The negotiable instrument representing the shares held by shareholders in a joint stock company is referred to in practice as a stock certificate and, in statutory terminology, as a share certificate. Just as joint stock companies may be established in closely held or publicly held form, the certificates to be issued may be registered or bearer certificates.
In closely held companies, and in particular in those that are family companies, the printing of registered share certificates has as a rule not been made compulsory. That said, where the minority so requests, registered certificates may have to be printed and distributed to all shareholders pursuant to Art. 486(3) of the Turkish Commercial Code No. 6102. The position is different for bearer shares: once the share prices have been paid in full, the certificates must be printed and distributed to the shareholders within three months.
Under the legislation, for shares whose price has been paid in full the board of directors must adopt a resolution on the printing of bearer share certificates and have that resolution registered and announced. For companies subject to independent audit, an additional obligation arises to publish the resolution on the company’s website. The amendment made by Act No. 7262 has added a further layer to that picture, introducing additional obligations concerning notification of bearer certificates to the Central Registry Agency. Unlike the Turkish Commercial Code, that amendment also provides for an administrative fine as the consequence of a failure to notify the MKK.
Although Act No. 7262 regulated the notification requirement, it contained no provision as to how that notification was to be made. That gap, which gave rise to numerous questions in practice, was closed by the Communiqué published on 06.04.2021.
Conditions Under Which the Printing Obligation Arises
A stock certificate is a negotiable instrument that corresponds to a portion of the share capital and enables the bearer to exercise membership rights. This document, commonly called a stock certificate in practice, is also termed a share certificate in statutory language. Just as joint stock companies may be established in publicly held or closely held form, whether the certificates are issued in registered or bearer form is likewise a matter of choice.
Registered certificates are encountered mostly in closely held companies, and in their respect the company as a rule has no obligation to print certificates. However, where the minority representing one tenth of the company’s share capital so requests, the company becomes obliged to print registered certificates. For bearer certificates, by contrast, an obligation arises directly upon the fulfilment of certain conditions.
Accordingly, the Turkish Commercial Code No. 6102, Art. 486, requires the certificates to be printed and distributed to the shareholders within the three-month period following payment in full of the price of the bearer shares. The power to adopt the printing resolution belongs to the board of directors. The resolution adopted must be registered with the Trade Registry Directorate and announced in the Turkish Trade Registry Gazette. If the company concerned is subject to independent audit, that same resolution must also be published on the company’s website.
For headings such as by whom and by what procedure joint stock companies are to be established, the principles of the company’s management, the position of the members and the capital structure, our notes entitled “Articles of Association of a Joint Stock Company” and “Incorporation of a Joint Stock Company” may be consulted.
The Amendment Introduced by Act No. 7262
The amendment concerning the printing and transfer of bearer share certificates was implemented on 31.12.2020, the date of entry into force of the Act on the Prevention of the Financing of the Proliferation of Weapons of Mass Destruction. With that regulation, the board of directors and the shareholders were placed under an obligation to notify the MKK of the transactions relating to the printing and transfer of bearer certificates.
Article 31 of the Act contains the following provision:
Act No. 7262, Art. 31
“Bearer shareholders and the information relating to the shares they hold shall be notified to the Central Registry Agency before the certificates are distributed to the shareholders.”
Before the amendment, as noted above, the board of directors adopted the resolution on the printing of bearer certificates and the registration and announcement of that resolution were considered sufficient. The new regulation has not removed the obligation of registration and announcement; in addition to those, it has made notification of the resolution to the MKK compulsory as well. Although the Act regulated the notification obligation and the sanction for breach of it, the procedure for notification was laid down by the Communiqué dated 06.04.2021.
It must be emphasised that the notification obligation is not confined to the printing operation; the transfer of bearer share certificates must also without fail be notified to the MKK. Before Act No. 7262 and the Communiqué, the transfer of possession — in other words, delivery of the certificate — was regarded as sufficient for the transfer of such certificates. Under the new regime, transfer of possession alone does not produce effects; notification to the MKK by the transferee is also required.
The Procedure for Notification to the Central Registry Agency
The procedural provisions on the printing of bearer certificates and their notification to the MKK are set out in the Communiqué published on 06.04.2021, following the amendment made by Act No. 7262.
