What Does a Veto Right Mean in Company Law?
A veto right is the requirement, in addition to the general majority, of the positive vote of a particular shareholder, share group or representative for a certain decision to be taken. This right is a tool of negative control that constitutes an exception to the majority principle: the holder of the veto cannot always take a decision alone, but can prevent a decision being taken on the protected matter.
A Veto, a Voting Privilege and Representation in Management Are Not the Same
A voting privilege gives particular shares more votes than other shares. A right of representation on the board of directors guarantees particular share groups or a minority the possibility of nominating or being represented on the board. A veto makes the taking of a particular decision subject to an additional approval.
| Protection instrument | Basic function | Legal location |
|---|---|---|
| Aggravated quorum | Ensures the decision is taken by a higher majority | Articles of association / company agreement |
| Voting privilege | Gives more votes to particular shares | Articles of association and the privileged share regime |
| Representation on the board of directors | Provides representation on the board for a particular group or minority | Articles of association, TCC Art. 360 |
| Veto / reserved matter | Makes a particular approval mandatory for a particular decision | Depending on the type of company, the articles of association, company agreement and shareholders' agreement |
| Voting agreement | Obliges the parties as to how they will vote | Shareholders' agreement; as a rule between the parties |
What Is a Reserved Matter?
Reserved matters are strategic transactions that are not wished to be decided by an ordinary majority. Matters such as a capital increase, borrowing, the transfer of significant assets, a merger, the budget, the appointment of senior managers, related-party transactions and share transfers may be included in the list of reserved matters.
Calling a transaction a "reserved matter" does not by itself create a veto. In which body the decision will be taken, the required meeting and decision quorum, who holds the veto and what happens if the veto is not given must be regulated in a legally binding manner.
How Is a Veto Right Established in Limited Liability Companies?
TCC Art. 577 expressly lists, among the binding provisions of the limited liability company agreement, provisions that give a veto right to specific or determinable shareholders or that give certain shareholders a casting vote in the event of a tie in a general assembly resolution.
The veto right must be regulated expressly in the company agreement
For a veto right in a limited liability company to be effective with respect to the company bodies, it must appear in the company agreement in a clear form suitable for registration. The provision should show the following elements:
- The shareholder or determinable group of shareholders holding the veto right,
- The decisions within the scope of the veto,
- Whether the veto will be exercised in the general assembly or the board of managers,
- The voting and meeting quorum,
- The duration of the right and the conditions of its termination,
- The outcome in the event of transfer, death, merger or a drop in the share ratio,
- The solution to be applied in the event of deadlock.
The requirement of a specific or determinable shareholder
A veto right may be granted personally to "the current shareholder A", or it may be established on objective criteria such as a particular share group or an investor who maintains a particular ratio. If it cannot be determined to whom the right belongs, the application and registration of the provision become difficult.
The difference between a casting vote and a veto
A casting vote gives priority to the vote of a particular shareholder in the event of a tie. A veto, by contrast, requires the positive vote of the veto holder even if a majority has formed. These two institutions are not the same. Which result is intended must be written expressly in the company agreement.
Important decisions under TCC Art. 621 and a veto
For important decisions in limited liability companies, such as changing the company's business purpose, providing for a voting privilege, restricting the transfer of base capital shares, a capital increase, an application to the court for the removal of a shareholder and the dissolution of the company, aggravated quorums are laid down in the law. If additional protection above these is to be built in the company agreement, the mandatory quorums cannot be reduced and the company's decision-making structure cannot be rendered inoperable.
How Is a Veto Right Structured in Joint-Stock Companies?
In joint-stock companies, there is no general and direct veto provision similar to TCC Art. 577 for limited liability companies. The veto effect is created by using together the corporate instruments that the law permits.
An aggravated quorum in the articles of association
The articles of association may, to the extent the law permits, provide a higher quorum for certain general assembly or board of directors decisions. If an investor's share ratio makes the investor's positive vote mandatory in order to reach the aggravated quorum, a veto effect arises in practice.
