Share certificates are negotiable instruments issued by a joint-stock corporation, representing the shares formed upon incorporation or capital increase (Turkish Commercial Code (“TCC”) Article 486(1)).
Privately held joint-stock corporations print physical share certificates. In contrast, publicly held joint-stock corporations do not issue share certificates and they register their shares to the Central Securities Depository’s (“CSD”) electronic system, which is under the supervision of the Capital Markets Board (Capital Markets Law (“CML”) Articles 3(1)(p), 13, and 81).
Joint-stock corporations can issue two share certificate types: registered share certificates or bearer share certificates (TCC Article 484(1)).
Registered Share Certificates and Bearer Share Certificates
A joint-stock corporation issues a registered share certificate to the name of a natural person or a legal entity, and these certificates’ sole beneficiary is the named person or their legal successors (TCC Article 487(2)). On the other hand, the corporation does not issue a bearer share certificate to the name of any person, and their beneficiary is the bearer of the certificate (TCC Article 658(1)).
Issuing bearer share certificates is an obligation for the corporation’s board of directors if the shareholders have paid the bearer shares fully (TCC Article 486(2)). Otherwise, bearer share certificates cannot be issued (TCC Article 484(2)). However, there is no such condition for registered share certificates; if the shareholders have paid at least 25% of each registered share, it is sufficient (TCC Articles 344, 459, and 487(2)).
The corporation records the shares without certificates and the registered shares in the share book (TCC Article 499(1)). In this framework, upon incorporation, the bearer shares and the registered shares are recorded in the share book; afterward, upon printing the bearer share certificates for the bearer shares, the records regarding these shares are deleted from the share book. Registered shares, on the other hand, whether with or without share certificates, remain to be registered in the share book, and the board of directors records the legal transactions regarding these shares in the share book (TCC Articles 499-501).
In this context, registered shareholders must be registered in the share book to attend the corporation’s general assembly, while it is sufficient for the bearer shareholders to prove their possession of the bearer share certificates (TCC former Articles 415 and 417).
As for the transfer of shares, shareholders can transfer the registered share certificates through endorsing the share certificates and passing their possession to the transferee (TCC Article 490(2)). If the transfer in question complies with the law and the corporate articles, the corporation’s board of directors records it to the share book (TCC Article 499(2)). In comparison, bearer share certificates are transferred by just passing their possession to the transferee (TCC former Article 489). Accordingly, while the corporate articles can limit the transfer of registered shares, they cannot impose such a limitation on bearer shares (TCC Article 492(1)).
Amendments Regarding Bearer Share Certificates
Law No. 7262, published on 31 December 2020, made fundamental amendments to the TCC regarding the bearer share certificates.
These amendments require notification to the CSD by the board of directors when bearer share certificates are issued and by the transferee when transferred (TCC Articles 486(2) and 489(1); Law No. 7262 Articles 31 and 32). In the case of a violation of this requirement, holders of bearer share certificates cannot enjoy their share-related rights until the notification is made (TCC Articles 426 and 489(1); Law No. 7262 Articles 30 and 32). Moreover, the amendments impose administrative fines on those who fail to make the relevant notifications (TCC Article 562(13); Law No. 7262 Article 33). In this respect, the amendments also envisage that the bearer shareholders cannot attend the corporation’s general assembly if the relevant notifications are not made (TCC Articles 415 and 417; Law No. 7262 Articles 28 and 29).
These provisions are in effect as of 01 April 2021 (Law No. 7262 Article 43). Accordingly, the Communiqué on the Notification and Registration of Bearer Share Certificates to the Central Securities Depository is published on 06 April 2021 and the Regulation Amending the Regulation on the Procedures and Principles of the Joint-Stock Corporations’ General Assembly Meetings and the Ministry Representatives to Attend These Meetings is published on 29 May 2021. They are both in effect as of their publication.
Consequently, those who held bearer share certificates before 01 April 2021, are by 31 December 2021, required to apply to the relevant corporation for these share certificates to be notified to the CSD (TCC Provisionary Article 14; Law No. 7262 Article 34). Otherwise, the sanctions, as mentioned earlier, will also apply to these persons.
What These Amendments Bring
With these amendments, the bearer shares of privately held joint-stock corporations became registered, as are the shares of publicly held joint-stock corporations. This situation contradicts the CML, stating that the issuance of shares not offered to the public by privately held joint-stock corporations is outside the scope of the CML (CML Article 2(1)) and causes many drawbacks.
First, the distinctive feature of bearer share certificates is the convenience of circulation. The basic principle is that the shareholders can pass these certificates from hand to hand quickly and easily only by transferring their possession. However, the obligation to notify the CSD has eliminated the convenience of circulation for bearer share certificates.
Indeed, the transaction bureaucracy has increased. Nevertheless, the board of directors’ obligation to issue share certificates for bearer shares and the shareholders’ obligation to pass bearer share certificates’ possession to the transferee to perfect a share transfer remains unchanged (TCC Articles 486(2) and 489(1)).
On the other hand, compared to registered shareholders, this situation unfairly disadvantages the bearer shareholders. While the board of directors still record the registered shares, whether with or without share certificates, to the share book, and one can follow the relevant transactions from the share book, bearer shares should be both certificated and registered to the CSD’s electronic system (TCC Articles 486(2), 489, and 499). Moreover, while it is still necessary to fully pay the shares for issuing bearer share certificates, it remains sufficient to pay at least 25% of each registered share for issuing registered share certificates (TCC Articles 344, 459, 486(2), and 487(2)). All this complicates the bearer shareholders’ position.
In addition, this situation is also controversial in determining the completion moment of the bearer share transfers. For instance, is the notification to the CSD with the share transfer constituent or declaratory? In other words, will the share transfer be perfected when the shareholders transfer the possession of the bearer share certificates to the transferee (declaratory) or when the transferee notifies such transfer to the CSD (constituent)? If declaratory, is it legally proportionate and expedient to suspend the transferee’s shareholding rights, who acquired them with the passing of possession, for failure to notify the CSD? If constituent, why should the share certificates’ possession still be transferred to the transferee for the share transfer to be realized?
Accordingly, will fail to notify the CSD result in the invalidity of the share transfer (TCC Article 489)? Or, in line with the rules governing the bearer certificates that the person who takes over the possession of a movable in good faith and to own it shall be the owner of that thing, and whoever is the holder of the certificate is considered its proper owner, will the share transfer be perfected validly through passing the possession of the certificates to the transferee (Turkish Civil Code (“TCiv.C”) Article 763; TCC Article 658(1))? What will be the fate of share transfers made to bona fide third parties following such a share transfer (TCiv.C Articles 988 and 990)?
Since there is the obligation to notify the CSD, will the CSD not be notified if the shareholders establish a usufruct right on the certificated bearer shares or pledge them? Further, will such a pledge be in the scope of the Law on Pledging Movables in Commercial Transactions?
We will see the outcomes of these and similar problems as disputes arise and the courts begin to try them. Nonetheless, the bearer share certificate concept is far away from the heart of this concept for now!
Av. Müge Önal Başer, LL.M., LL.B.