1. Why a Shareholders Agreement with a Foreign Partner in Turkey Is Essential
When a foreign investor participates in a Turkish company—whether as a minority shareholder or controlling partner—the relationship between the parties is rarely governed only by the Articles of Association and the Turkish Commercial Code. In practice, a shareholders agreement with a foreign partner in Turkey becomes the primary instrument that:
- Allocates control and decision-making power,
- Protects both majority and minority rights,
- Regulates capital contributions and future funding,
- Defines exit scenarios and valuation mechanisms, and
- Manages cross-border issues such as governing law, language, and dispute resolution.
For foreign investors, a well-drafted shareholders agreement is often the difference between a secure, predictable investment and an expensive dispute in an unfamiliar legal environment. For Turkish founders and local partners, it is the main tool to protect entrepreneurial control, prevent abusive dilution, and ensure a fair exit in the future.
2. Legal Framework: Shareholders Agreements under Turkish Law
2.1. Relationship with the Articles of Association
Under Turkish law, the Articles of Association (AoA) of a company—whether a limited liability company (Ltd. Şti.) or a joint stock company (A.Ş.)—are public and binding on the company and all shareholders. A shareholders agreement (SHA), in contrast:
- Is a private contract among some or all shareholders (and sometimes the company),
- Is not registered in the Trade Registry, and
- Binds only the parties to the agreement.
Where there is a conflict between the AoA and the SHA, third parties and corporate organs will primarily apply the AoA. Therefore, when drafting a shareholders agreement with a foreign partner in Turkey, it is crucial to:
- Align the AoA with key corporate governance and transfer provisions, and
- Ensure that contractual rights in the SHA are reflected, where possible, in the AoA to increase enforceability at corporate level.
2.2. Typical Company Forms for Foreign Partners
Foreign investors commonly participate in:
- Joint Stock Companies (Anonim Şirket / A.Ş.) – preferred for larger investments, venture capital, and when an IPO is a potential exit.
- Limited Liability Companies (Limited Şirket / Ltd. Şti.) – frequently used for smaller or closely held businesses.
The type of company affects:
- Transferability of shares,
- Governance structures (board vs. manager),
- Capital increase mechanics, and
- Certain statutory rights and thresholds.
A shareholders agreement should be drafted with the specific company form and its statutory framework in mind.
3. Special Considerations When One Shareholder Is Foreign
3.1. Language, Translation and Dual-Language Documents
In cross-border deals, language can become a source of dispute. For a shareholders agreement with a foreign partner in Turkey, parties often:
- Draft the agreement in English or in dual language (Turkish–English).
- Specify which language version prevails in case of contradiction.
- Use professional legal translators for the AoA and key corporate documents.
If the SHA is in English only, Turkish notaries and public authorities may still require sworn translations for certain processes. Clear language clauses minimize inconsistencies and translation-based disputes.
3.2. Governing Law and Jurisdiction
Parties can choose:
- Turkish law as governing law, with disputes resolved before Turkish courts or arbitration; or
- A foreign law (often English law or Swiss law) combined with international arbitration.
Key points:
- Incorporeal rights over shares in a Turkish company and corporate governance rules are heavily influenced by mandatory Turkish company law, even if the SHA is governed by foreign law.
- Choosing foreign law for a purely domestic relationship may complicate enforceability before Turkish courts.
- International arbitration (e.g. ICC, ISTAC, LCIA) with an agreed seat (e.g. Istanbul, London, Geneva) is a common compromise.
A careful analysis is needed: governing law choices do not erase Turkish mandatory rules, especially on corporate and regulatory matters.
3.3. Foreign Investment and Regulatory Limits
Turkey generally allows foreign investors to invest freely. However, in some sectors (e.g. banking, insurance, media, aviation, energy), additional licensing and shareholding restrictions may apply. A shareholders agreement should consider:
- Sector-specific approval requirements,
- Foreign ownership caps, if any,
- Notification duties to regulatory bodies.
Ignoring regulatory issues can render certain clauses unenforceable and jeopardize the transaction.
3.4. Currency and Payment Arrangements
Foreign partners often invest in foreign currency (USD, EUR, GBP). Parties must consider:
- Capital injection in Turkish lira versus foreign currency,
- FX controls and reporting obligations,
- Currency of dividends, put/call prices, and other payments.
A consistent approach should be adopted in the SHA to avoid mismatches between economic expectations in foreign currency and legal obligations recorded in Turkish lira.
4. Core Clauses in a Shareholders Agreement with a Foreign Partner
4.1. Capital Structure and Share Classes
A foreign investor may require:
- Different share classes (e.g. preferred vs. ordinary),
- Special dividend or liquidation preferences,
- Conversion rights or anti-dilution rights.
