclusion of a shareholder from a corporation is an issue that needs to be meticulously emphasized during the incorporation of a new company, yet it is frequently omitted during the establishment period. This procedure has similarities as well as differences depending on the type of corporation established,  and is of great importance for other shareholders, the shareholder who wants to leave or will be excluded and the company itself. This article discusses the ways of leaving the corporation as a shareholder in limited liability companies and corporations under US and Turkish Law comparatively.

Author's Note: Leaving a corporation may require different procedures between depending on the type of company and the extent that it is regulated in the company's articles of incorporation. Even though this article tackles the issue of leaving a corporation in general terms, other conditions and the specific articles of incorporation of the particular company in question should be examined in detail before any decisions are made accordingly.

Leaving the Corporation and Transfer of Share in Joint-Stock Companies

Joint-stock companies are one of the most preferred company types under Turkish local law due to the limited liability it provides to its shareholders and the advantages it provides during the incorporation procedure. In principle leaving a corporation or transfer of shares are not restricted in joint -stock companies; however there are certain exceptions to this general rule.

In principle, the shareholders are not liable from for the debt incurred by the company in joint-stock companies, including public debt (such as taxes). One of the most important reasons why joint stock companies are preferred as a structure during the establishment phase is this limited liability advantage that it provides. However, the board members are liable from public debt. Therefore, if a person is a board member and a shareholder at the same time, that person can still be liable for public debt.

Shares hold great value in corporations in comparison to sole-proprietorship structures. In other words, for a shareholder, the stock share is what holds value rather than who he is and his personality. This is due to the reason that the only responsibility the shareholder has towards the company is the payment of his committed share of capital debt. A shareholder who does not pay the share price may be excluded. Apart from this, the shareholder usually leaves the corporation by transfer of shares.

The main procedural rule for validity in share transfers is the registration of those shares in the share ledger. Although the liberty of share transfers is the general rule in joint stock companies, the exceptions to this liberty can be gathered under 6 headings.

1. Prohibition to acquire one's own share

2. Prohibition of transfer before registration

3. The situations where the share value price is not paid

4. The situations where the transfer of shares is restricted by the articles of incorporation

5. The right of the company to not accept an inheritor of shares

6. The restriction of share transfers by other bodies of local law (family law etc.)

On the other hand, the corporation also terminates automatically in case of the dissolution of a joint-stock company or death.

As aforementioned, the only obligation of a shareholder, unless more is determined by the articles of incorporation is to pay their share of the capital debt. However, the articles may place shareholders under additional obligations during the incorporation or later by a general assembly resolution, as long as it is not prohibited by law.

In order for a shareholder to transfer any ordinary share, a written assignment declaration is necessary. This declaration should be made in accordance with the provisions of transfer laws under the Turkish Law of Obligations. Even if not necessary, notarization of this declaration is preferred so that the validity of the signatures would not later be challenged.

In case of nominative shares, if the share price is not paid in full, the transferee will have to pay the remainder of the share price during the transfer. If the payment is not made, the company has the right to refrain from registering the transferee to the share ledger. In practice, this may be the case especially when there is certain doubt about the financial status of the transferee. Of course, if the transferee provides a certain amount of guarantee deposit, this measure will not apply. Nominative shares must be registered to the share ledger because this is the only way to exercise the rights based on shares. Bearer shares become valid upon the transfer of possession to the transferee. Since only the person registered in the share ledger is accepted as a shareholder and beneficial owner by the company, registration in the share register must be made in accordance with a decision of the Board of Directors and be done in accordance with Article 375 of the TCC (Turkish Commercial Code). In principle, the Board of Directors must register the transfer of shares other than those aforementioned exceptions mentioned in this article.

Pursuant to Article 491 of the Turkish Commercial Code, if the share price is not paid in full, these shares can only be transferred with the approval of the company, however the company must approve the transfer if the transferee clearly has the financial ability to pay. The approval of the company is not necessary if the transfer arises from a compulsory execution, inheritance or due to a division of matrimonial property.

