Shareholders’ Agreement: Voting Arrangements, Tag-Along, Exit and Breach

A shareholders’ agreement governs the obligations that a company’s shareholders assume toward one another regarding the exercise of votes, representation in management, share transfers and exit from the company. As a rule, it binds only its parties. For that reason, conduct in breach of the agreement may give rise to the liability of the shareholder concerned, but a company resolution adopted or a transfer carried out as a result of that same conduct does not become invalid automatically. Effective protection depends on establishing together a valid contractual provision, a transaction suited to the type of company and an enforceable sanction. [1, 2]

An investor’s expectation that “the company cannot be sold without my approval,” a founder’s expectation that “I will stay in management,” or a minority shareholder’s expectation that “if the majority exits, I exit on the same terms” cannot be secured by a single-sentence clause. Which person undertakes which conduct, when the right will be exercised, how the price will be calculated and which transactions the company organs will carry out must each be determined separately.

This guide addresses the contractual arrangement established among shareholders in joint-stock and limited liability companies in Türkiye. Special regimes such as mandatory tender offers in publicly traded companies, sector-specific permits and merger control must be reviewed separately. For the general framework of the establishment phase of an investment, the guide on investing in Türkiye may also be consulted.

A Shareholders’ Agreement and the Company’s Articles of Association Produce Different Results

The obligation undertaken, not the name of the agreement, is decisive

A shareholders’ agreement may also be drawn up under names such as a stockholders’ agreement or an inter-partner agreement. It benefits from freedom of contract under Articles 26 and 27 of the Turkish Code of Obligations. However, obligations that conflict with mandatory rules, public order, morality or personality rights do not become valid. Writing in the agreement that it “applies before the articles of association” does not eliminate the law or the legally valid corporate order of the company. [1, 2]

Not every shareholders’ agreement is automatically a simple partnership. Where there is a structure involving the pooling of labor or assets for a common purpose, characterization as a simple partnership under TBK Article 620 may come into question. Mutual obligations relating solely to a share sale, or a unilateral voting undertaking, do not necessarily call for the same assessment. The characterization also affects the provisions that apply to termination, limitation periods and the resolution of disputes. [2]

In a joint-stock company, the sole-obligation principle must not be confused with a personal undertaking

TTK Article 340 limits the scope for the articles of association of a joint-stock company to depart from the law. TTK Article 480, in turn, prevents the articles of association from imposing obligations on a shareholder other than the share price or premium, except for statutory exceptions. By contrast, a shareholder may assume a valid personal obligation toward another shareholder through a separate agreement. This possibility is not a way of escaping all of the mandatory rules of company law. [1]

For example, a founder’s undertaking toward another shareholder not to compete for a certain period and the imposition of the same obligation, through the articles of association, on all of the company’s present and future shareholders are different matters. The validity of a separate agreement is likewise not independent of a proportionality review in terms of activity, duration and persons. [2]

The company’s signature and a trade registry entry do not cure every deficiency

It may be possible for the company to assume certain contractual obligations through a valid act of representation. Even so, the company’s signature cannot transfer the non-delegable powers of the board of directors or the general assembly to the other parties. The authority of the person signing on behalf of the company, conflicts of interest and the lawfulness of the performance undertaken, as regards the company, are examined separately. [1, 3]

Filing a shareholders’ agreement with the registry or placing a copy in the company file likewise does not give all of its clauses effect against everyone. First, it is examined whether the law permits the provision to be included in the articles of association; then, whether a proper amendment has been made. An obligation that the law does not permit cannot be turned into a valid company provision by registering it. [1, 3]

How Are Voting Arrangements and Representation in Management Secured?

The general assembly vote must be distinguished from the duty of the management body

Shareholders may agree to act together on certain general assembly matters or to support certain candidates. The provision should indicate the relevant resolutions, the persons who will vote, the method of deliberation and the process that will apply in the event of a dispute. The expression “all decisions are taken unanimously,” when used without specifying which organ and which decisions are meant, creates serious problems in practice. [1, 2]

Where the institutional protection of a share group’s representation on the board of directors of a joint-stock company is desired, a provision in the articles of association is considered under TTK Article 360. At the same time, a board member is not a representative who carries out every instruction of the shareholder who nominated him or her. The duty of care and of safeguarding the company’s interests under TTK Article 369 and the non-delegable duties under Article 375 continue to apply. In a limited liability company, the powers and liabilities of managers are also separately protected under TTK Articles 625 and 626. [1]