For example, if an investor is a 30 percent shareholder and 75 percent positive votes are required for a certain decision, the other shareholders cannot take the decision alone with 70 percent. However, this mathematical protection may lose its effect when the share ratio changes or when new shares are issued. For this reason, dilution, share transfer and capital increase scenarios must be regulated separately.
Amending the aggravated quorum provision
In its decision E.2018/2183, K.2019/6811, the 11th Civil Chamber of the Court of Cassation treated the amendment, by 98 percent of the votes, of a provision in the articles of association requiring a 100 percent quorum for capital increases and reductions as subject to the sanction of non-existence. The Chamber accepted that an aggravated quorum provision can be amended at least by the same quorum.
This approach functions as a "protective lock" that prevents the veto mechanism from being abolished by a simple majority. When drafting the provision, not only the reserved matter decision but also the quorum required for amending the veto and aggravated quorum provision should be regulated expressly.
Voting privilege and share group rights
Under TCC Art. 478 and Art. 479, particular shares may be granted votes, dividend, liquidation share, pre-emption or other superior rights not provided for in the law. However, there are statutory limits to a voting privilege and decisions to which it does not apply.
A veto is not always established through a voting privilege. In some cases, representation in management for the share group, special body approval, or group majority for certain decisions may be more suitable.
Representation of particular groups on the board of directors
Under TCC Art. 360, the articles of association may grant a right of representation on the board of directors to particular share groups, to shareholders who form a particular group with their characteristics and qualities, or to a minority. This right is not a veto; but when combined with an aggravated quorum in the board of directors for reserved matters, it provides effective protection.
A member of the board of directors acts not on the instruction of the shareholder who nominated him or her but within the framework of the company's interest and the duty of care and loyalty. For this reason, an absolute provision such as "the investor's representative shall in every case vote in the direction the investor wishes" may be incompatible with the statutory nature of board membership.
The special meeting of privileged shareholders
If a general assembly decision such as an amendment of the articles of association or a capital increase violates the rights of privileged shareholders, approval by a special meeting under TCC Art. 454 may be required. This protection does not replace every veto right created by contract; it applies only where statutory privilege rights are violated.
In its decision E.2017/4546, K.2019/3753, the 11th Civil Chamber of the Court of Cassation assessed the protection of a privilege of representation on the board of directors under TCC Art. 454 and the effect of the special meeting resolution.
The Difference between the Articles of Association and the Shareholders' Agreement
The most important mistake in veto design is to assume that an arrangement in the shareholders' agreement automatically binds the company bodies.
The articles of association have institutional effect with respect to the company and its bodies
The articles of association are the institutional instrument that binds the company, its bodies and its shareholders to the extent they comply with the law and the registration system. For rights such as an aggravated quorum, a share group, a privilege and representation on the board of directors to affect the validity of a company decision, they must in most cases appear in the articles of association.
A shareholders' agreement as a rule has effect between the parties
A shareholders' agreement regulates the parties' obligations on voting, share transfers, financing, information sharing, nominating managers and exit. If a shareholder votes in breach of the agreement, and the general assembly or board of directors decision complies with the law and the articles of association, the decision may not automatically be invalid for that reason alone. Breach of the agreement brings into play specific performance, a penalty clause, damages, share purchase and sale rights or other contractual sanctions.
The company's being a party to the contract does not solve every problem
The company's being a party to the shareholders' agreement does not change the mandatory system of authority of the bodies. The statutory duties of the general assembly or the board of directors cannot be transferred to a third body by a private contract. The company's being a party may create an obligation to provide information, to give notice or to facilitate the transaction; but it does not in every case take the place of the articles of association provision necessary for institutional validity.
Consistency between the two documents must be ensured
The safest structure is to place rights intended to have institutional effect in the articles of association, and the detailed process, sanction, confidentiality and exit provisions between the parties in the shareholders' agreement. If there is a contradiction between the two documents, the company decision and contractual liability may give different results.
How Should the List of Reserved Matters Be Prepared?