Pursuant to Article 492 of the Turkish Commercial Code, the restrictions in the articles of incorporation regarding share transfers would be valid only if there is cause. For example, it would be a valid cause if a family-run company decides to only approve transfer of shares to another family member or another company to only approve of transfer relating to the subject of the business. The restriction of share transfers with cause that are inscribed in the articles of incorporation rests on Article 493/1 of the Turkish Commercial Code.

Restricting transfer of shares to inheritors, in other words the right to reject an inheritor to join the company can be exercised only if the company offers to take over those shares by paying the stocks market value - a right of first refusal. If the inheritor is not satisfied with the value offered for the exercise of this right by the company, there exists a right to have the value determined by the court - which will be the commercial court of where the company headquarters is located. This preemption right may be subject to transfer proposals as well. If the transferor does not reject the price proposal within a month, it will be deemed an acceptance.

So what will be the options of a shareholder if staying in the company has become unbearable but the articles of incorporation are silent on the issue and the other shareholders do not approve of the request? If a shareholder desires to leave the company despite refusals, the shareholder may go to court and request to leave the corporation with just cause. In the case where the company's financial statements indicate loss or where the main capital cannot be maintained, or in a case of inadequate management of the company and the dissatisfaction of the shareholder with this situation the shareholder will be deemed to have a just cause to leave and since the right to leave is an indispensable right, the courts are likely to rule for the shareholder's leave of the company.

Commercial courts often rule for the leave of a shareholder if there exists serious disagreement between the existing shareholders. In such cases, as a result of the tension between shareholders, if the absence of a partner who wants to leave the corporation will not cause serious harm to the company, the court decides to let the partner leave and this decision becomes effective as of the date of the decision. (Ünal Tekinalp, Sermaye Ortakliklarinin Yeni Hukuku, Istanbul, 21,41)

Leave and Transfer of Shares in Limited Liability Companies

Under the Turkish Commercial Code, a shareholder in a limited liability company may leave the company in several different ways. The shareholder can transfer shares by going through the procedure defined in Article 595 of the TCC, or can exercise the right to leave pursuant to Article 638 of the TCC. Although these are the two most common ways to leave a limited liability company, a shareholder may also file suit in a commercial court asking for the dissolution of the company. If the dissolution conditions are not met, the court may decide for the claimant shareholder to leave the company. Article 636 of the TCC respectively regulates the conditions under which the limited liability companies terminates. Apart from the listed conditions under the provision, the articles of incorporation may also grant the shareholders the right to leave the company again under the scope of Article 638 of the TCC, yet the exercise of this right may be subject to certain conditions. Additionally, pursuant to Article 638/2 of the TCC, each partner can file a lawsuit to obtain a decision to leave the corporation if a just cause exists.

The court may, upon request, decide on certain measures such as seizing some or all of the rights and obligations of the claimant arising from being a shareholder of the company or other measures to protect the status of the claimant shareholder. Therefore, leaving a corporation can be made possible by amending the articles of incorporation with the unanimous decision of the shareholders even if there exists no clause regulating this issue in the articles.

Additionally, in accordance with Article 639 of the TCC, if one of the shareholders requests to leave the corporation based on a provision in the articles of incorporation or files a lawsuit to leave, the managers need to immediately inform the other shareholders about such request. The remaining shareholders of the company will also have the right to leave the company within a month from the date of such notice, on the condition that the stated cause also applies to them. All the shareholders who would like to join the leave should be treated equally in proportion to their basic capital shares.

When a shareholder leaves the company, the leave will be automatically accompanied by the right to receive a leaving fund determined based on the real value of the registered capital share.  Companies may choose to regulate the process differently depending on how the issue is regulated in the articles of incorporation.

On the other hand, if the reasons to exclude a shareholder by a general assembly resolution are stipulated in the articles of incorporation, the company may be able to force a shareholder to leave. Faced with such a decision, the shareholder has the right to file an action for annulment within three months after the delivery of an official notification in accordance with Article 640 of the TCC.

Any shareholder of a limited liability company can transfer shares to a third party or another shareholder of the same company. In this case, which is regulated under Article 595 of the TCC, the shareholders may refuse to approve of such a transfer even without stating a reason, unless the articles of incorporation states otherwise. For validity, the transfer agreement must be in writing and it has to be notarized. A share transfer/sale will be deemed to have consented to if the general assembly does not refuse the transfer within three months from the application. Even if the articles of incorporation prohibit the transfer or the general assembly refuses to give approval, the shareholder will reserve the right to leave the corporation given there is just cause.