For this reason, a shareholder’s undertaking concerning his or her own vote and the compulsion of a manager to act contrary to the company’s interest cannot be regulated in the same way. The limits on the specific enforcement of a voting undertaking by a court or arbitral tribunal are also debated; it should not be assumed that a particular general assembly outcome will necessarily be obtained simply because it is written in the agreement. [2, 3]

A breach of the agreement and annulment of a general assembly resolution are different claims

In its decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay) dated 11.10.2016, E.2016/1275, K.2016/8000, the establishment at the general assembly of a different management structure for managers was discussed, even though there was an arrangement among the shareholders on joint management and representation. In a case where breach of an inter-shareholder agreement that does not bind the company, which was not a party to it, was asserted, the Chamber upheld the dismissal of the action. [4]

The decision is not a ruling of invalidity covering all provisions of all partnership agreements. Nor does it prevent an assessment of whether the general assembly separately acted contrary to the law, the articles of association or the principle of good faith. The counterparty, the cause and the time limit of an annulment claim and of a contractual damages claim must be determined separately. In a joint-stock company, the three-month period for the annulment action under TTK Article 445, which runs from the date of the resolution, does not stop automatically because contract negotiations are being held. [1, 4]

What Is the Difference Between the Tag-Along Right and Drag-Along?

The tag-along right gives the minority an exit option

The tag-along right, known by that name in international agreements, gives the other right holders the opportunity to join the sale if a designated shareholder sells its shares. Its scope, however, is set in the agreement: Will all of the shares be able to be sold, will participation be in proportion to the sale, or will only a change of control give rise to the right? [2]

If the buyer is not a party to the agreement, a purchase obligation cannot be imposed on the buyer by a clause solely among the existing shareholders. The obligation of the selling shareholder should therefore be written clearly: Must it refrain from completing its own sale unless the shares of the other right holders are also purchased in the same transaction, or does it undertake an obligation to secure a particular result? The right should not be requested to be exercised without seeing the buyer’s offer, side agreements and the conditions for completion of the sale.

Drag-along is not a majority power that arises by itself

Drag-along, in its international name, aims to impose, under the conditions set out in the agreement, an obligation on the other parties to sell their shares to the same buyer. Holding a majority of the shares does not, on its own, create this right. The right holder, the required threshold, the independence of the buyer, the minimum price and the notice mechanism should be set out in the agreement. [1, 2]

This arrangement is not a statutory route for squeezing out a shareholder. Exercising the right does not by itself transfer ownership of the shares to the buyer; transfer transactions appropriate to the type of company and the nature of the share are completed. Where the validity of the provision or the satisfaction of its conditions is disputed, a statement that “we have a drag-along right” does not cause the registry to record a change in shareholding directly. [1]

The same price per share is not always an equivalent economic condition

The following is an example of a contract assessment: If the majority shows the same price per share but accepts payment in cash for itself and payment deferred over three years for the minority, the economic results are not equal. Likewise, a separate consulting fee paid to the majority, or holding the minority unlimitedly liable for all of the company’s past debts, can upset the apparent equality in the sale price.

For this reason, the agreement should regulate, together with the price, the time of payment, security, deductions, blocked amounts, transaction costs and the seller’s warranty liability. It should also be clear whether the minority can be compelled to give broad warranties about company matters to which it has no access. Separate agreements can be addressed by specifying in which cases they will be counted toward the sale price, which reduces the risk of circumvention. These are not provisions that the law requires in the same form in every agreement, but contract-design choices that increase enforceability. [2]

Pre-Emption, First Offer and Call and Put Options Are Not Interchangeable

A right of first offer may be structured so that an offer is made to the existing right holder before the sale process with a third party. A right of pre-emption, on the other hand, is a priority of acquisition tied to a sale event defined in the agreement. The ability to match an offer received from a third party and a pre-emption right exercised after a sale agreement has been concluded do not occupy the same position in the order of the transaction. Translating the foreign term into a Turkish heading does not, by itself, determine the legal characterization. [2, 5]

A call option may be structured as an obligation-creating mechanism that allows the right holder to acquire the other party’s shares on specified conditions; a put option, as one that allows the right holder to sell its own shares to the other party. The shares, the event giving rise to the right, the exercise notice, the price or a method for determining the price, and the conditions of completion must be clear. The creation of a contractual relationship upon exercise of the right and the passing of ownership of the share are separate stages. [1, 2, 5]