Reserved matters must be consistent with the company's size, sector, investment structure and shareholding balance. Bringing all day-to-day transactions within the scope of the veto renders management inoperable; keeping the list too narrow makes the protection ineffective.
Matters relating to capital and share structure
- A capital increase or reduction,
- The creation of new shares or privileges,
- Restriction of the pre-emption right,
- Share buy-back, pledge or usufruct over shares,
- Changing share transfer restrictions,
- Employee share plans and option programs.
Matters relating to financing and the budget
- The annual budget and business plan,
- Credit and borrowing above a certain amount,
- Surety, guarantee, pledge and security,
- Off-budget expenditure,
- Dividend policy and the use of reserves.
Matters relating to management and organization
- The appointment and removal of senior managers,
- The signature and representation arrangement,
- The working procedure of the board of directors,
- The selection of an independent auditor or critical advisor,
- Policies on the remuneration and bonuses of key personnel.
Strategic transactions
- Merger, demerger, change of type and liquidation,
- Transfer of a business or significant assets,
- Entering a new line of business or exiting the main activity,
- Establishing or selling a subsidiary,
- Transfer or licensing of a significant intellectual property right.
Related-party transactions and disputes
- Transactions with a shareholder, manager or affiliated company,
- Settlements and waivers above a certain amount,
- Initiating a significant lawsuit or arbitration,
- Diverting a company opportunity to another business.
What Design Elements Are Needed for Reserved Matters?
Monetary thresholds and periods must be determined
Instead of vague expressions such as "significant borrowing" or "high-value transaction", an amount, a balance sheet ratio, a budget deviation or an annual total threshold should be set. The method of updating thresholds because of inflation and company growth should also be written.
Ordinary matters should be distinguished from extraordinary matters
The company's day-to-day activity needs to be conducted by the board of directors or the general manager. Requiring a veto for every supply, customer contract or payment in the ordinary course of business may make the company unmanageable.
The identity of the veto holder and the minimum share ratio should be preserved
A veto right may be granted to a particular investor for as long as its share ratio does not fall below 15 percent. Clear rules should exist for transfer, dilution, transfer to an affiliated person and changes in economic ownership.
Duration and termination events should be written
A veto right may end with the repayment of the investment, a particular period, an initial public offering, a breach of obligation by the investor or a drop in the share ratio. A perpetual personal veto that continues in all circumstances may obstruct the company's future financing and transfer transactions.
Exception for emergencies and statutory obligations
In situations such as tax, occupational safety, loss of capital, a court decision, urgent financing or loss of a license, the company's waiting may cause serious loss. An emergency procedure for the veto holder's failure to respond within a reasonable time and a mechanism for subsequent information should be regulated.
How Is a Board of Directors Veto Established?
The board of directors is a collective body. A veto effect may be established through an aggravated meeting or decision quorum in the articles of association that complies with the law, the representation of a particular share group on the board and a clear definition of the reserved matters.
A structural quorum should be preferred to a personal member veto
A provision such as "no decision can be taken without the positive vote of member X" may lock the company if that member leaves office, dies, resigns, does not attend the meeting or has a conflict of interest. A more resilient method is to require the positive vote of at least one member nominated by a particular share group and to set up a substitute candidate mechanism.
The veto may not be exercisable in the event of a conflict of interest
In a conflict of personal interest under TCC Art. 393, the member cannot take part in the negotiation. How the decision will be taken where the member holding the veto cannot take part should be regulated in advance. Otherwise, the veto may turn into a tool for the member concerned to protect his or her own interest, instead of supervising the related-party transaction.
Non-transferable powers cannot be transferred to another body
The non-transferable duties of the board of directors in TCC Art. 375 cannot be left to an investment committee or a shareholders' council. Committee approval may serve a preparatory or internal control function; the final decision authority must remain with the statutory body.
What Consequence Does Abuse of the Veto Right Have?
A veto right is not unlimited. If the right is used for the purpose of causing loss to the company, obtaining a personal benefit, protecting a competing activity or forcing the other shareholder to sell its share at a low price, abuse of rights under Art. 2 of the Turkish Civil Code (TMK) may come into play.