With the statutory amendment, notification to the MKK was added to the procedures of registration, announcement and publication on the website; the text of Act No. 7262, however, contained no provision as to the period for, or the form of, the notification. Under Article 4 of the Communiqué, the procedure to be followed consists of the following steps:
- Once the share prices have been paid in full, the board of directors adopts a resolution and the bearer share certificates are printed on the basis of that resolution. That resolution must show, as a minimum, the information relating to the share certificates enumerated in Art. 4(2) of the Communiqué.
- The certificates bearing that information are notified to the MKK by the persons authorised to represent the company, together with the board resolution and the details of the shareholder to whom each of the certificates to be printed is to be delivered. Following the notification, the certificate is recorded in the system established for this purpose. On registration, the certificate is entered in the system in the name of its holder, associated with the company concerned, under a unique number generated by a special algorithm.
- At the next stage, the certificate is printed by the company so as to include that unique number. The board resolution on the printing is registered and announced; in companies subject to independent audit, that resolution is additionally placed on the company’s website.
- At the final step, the certificates are signed by at least two persons authorised to sign on behalf of the company; once the necessary checks have been completed, the certificates are delivered to the shareholders against signature.
It is a statutory requirement that these three operations — the printing of the certificates, their notification to the MKK and their distribution to the shareholders — be completed within a specified period. Our legislation lays down a three-month period for the fulfilment of these obligations, running from the date on which the share prices were paid in full.
The Temporal Application of Act No. 7262
The amendments made to the Turkish Commercial Code by Act No. 7262 took effect as from 01.04.2021. Accordingly, the provisions of that act apply to bearer share certificates issued as from that date and to transfers of such certificates.
Printing and Transfer Operations After the Entry into Force
It should be noted that, before the amendment, the transfer of bearer certificates could produce legal effects by the transfer of possession. With the new regulation, transfers not notified to the MKK will produce no effect. In other words, the validity of the transfer as against the company and third parties has been made conditional upon notification being made.
As regards bearer certificates to be printed after the entry into force of the Act, notification must be made before delivery to the shareholders. The procedure laid down in the Communiqué will apply to those certificates.
Certificates in Circulation Before the Entry into Force
In the current position, holders of bearer share certificates must apply to the joint stock company by 31.12.2021 so that notification may be made to the MKK. Within five business days following the making of the application, the company is obliged to notify the MKK of the information relating to the bearer shareholders and to the shares they hold.
Shareholders who do not apply to the company will be unable to exercise the rights arising from the law and attaching to the share. An administrative fine is, moreover, provided for in that situation. It would therefore be appropriate for bearer shareholders to apply to the company by the date indicated.
The Sanction Applicable to Breach of the Notification Obligation
In the printing of bearer share certificates carried out after the entry into force of the Act, companies acting in breach of the notification requirement are subject to an administrative fine of TRY 20,000.
Similarly, an administrative fine of TRY 5,000 is provided for those who fail to notify the Central Registry Agency of transfers carried out as from 01.04.2021.
In the current position, if those holding bearer share certificates do not apply to the company by 31.12.2021, or if the company remains unresponsive to an application made, the administrative fines indicated above will likewise arise.
Independent Legal’s Assessment
Although the amendment made to the bearer share regime by Act No. 7262 appears to be no more than a technical notification obligation, in its consequences it directly affects proof of shareholding. Since a transfer that has not been notified cannot be asserted against the company or against third parties even where a contract has been concluded between the parties and the certificate has been delivered, it can in practice give rise to serious disputes as regards attendance at the general assembly, dividend claims and entries in the share ledger.
For that reason, in companies with a bearer share structure it should be borne in mind that the obligation arises afresh not only at the moment of incorporation or of a capital increase, but on every transfer. In a concrete compliance exercise, we recommend that the following headings be addressed as a priority:
- Documenting the date on which the share prices were paid in full and tracking the three-month period from that date
- Setting out in full, in the board resolution, the minimum information required by Art. 4(2) of the Communiqué
- Completing separately the steps of registration, announcement, publication on the website and notification to the MKK
- Confirming, in transfer transactions, that the notification obligation has been fulfilled by the transferee
- Not neglecting the website publication obligation in companies subject to independent audit
- Reviewing past transfers in terms of registration, against the risk of an administrative fine
Independent Legal provides advisory services on the processes for printing share certificates in joint stock companies, compliance with MKK notification obligations and the resolution of disputes arising from share transfers.