Merely referring to “fair market value” in a valuation clause may not be sufficient. The valuation date, the calculation of net debt and cash, intra-group receivables, the minority discount, the selection of the expert, access to necessary information and the resolution of the difference between two valuations should be specified. A clause stating that “the share of a defaulting departing shareholder is purchased at nominal value” is likewise reviewed in terms of the gravity of the breach, the person’s economic freedom and its character as a sanction; it cannot be generalized as valid in every case or invalid in every case. [2]

An exit model in which the company would purchase its own shares must be examined separately under TTK Article 379 et seq., or, for limited liability companies, Article 612. Making the company an unlimited and unconditional buy-back obligor does not remove the rules on the protection of capital. [1]

In Limited Liability Companies, the Notarial Form and the Articles of Association Are Especially Important

Under TTK Article 595/1, the transfer of a capital share in a limited liability company and transactions that give rise to an obligation to transfer must be made in writing, with the parties’ signatures notarized. Therefore, if a shareholders’ agreement contains a provision creating an obligation to sell or transfer a limited liability company share, it cannot be said that an ordinary written agreement is sufficient in every case. The agreement as a whole, its annexes and its amendments must be examined together. [1]

Unless the articles of association provide otherwise, general assembly approval is also required for the transfer. Notarization does not take the place of general assembly approval. On the other hand, TTK Article 577 expressly allows the articles of association to regulate matters such as pre-emption, repurchase, purchase, veto, contractual penalty and withdrawal. This area can still be used only within the limits of Article 579 and the relevant special provisions; the consequences that apply to a joint-stock company should not be transposed as is to a limited liability company. [1]

Non-compliance with the required form is not merely a technical deficiency. Claiming a contractual penalty tied to an invalid undertaking to transfer also creates a problem under TBK Article 182/2. As to the other provisions, partial invalidity and the hypothetical intention of the parties are assessed. Writing in the agreement that “if one clause is invalid, the rest remain valid” does not remove the need to examine the importance that the invalid provision carries for the transaction as a whole. [2]

A Decision-Making Deadlock Should Not Condemn the Company to a Forced Sale

In a company with equal shareholdings, it is possible that a budget, the election of managers or an investment decision cannot be adopted. However, treating every disagreement as a “deadlock” can allow one of the parties to use the exit mechanism as a pressure tool. On which decisions, after how many inconclusive meetings and after which negotiation stage a deadlock will arise should be specified. [2]

A contractual resolution sequence may be structured as discussion at the managerial level, negotiation with the parties’ senior officers, mediation or a valuation expert’s review in suitable disputes, and, as the last stage, a share transfer. In this sequence, how urgent operating expenses, employee wages and statutory obligations will be handled should also be regulated. An expert valuation and an arbitral award resolving a legal dispute are not the same thing.

A model in which one shareholder sets a price and offers the other the option of “either sell your shares or buy mine” can have severe consequences if the financing capacity of the two sides differs. Tools such as an independent valuation, a reasonable period to arrange financing and an option to sell to a third party should be considered. The termination of the agreement does not by itself liquidate the company or remove the parties from the partnership; a separate relevant transaction or statutory conditions are required for that. [1, 2]

What Claims Can Be Brought in the Event of Breach?

Specific performance, damages and contractual penalty are assessed separately

Specific performance is a request that the undertaken performance be carried out. In the case of an undertaking to transfer shares, the existence of a valid obligation, the conditions for exercise that have occurred and the possibility of performance are examined. The content of the claim must be framed separately for different stages such as delivery of a registered share certificate, company approval or entry in the share ledger. It cannot be assumed that every dispute will be resolved in the same way under the heading of “cancellation of shares and registration.” [1, 2]

For damages, the contract, the breach, the loss and adequate causation must be shown; under TBK Article 112, the debtor is liable unless it proves that it was not at fault. The loss suffered by the company must not be confused with the shareholder’s direct personal loss. The value of a lost sale opportunity should be explained on the basis of the actual offer, the transaction terms and the effect of the breach, not on the basis of a hypothetical company value. [2]

A contractual penalty may be claimed even if no loss has arisen; however, the validity of the principal obligation and the occurrence of the event to which the penalty is tied are required. Under TBK Article 179, it matters whether the penalty is provided in place of performance or in addition to performance on account of delay. For loss exceeding the amount of the penalty, proof of fault under Article 180 is also taken into account. The same loss should not be claimed twice under different names. [2]