If a shareholder wants to leave a limited liability company but there articles are silent on the matter, another method to leave the company would be to file a lawsuit for the dissolution of the company and consequently obtain a court decision for the exclusion of the claimant shareholder.

Each shareholder has the right to file for a company's dissolution, but the court has sole discretion in deciding whether to exclude the claimant shareholder on the condition that the company buys out the claimant partner's share or rule for dissolution. In most cases dissolution would be the last resort where the remaining shareholders would clearly not be able to cooperate for the company's best interest. In such cases, this decision is also usually based on the fact that the remaining shareholders are unable to reach a consensus on whether to allow that one shareholder to leave.

Since capital, not the individuals, is what matters the most in stock companies, the Turkish High Court has myriad decisions in which it has decided that the claimant shareholder should leave. In such cases, the conflicts between the shareholders and the lack of any reasonable ground for the continuation of the business leads to the belief that the company cannot be maintained and run efficiently. These types of rulings and such concerns are much more common in smaller privately held companies with a small number of shareholders. The court in such cases also must decide on the fair value of the leaving fund during trial, and this value should be determined on the basis of the stocks real market value as the date of the judgment. No shareholder can be forced to continue as partner in a company.

As the ultima ratio, a shareholder always has the right to leave a company if a reasonable cause exists, and by taking the market value of their share on the date of the decision.

LEAVING A COMPANY AS A SHAREHOLDER UNDER US LAW

Under American law, a shareholders' desire to leave a company that is incorporated in the US and has its headquarters located in the United States is possible in somewhat similar ways. Divorce, disability or bankruptcy may require a shareholder to leave the company. Apart from these involuntary cases, if a shareholder is not satisfied with the operational business of the company and does not possess the sufficient power to initiate change, a leave request can always be made.

A shareholder intending to leave a corporation incorporated in the United States for any reason is generally required to follow the procedure that is prescribed under that company's articles of incorporation. It is of utmost importance that articles of incorporation are well-prepared and regulate the issue of shareholders and founding partners leave of the corporation. In most cases, a shareholder's leave does not have a significant effect for the company's day to day operations. For founding partners, on the other hand, the procedure and outcomes may be much more tricky and critical, especially in S Corp type corporations.

We believe that the articles of incorporation of a company should always address the right of first refusal, granting the company the right to buy out the shares of a shareholder when a shareholder wishes to leave the company and also contain a provision regarding the procedure to be followed in share transfers. If the company's repurchase of its shares is approved by a general assembly decision, the company will become the owner of these shares.

If a company's articles of incorporation are silent about the leave of the shareholder and contains no buyout provision, a shareholders leave would be carried out by following state law provisions. However, since this process may differ according to which state the company in incorporated in, we believe that the most effective way to address this issue would be under the articles of incorporation. This way, the company will also be able to regulate the leave and buy out process in a way that would be most beneficial to the company's specific interests.

After obtaining the necessary permissions, the procedure will be complete with the cancellation of the share certificate of the leaving shareholder and the registration of the share transfer to company books.

In closely-held companies, it is common for a shareholder to also hold managerial positions and act as a director. In such cases, the managing partner who wants to leave the company must also leave the managerial position. Thus this procedure should also be separately approved and the change of directors must be recorded in the books.

CONCLUSION:

Due to the fact that there are different legal systems in the US and in Turkey, the way a shareholder leaves a company is also regulated through different procedures.

Yet, as different as the legal systems may be, as aforementioned, it is possible in both systems to control such situation to a great degree by including clauses in the articles of incorporation and prevent the uncertainty.

If the articles of incorporation are silent on the matter, shareholders may still be able to leave the company by providing a reasonable cause for their leave.

In the light of the information provided in this article, we believe that regulating this issue in the articles of incorporation will be an effective way of preventing many future uncertainties and risks that may arise both for the company and individual shareholders.

SUPPORTER;

AV. YİĞİT YILDIZ

Ege ÖZYEGİN