When an amendment to the articles of association of a joint stock company is spoken of, three distinct operations may be meant: the removal of an existing provision from the text, the addition to the articles of new rules not previously found there, or the alteration of the content of provisions in force. Because the articles of association function as the company’s constitution, the Turkish Commercial Code has made any intervention in that text subject to a special procedure.
The articles of association are binding upon all members and shareholders of the company. Since an amendment to the text may affect the company’s most critical balances, the legislature has laid down special rules that depart from those governing ordinary general assembly resolutions. The function of those rules is twofold: on the one hand the position of shareholders left in the minority is safeguarded, and on the other the decisions the company takes in commercial life are prevented from harming public order and the functioning of the market.
The General Assembly as the Holder of the Power to Amend
Under the Turkish Commercial Code No. 6102, the power to amend the articles of association of a joint stock company rests with the general assembly. Indeed, this matter is separately enumerated among the non-transferable duties and powers of the general assembly.
That power is accordingly exclusive in nature. It is not legally possible for the board of directors, or for any other organ of the company, to amend the articles of association of its own motion. For detail on the content and the mandatory elements of the articles of association, reference may be made to our note entitled Articles of Association of a Joint Stock Company.
Limits on the Power of the General Assembly
Although the Code confers an express power of amendment on the general assembly, that power is not unlimited. Some of the limits arise directly from the law, others from the company’s own articles of association.
Mandatory Provisions and Restrictions Arising from the Articles of Association
Article 452 of the Turkish Commercial Code No. 6102 provides that, unless the articles of association stipulate otherwise, the general assembly may amend all provisions of the articles, subject to compliance with the conditions required by law.
The structure of that provision shows that a rule inserted into the articles of association may render the whole text, or particular articles of it, unamendable. Where such a clause has been added to the articles, the general assembly’s power to amend the provision concerned falls away. Beyond that, the general assembly may not adopt an amendment to the articles of association that would conflict with the mandatory provisions of the law.
Inalienable Rights
Inalienable rights are rights granted to the shareholder which not even the shareholder personally may waive. The purpose of granting these rights is not solely to protect the shareholder’s interest; they also serve to preserve the structural integrity of the joint stock company.
A right of this nature cannot be taken away from the shareholder even with his consent. The ability to bring an action for annulment, to have recourse to a liability action or to an action for dissolution on just grounds, and the minimum voting right, are examples of rights falling within this group.
It is not legally accepted for the general assembly to curtail these rights by amending the articles of association.
Vested Rights
Vested rights are divided into two sub-headings, absolute and relative. Vested rights of an absolute nature may not be altered in any way without the consent of the holder. Relative vested rights, for their part, are rights that must be protected as to their essence.
The member’s right to claim a dividend may be given as an example of a relative vested right, whereas the joint stock company ceasing to hold Turkish nationality constitutes an example in respect of absolute vested rights.
The general assembly’s power of amendment is likewise limited in the face of these categories of rights.
Convening a Meeting with an Amendment on the Agenda
The manner in which the articles of association are to be amended is also set out in the Code. The process begins with the board of directors preparing a draft amendment containing the provisions it is proposed to change and adopting a resolution on it.
The general assembly must then be called to a meeting. The call is made, in the form specified in the articles of association, by an announcement to be published on the company’s website and in the Turkish Trade Registry Gazette. Disregarding the day of announcement and the day of the meeting, the call must be made at least two weeks before the date of the meeting. The draft amendment adopted by the board of directors must also appear in that announcement.
In addition, a separate notification is sent to the shareholders entered in the share ledger and to those who have previously notified the company of their address by submitting a share certificate or a document evidencing shareholding. The day of the meeting, the agenda and the newspapers in which the announcement has been or is to be published are communicated to those persons by registered letter with return receipt.
Quorums Required for the Adoption of a Resolution
The Code has not made amendments to the articles of association subject to a single quorum; it has laid down different thresholds according to the subject matter of the amendment.
Amendments Requiring Unanimity
The Turkish Commercial Code No. 6102 requires the unanimity of the holders, or the representatives, of the shares constituting the entire share capital in the following two matters:
- Resolutions concerning the transfer of the company’s registered office abroad
- Resolutions imposing obligations or secondary obligations on the shareholders for the purpose of covering balance sheet losses
In these matters, which directly affect all members, the legislature has made the consent of everyone a condition without exception.
Amendments Requiring a Seventy-Five Per Cent Majority
For the following resolutions, the affirmative vote of the holders, or the representatives, of shares representing at least seventy-five per cent of the share capital is required:
- The introduction of restrictions on the transfer of registered shares
- The creation of a privilege attaching to a share
- The complete change of the company’s business purpose to another field
Under these headings, which closely concern the identity of the company and its shareholding structure, an aggravated threshold has been adopted.
Amendments That May Be Adopted by an Ordinary Majority
In cases falling outside the special situations set out above, and unless the law or the articles of association provide otherwise, resolutions amending the articles of association are adopted at a general assembly at which at least half of the company’s share capital is represented, by a majority of the votes present at the meeting.
If the meeting quorum required at the first meeting is not reached, a second meeting may be held within one month at the latest. The quorum laid down for that second meeting is the representation of at least one third of the company’s share capital.
The ratios indicated constitute the basic rule applicable to amendments of the articles of association. The company may raise these thresholds by its articles of association; it may not, however, reduce them below the level laid down by law.
The Registration and Announcement Stage
The final link in the process of amending the articles of association is registration and announcement.
Under the legislation, the general assembly resolution concerning the amendment is registered by the board of directors with the trade registry of the place where the company’s registered office and, where applicable, its branches are located. Matters subject to announcement are additionally announced, and the resolution that has been registered and announced is published on the company’s website.
The moment at which the resolution takes effect differs as between the internal and the external relationship. In the internal relationship, the amendment begins to produce its effects as from the date of the resolution; as against third parties, by contrast, it does not take effect until registration has been completed. For the formalities of the incorporation stage, our note entitled Incorporation of a Joint Stock Company may be consulted.
Independent Legal’s Assessment
In amendments to the articles of association, the great majority of disputes arise not from the content of the resolution but from a failure to observe the rules on the call and the quorum. Failure to comply with the two-week announcement period, omission of the draft amendment from the text of the announcement, or the adoption of a resolution on the wrong quorum, may cause an amendment that is in substance commercially reasonable to be undone by an action for annulment.
When the process is being planned, we recommend that the following points be settled in advance:
- Determining from the outset, by reference to the subject matter of the resolution, which quorum group the amendment falls into
- Checking whether the articles of association contain a provision that aggravates the thresholds or renders particular articles unamendable
- Adopting the draft amendment by a resolution of the board of directors and reflecting it in full in the text of the announcement
- Documenting that notification has been given by registered letter with return receipt to the shareholders entered in the share ledger
- Carrying out a legal analysis of whether the amendment touches upon inalienable or vested rights
- Taking into account in the transaction timetable that no effect will be produced as against third parties until registration is complete
Independent Legal provides advisory services on the preparation of amendment texts for the articles of association of joint stock companies, the management of the general assembly process and the follow-up of the registration stage.