Not every company shareholder is a merchant

While TBK Article 182 regulates the reduction of an excessive contractual penalty, TTK Article 22 introduces a special limitation for a merchant debtor. A natural person’s merely being a shareholder in a joint-stock or limited liability company does not automatically make that person a merchant. It is therefore not correct to apply the prohibition on reduction applicable to merchants to all of the shareholders in the agreement. The review of conflict with mandatory law and morality is also treated separately from the question of reducing a penalty. [1, 2]

Even if a third party knows of the agreement, that knowledge alone does not make the third party a debtor under the agreement. However, it may be examined whether the specific conduct constitutes another legal cause, such as simulation or a tort. Such a claim should be built not merely on the sentence “the buyer knew about the agreement,” but on the particular facts and evidence of that cause. [2]

How Are Courts, Arbitration, Mediation and Time Limits Determined?

The legal nature of the claim is determined first

The assessment of subject-matter jurisdiction may differ between claims based on company law and claims arising solely from an inter-shareholder contract of obligation. Under TTK Articles 4 and 5, commercial-case status is examined through the basis of the claim and, where necessary, the parties’ connection to commercial enterprises. In addition to the rules on general venue and the place of performance of the contract, special venue provisions are also taken into account. [1, 6]

For a jurisdiction agreement, the party capacity and validity requirements of HMK Articles 17 and 18 are sought. Two natural persons who are not merchants cannot make any court competent by contract merely because they are company shareholders. For commercial receivables and damages claims whose subject is money, mediation as a condition precedent to suit under TTK Article 5/A applies; in disputes where a valid arbitration agreement exists, the exception in Article 18/A/18 of Law No. 6325 on Mediation (HUAK) is assessed separately. [1, 6, 7]

An arbitration clause cannot cover all company disputes

A valid arbitration agreement can be made for contractual disputes over which the parties may freely dispose. However, the company, or a shareholder that has not joined the agreement, cannot be considered bound by it automatically. Claims that affect the company’s corporate order and third parties, such as the annulment of a general assembly resolution, cannot be subjected to the same assessment as a personal damages claim. Under HMK Articles 408 and 412, the scope, the parties and arbitrability must be examined separately. [3, 6]

If there is a foreign shareholder, the governing law, the seat of arbitration, the language and the countries in which the award will be enforced should be set out clearly. The choice of foreign law does not automatically remove the mandatory organizational and transfer rules applicable to a company in Türkiye. The relationship between an application to the court for interim protection and the resolution of the merits in arbitration should also be established without creating a conflict in the agreement. [1, 3, 6]

A contractual notice period and a limitation period for suit are not the same

The exercise period of the option, the notice of participation in the sale and the maturity of the obligation should be kept distinct. The general limitation rule is ten years under TBK Article 146; where the agreement has the character of a simple partnership and the claim arises from the partnership agreement, the five-year provision in Article 147/4 is assessed separately. For the starting point, maturity under Article 149 is the basis. Special periods and statutory grounds for suspension or interruption are reserved. [2]

Where there is a danger that the share will quickly be transferred to a third party, a concrete and proportionate interim injunction may be sought under HMK Articles 389 and 390. The application does not itself stop the transfer. The periods for requesting enforcement of the order and for completing a pre-suit injunction are also to be monitored separately: the one-week period to request enforcement running from pronouncement (tefhim) or service under Article 393, and the two-week period to bring the main action running from the enforcement request under Article 397, should be assessed together with any special mediation-related time-limit provisions. [6, 7]

The court fee, valuation and expert costs, service costs and, where necessary, security for an injunction should also be planned. The security regime and exceptions under HMK Article 392 are assessed in the specific application. The litigation costs and attorney fee that the court may award are separate from the fee agreement a party makes with its own attorney. A fixed total cost cannot be reliably calculated without seeing the type and amount of the claim. [6]

Document Review Before Signing and After a Breach

These documents must be obtained by lawful methods, and parts containing trade secrets must not be disclosed to unnecessary persons. For a lawsuit or an arbitration application, the final signed version of the agreement, its annexes and its amendments should be preserved together. An exercise of the right made with a missing annex or a different version can weaken the basis of a claim that appears correct.

Conclusion

In a shareholders’ agreement, what is decisive is that each obligation is directed at the right person, that the necessary form is observed, that company transactions are completed and that the claim in the event of breach is enforceable. Voting arrangements, tag-along and exit provisions should be prepared by considering together the type of company, the nature of the shares, the parties’ financing capacity and the existing articles of association.