Not every refusal is an abuse
The purpose of the veto right is to seek common agreement on the reserved matter. The veto holder's casting a negative vote for reasons of commercial risk, financing, valuation or compliance is, as a rule, the exercise of the right. For abuse, the reason for refusal, the company's interest, any alternative offer, the timing and the conduct of the party are examined together.
Contractual sanctions
In the shareholders' agreement, in case of a bad-faith veto or unjustified obstruction, the following:
- A penalty clause,
- Compensation for loss,
- A share purchase or sale option,
- Temporary loss of the management right,
- A dispute resolution and exit mechanism
may be provided. The validity, proportionality and compatibility with mandatory law of the sanction should be examined separately.
Which Mechanisms Are Used If a Veto Leads to Deadlock?
The most important risk of a veto right is management deadlock. Inability to take a decision on a reserved matter for a long time may cause investment, financing and day-to-day activity to stop.
Staged negotiation and senior-level escalation
First negotiation at the board of directors or shareholders' level; if no result is reached, escalation to the senior representatives of the parties; then mediation or an expert opinion may be provided.
An independent expert decision
Objective matters such as accounting, valuation, technical performance or the budget may be left to the determination of an independent expert. The expert should not make a general management decision in place of a company body, but only resolve the defined technical dispute.
Buy-sell and exit mechanisms
If the deadlock continues, share purchase and sale mechanisms such as a call/put option, a mutual offer method, a sealed envelope, a "Russian roulette" or a "Texas shoot-out" may be used. The applicability of these methods in Turkish law should be regulated in detail as to valuation, financing, equality, time and penalty conditions.
Dissolution or liquidation as a last resort
If continuing the shareholding relationship becomes impossible, dissolution for just cause may come into play according to the type of company. However, because dissolution has serious consequences for employees, creditors and company value, contractual exit mechanisms should be considered first.
Enforceability against the Company and Third Parties
Protection in the articles of association has institutional effect
A provision of the articles of association that complies with the law and has been registered and announced affects the decision-making system of the company bodies. A decision taken without the required quorum may be subject to the sanction of non-existence, nullity or annulment.
A shareholders' agreement as a rule does not bind a third party
A contractual veto cannot be asserted directly against a shareholder, member of the board of directors or third party who is not a party to the contract. Where a third party knows the contract and knowingly participates in the breach, discussions of tort, unfair competition or interference with contract may come into play according to the specific case.
Registration and announcement do not make every provision valid
Registration in the registry does not make a provision that is contrary to mandatory law or that transfers the authority of a body valid. Suitability for registration and substantive validity should be assessed separately.
Checklist When Preparing a Veto Provision
- Have the type of company and the decision body been determined correctly?
- Has the commercial interest to be protected been defined concretely?
- Are the reserved matters limited and understandable?
- Have monetary thresholds and annual totals been written?
- Can the veto holder be determined as specific or objectively determinable?
- Have the minimum share ratio and the dilution effect been regulated?
- Are the duration of the right and the cases of termination clear?
- Are the articles of association and the shareholders' agreement consistent?
- Have the general assembly and board of directors quorums been set separately?
- Has the scenario of conflict of interest and exclusion from voting been resolved?
- Is there an exception for statutory and emergency transactions?
- Is there a protective quorum for amending the veto provision?
- Have the response time and the consequence of silence been determined?
- Is there a deadlock, mediation and exit mechanism?
- Is the sanction for breach of contract proportionate and enforceable?
- Have the registration, announcement and permit requirements been checked?
Conclusion
A veto right in companies is not a personal power of obstruction that can be established with a single sentence. A valid and functional veto system requires that the type of company, the authority of the body, the articles of association, the shareholders' agreement, share groups, aggravated quorums and exit mechanisms be designed together.
