In our legal system, the establishment of a pledge right on the shares (partnership shares) of the share capital of commercial companies is allowed, and certain conditions are stipulated for the establishment and enforcement of the pledge right on the shares.
I. In General
Although the pledge of the capital share of a limited liability company is a transaction that may cause the share to change hands, it is essentially different from the transfer of the share. In a share pledge, the rights attached to the share remain with the shareholder. In other words, the pledge of shares does not give the pledgee the right to property and participation rights; it only gives the right and opportunity to sell the shares through forced execution and for the creditor to obtain its receivables.
II. New TCC Regulation
The old Commercial Code No. 6762 only allowed the pledge of the share capital of a joint stock company, but did not mention the pledge of the share capital of a limited liability company. The new Turkish Commercial Code (TCC) No. 6102 introduced a novelty in this regard; in Article 600/II titled “Right of Benefit and Pledge” in the sixth section regulating the type of limited liability company;
“The establishment of a pledge right on the capital shares may be subject to the approval of the general assembly. In this case, the provisions regarding transition shall apply. The general assembly may refrain from approving the establishment of a pledge right only in the presence of justified reasons.”
The provision allows the pledge of the capital shares in limited liability companies as well.
III. The Pledge is Subject to the Approval of the General Assembly
Establishment of a pledge right on shares may be subject to the approval of the general assembly. In this case, the provisions regarding the transfer of shares shall apply to the pledge of shares. Pursuant to Article 595/I of the TCC regulating the transfer of shares in limited liability companies;
“The transfer of the share capital and the transactions giving rise to the transfer obligation shall be made in writing and the signatures of the parties shall be notarised. In addition, in the transfer agreement, additional payment and ancillary performance obligations; if the prohibition of competition is aggravated or extended to cover all shareholders, this matter shall also be specified in the conditions regarding being subject to proposal, pre-emption, repurchase and purchase rights and contractual penalty.”
Accordingly, a written pledge agreement must be executed for the pledge of the share, the signatures on the agreement must be notarised, and the general assembly must approve the pledge.
If the application for the approval of the general assembly for the establishment of a pledge right on the capital share is not rejected within 3 months following the date of application, it shall be deemed approved. However, if the transaction is not approved by the general assembly, the pledge agreement shall be null and void.
The general assembly may not reject the application for approval, except for justified reasons. The justified reasons stated in the article are not specified in the article and its justification, and the judge shall evaluate the justification of the reason for the general assembly’s refusal of approval in each concrete case.
IV. The Pledge is not Subject to the Approval of the General Assembly
Pursuant to Article 600/II of the TCC, if the articles of association of a limited liability company do not provide for the approval of the general assembly for the pledge of the capital shares, then the provisions of Article 954 et seq. of the Turkish Civil Code (TCC) shall apply for the establishment of the pledge. In this case, the existence of the following conditions is sought:
a. Absence of Prohibition of Transfer: Article 954 of the TCC titled “Pledge on Receivables and Other Rights”
“Receivables and other rights transferable to others may be pledged. Unless otherwise provided, the provisions of pledge subject to delivery shall also apply to their pledge.”
Article 939 regulates the pledge subject to delivery;
“Except for the exceptions stipulated by law, movables may be pledged only by transferring possession to the creditor.”
The law stipulates that the limited liability company share cannot be transferred and cannot be pledged. Accordingly, in order to be able to talk about the right of pledge on the limited liability company capital share, there must be no prohibition of transfer arising from the law or the company agreement; otherwise, since the limited liability company share cannot be transferred, it cannot be pledged.
The articles of association of the company may prohibit the transfer of shares as well as the establishment of a share pledge; or may stipulate formal requirements for the establishment of a pledge, such as notification to the company, delivery of the share certificate, etc. In these cases, a pledge right cannot be established on the share unless the prescribed conditions are fulfilled.
b. Establishment of Written Pledge Agreement: Pursuant to Article 955 of the TCC, which regulates the procedure for the establishment of a pledge for receivables that are and are not subject to a promissory note;
“For the pledge of receivables that are or are not subject to a promissory note, the pledge agreement must be made in writing and the promissory note must be delivered for receivables subject to a promissory note.”
Accordingly, in order to establish a pledge over the shares of the capital in a limited liability company, a written pledge agreement must be executed and the pledged shares must be clearly stated in this agreement. Following the signature of the agreement, the signatures in the written pledge agreement must be approved by a notary public. Here, the notary public does not issue the pledge agreement, but only approves it. The said procedure is a condition of validity for the establishment of the pledge, and it is not possible to establish a pledge on the capital share without complying with this procedure.
c. Registration in the Share Ledger: The pledge right established on a limited liability company share must be registered in the share ledger in all cases. This issue is also clearly stated in Article 594 of the TCC titled “Share Ledger”:
“The Company shall keep a share ledger containing the shares of the capital. The names and addresses of the shareholders, the number of capital shares held by each shareholder, transfers and transitions of the capital shares, their nominal values, their groups, usufruct and pledge rights on the capital shares, and the names and addresses of the owners shall be recorded in this book.”
However, this record is not constitutive, but declarative, and such a record is in the interest of the pledge creditor in order to prevent the payment to the shareholder in good faith.
The share pledge does not need to be notified to the trade registry.
d. Delivery: Pursuant to the New TCC, it is possible for limited liability companies to issue registered capital shares. Accordingly, in addition to the above-mentioned elements, the pledge of the shares issued in the form of proof or in registered form also requires the delivery of these shares to the pledge creditor. Pursuant to Article 956 of the Turkish Civil Code (TCC);
“For the pledge of bearer promissory notes, delivery of the promissory note to the pledge creditor is sufficient. For the pledge of other negotiable instruments, the bill must be delivered as endorsed or with a written declaration of transfer.”
V. Termination of Pledge
Since the pledge is an accessory right, as a rule, it terminates automatically upon the termination of the original receivable that it is the collateral of. A pledge may be terminated by the performance of the debt, release, statute of limitations, settlement, merger of the title of creditor and debtor in the same person, as well as by the foreclosure of the pledge.
VI. Conclusion
In limited liability companies, the pledge of the main capital share may be subject to the approval of the general assembly in the articles of association of the company, or if the transfer of the share is not prohibited in the articles of association, it may be realised without the approval of the general assembly. However, in any case, the right of pledge on the share may be established by signing a written pledge agreement, notarising the signatures and recording it in the share ledger. In the pledge of the shares of the share capital issued in the form of proof or registered shares, the delivery of the shares to the pledge creditor is also required. As with other types of pledges, the right of pledge on the shares of the share capital shall terminate upon the termination of the original receivable or the monetisation of the pledge.