When a dispute arises, a breach of the agreement and the unlawfulness of a company resolution should be examined separately; evidence, notices and time limits should be checked within the same review. In this way, the commercial expectation among the shareholders can be turned into a legal arrangement that can be enforced.

Related articles: Share Transfer in a Limited Liability Company: Notary, Approval and Registration; Share Transfer in a Joint-Stock Company: Share Ledger and MKK Notification; Non-Compete Obligations in Companies: Distinguishing Shareholders and Managers; Annulment of a General Assembly Resolution: Time Limit, Nullity and Injunction.

Frequently Asked Questions

Does a shareholders’ agreement automatically bind the company?

No. There must be a basis that is examined separately, such as the company being a party or an arrangement in the articles of association that complies with the law. The company’s signature also does not remove the mandatory powers of its organs. [1, 3]

Is a shareholders’ agreement valid without notarization?

The same answer cannot be given for every provision. In particular, provisions that include transactions giving rise to the transfer of a limited liability company share or to an obligation to transfer are assessed under the written form and notarization requirement of TTK Article 595. [1]

Can the majority shareholder force the minority to sell its shares?

Merely holding the majority of the shares is not sufficient. There must be a valid contractual obligation to sell or a relevant statutory route, and the conditions for exercising the right and the requirements for transfer must be met. [1, 2]

Does a vote in breach of the agreement invalidate a general assembly resolution?

A breach of the agreement alone does not automatically produce that result. The conformity of the resolution with the law, the articles of association and the principle of good faith is assessed separately; claims against the person who breached the agreement can also be brought separately. [1, 4]

Does a new shareholder automatically join the old shareholders’ agreement?

Merely purchasing the shares does not mean that all of the personal obligations in the agreement have been assumed. The scope of the accession document, the necessary consents and the form of the obligations must be determined; statutory cases of succession are assessed separately. [2, 3]

Does providing for a contractual penalty make proof of damages unnecessary?

Loss is not required for the penalty to be claimed; however, a valid principal obligation and the occurrence of the event to which the penalty is tied are required. A claim for loss exceeding the penalty is assessed separately in terms of loss and fault. [2]

Can a shareholder not seek a reduction of the penalty because shareholders are treated as merchants?

Being a company shareholder does not by itself give a natural person the status of a merchant. For TBK Article 182 and TTK Article 22 to apply, the debtor’s legal status is determined separately. [1, 2]

When a shareholders’ agreement ends, does the shareholding also end?

As a rule, these two outcomes are not the same. The end of the agreement affects personal obligations; the fate of the shareholding, the company or the share transfer transaction is determined by separate provisions. [1, 2]

Sources

1. Turkish Commercial Code No. 6102, in particular Articles 4, 5, 5/A, 12, 16, 22, 340, 360, 369, 375, 379, 408, 445–446, 480, 493, 577, 579, 595, 612, 625–626; Ministry of Justice, UYAP Legislation Programme.
2. Turkish Code of Obligations No. 6098, in particular Articles 1–2, 12, 19, 26–27, 49, 112–113, 117, 146–149, 179–182 and 620; Ministry of Justice, UYAP Legislation Programme.
3. Muhammed Sulu, “Pay Sahipleri Sözleşmelerinden Kaynaklanan Uyuşmazlıkların Çözümünde Arabuluculuk ve Tahkim”, Ticaret ve Fikri Mülkiyet Hukuku Dergisi, 2022, 8(2), pp. 511–528; in particular the discussions on privity, the company’s status as a party and arbitrability. Full text.
4. 11th Civil Chamber of the Court of Cassation (Yargıtay), 11.10.2016, E.2016/1275, K.2016/8000. Full text of the decision as published by Avrasya Hukuk.
5. Direnç Akbay, “Anonim Ortaklık Pay Sahipleri Arasında Yapılan Önalım Hakkı İçeren Sözleşmeler”, İstanbul Hukuk Mecmuası, 2019, 77(2), pp. 697–746, DOI:10.26650/mecmua.2019.77.2.0008. Full text.
6. Code of Civil Procedure No. 6100, in particular Articles 6, 10, 17–18, 323, 326, 389–393, 397, 408 and 412; Ministry of Justice, UYAP Legislation Programme.
7. Law No. 6325 on Mediation in Legal Disputes, in particular Article 18/A; Ministry of Justice, UYAP Legislation Programme.