In limited liability companies, TCC Art. 577 expressly allows a veto right to be granted in the company agreement to specific or determinable shareholders. In joint-stock companies, a veto is mostly provided by means of an aggravated quorum, a privilege, representation on the board of directors and a voting agreement. Matters for which institutional validity is wanted should be transferred into the articles of association; the shareholders' agreement should complete the detailed process and sanctions. While a veto is designed to protect the company, it should not turn into a deadlock tool in which the company can never take a decision.
Frequently Asked Questions
Can a veto right be given to a shareholder in a limited liability company?
Yes. TCC Art. 577 expressly permits veto rights to be given to specific or determinable shareholders by the company agreement. The scope, body, duration and termination conditions of the right should be written.
Can a veto right be granted directly in a joint-stock company?
In joint-stock companies, instead of a general veto article, the instruments of an aggravated quorum that complies with the law, a share group privilege, representation on the board of directors and a shareholders' agreement are used together.
Does a veto in a shareholders' agreement invalidate a general assembly decision?
Not always. If the decision complies with the law and the articles of association, a mere breach of the shareholders' agreement mostly gives rise to contractual liability. The provisions necessary for institutional effect should be transferred into the articles of association.
Can an aggravated quorum in the articles of association be removed by a simple majority?
As a rule, a protective quorum provision cannot be removed without complying with the aggravated quorum provided for it. The Court of Cassation has given decisions linking such violations to the sanction of non-existence.
Are a veto and a voting privilege the same?
No. A voting privilege gives more votes to particular shares; a veto creates an additional positive vote requirement for a particular decision. The two mechanisms give different results.
Can a personal veto be given to a member of the board of directors?
A veto effect can be established with an aggravated quorum and group representation that comply with the law. However, a personal veto dependent only on the presence of a particular person is risky as regards leaving office, conflict of interest and the collective structure of the board.
What happens if the veto holder is in a conflict of interest?
In a conflict of personal interest under TCC Art. 393, the member may not be able to take part in the negotiation. A substitute decision procedure should be provided in the contract for this case.
How broad should the list of reserved matters be?
It should cover only strategic and extraordinary transactions. Making all day-to-day activities subject to a veto may render the company unmanageable.
What can be done if a veto is abused?
TMK Art. 2, contractual damages and penalty clauses, share purchase and sale options, mediation and, depending on the type of company, dissolution routes may be considered.
What is the most effective solution to a veto deadlock?
There is no single method. Staged negotiation, an independent expert, mediation, a call/put, a mutual offer or other exit mechanisms should be designed together according to the company and shareholding structure.
Sources
Legislation and Official Sources
1. Turkish Commercial Code No. 6102, in particular Art. 340, Art. 357, Art. 360, Art. 375, Art. 390, Art. 393, Art. 418, Art. 421, Art. 454, Arts. 478-479, Art. 577 and Art. 621: Text of the law published by the Ministry of Trade
2. Turkish Civil Code No. 4721, in particular Art. 2 and Art. 23: Legislation Information System
3. Turkish Code of Obligations No. 6098, provisions on freedom of contract, absolute invalidity and penalty clauses: Legislation Information System
Court of Cassation Decisions
4. Court of Cassation 11th Civil Chamber, E.2018/2183, K.2019/6811, dated 05.11.2019: Text of the decision
5. Court of Cassation 11th Civil Chamber, E.2022/275, K.2023/3023, dated 16.05.2023: Text of the decision
6. Court of Cassation 11th Civil Chamber, E.2023/5865, K.2024/8480, dated 28.11.2024: Text of the decision
7. Court of Cassation 11th Civil Chamber, E.2017/4546, K.2019/3753, dated 14.05.2019: Text of the decision
8. Court of Cassation 11th Civil Chamber, E.2021/3726, K.2022/9001, dated 13.12.2022: Text of the decision
Academic and Professional Sources
9. Erdem & Erdem, "Veto Rights in Joint-Stock Companies": Knowledge Bank
10. Marmara University Faculty of Law Journal of Legal Research, a study on the veto right of members of the board of directors nominated by a particular share group: DergiPark
11. A current academic study on the veto right in Turkish law: DergiPark