In Turkey, such rights are typically implemented through:
- Privileged shares in the AoA (e.g. privileged in dividends, voting, or liquidation),
- Contractual arrangements in the SHA, backed by obligations to amend the AoA.
The SHA should clearly define:
- Total capital and each shareholder’s stake,
- Type and privileges of shares,
- Which rights are contractual only and which must be reflected in the AoA.
4.2. Governance: Board Structure, Management and Veto Rights
For foreign investors, governance protections are often more important than the bare percentage of shares. A robust shareholders agreement with a foreign partner in Turkey will address:
- Board composition:
- Number of board members or managers;
- How many are nominated by the foreign investor;
- Any independent members or chairperson.
- Decision-making thresholds:
- Ordinary board decisions vs. reserved matters requiring supermajority or unanimous approval;
- Quorum requirements for board and general assembly meetings.
- Management roles and employment relationships:
- Whether founders also act as directors or managers;
- Service agreements, non-compete and confidentiality obligations;
- Removal and replacement rights.
4.2.1. Reserved Matters and Veto Rights
Reserved matters (also called “major decisions” or “veto matters”) are typically decisions that cannot be taken without the consent of the foreign investor or a specified supermajority. Examples include:
- Changes to the AoA or capital structure,
- Issuance of new shares or convertible instruments,
- Mergers, demergers, sale of substantial assets,
- Approval of annual budget and business plan,
- Incurrence of significant debt or granting guarantees,
- Changes in dividend policy,
- Related-party transactions beyond agreed limits.
These must be carefully balanced. From the foreign investor’s perspective, veto rights are essential to protect the investment. From the Turkish founder’s side, an excessively long list may paralyze daily operations.
4.3. Information Rights and Reporting
Foreign shareholders often require enhanced transparency, including:
- Periodic financial statements (monthly/quarterly),
- Management reports and KPIs,
- Access to bank statements, tax filings and key contracts,
- Audit rights and appointment of external auditors.
The SHA should detail:
- Frequency, format and language of reports,
- Confidentiality obligations,
- Costs of additional audits and who bears them.
Well-designed information rights can prevent misunderstandings and build trust between foreign investors and local management.
5. Capital Increases, Funding and Anti-Dilution Protection
5.1. Pre-Emptive Rights in Capital Increases
Under Turkish law, shareholders generally have pre-emptive rights in proportion to their shareholding when new shares are issued. The SHA should:
- Confirm or refine pre-emptive rights,
- Provide a clear timeline and process for exercising them,
- Regulate the sale of unused subscription rights to other shareholders or third parties.
For a foreign investor, avoiding unexpected dilution is often a key priority. For Turkish founders, flexibility to bring in new investors can be equally important.
5.2. Shareholder Loans and Alternative Funding
Startups and growth companies in Turkey commonly use:
- Shareholder loans,
- Convertible loans or instruments,
- Personal guarantees by founders.
The SHA should regulate:
- Whether shareholders are obliged or merely entitled to provide additional funding,
- Interest rates, subordination and repayment terms for shareholder loans,
- Conversion mechanics into equity (if any),
- Consequences if a shareholder does not participate in agreed funding.
5.3. Anti-Dilution Mechanisms
In venture capital and high-growth investments, foreign investors may insist on anti-dilution protections, particularly for down-rounds. Typical mechanisms include:
- Full ratchet anti-dilution,
- Weighted average (broad-based or narrow-based).
However, these must be adapted to Turkish corporate law and reflect:
- How additional shares will be issued,
- How privileges and voting power will adjust,
- How such arrangements will be reflected in the AoA.
Poorly drafted anti-dilution provisions can be unenforceable or create severe conflicts with mandatory capital maintenance rules.
6. Share Transfers, Lock-Ups and Exit Rights
6.1. Transfer Restrictions and Lock-Up Periods
In closely held companies, both foreign investors and Turkish founders want to avoid unwanted shareholders entering the company. A shareholders agreement with a foreign partner in Turkey typically includes:
- Lock-up periods, during which transfers are prohibited (e.g. first 3–5 years),
- Prohibition of transfers to competitors or specified categories of buyers,
- Requirement for board or shareholder approval for any transfers,
- “Permitted transfers” to affiliates or group companies under certain conditions.
These restrictions should be compatible with statutory rules for share transfers in A.Ş. and Ltd. Şti.
6.2. Pre-Emption Rights (Right of First Refusal)
Pre-emption or Right of First Refusal (ROFR) gives existing shareholders the first right to purchase shares offered for sale by another shareholder. The SHA should define:
- The mechanism for notifying proposed transfers,
- Price determination (third-party offer vs. valuation formula),
- Allocation among multiple shareholders wishing to purchase,
- Timelines and closing mechanics.
Properly structured ROFR clauses protect stability while allowing liquidity.
6.3. Tag-Along (Co-Sale) Rights
A foreign minority shareholder will want to avoid being “left behind” when the majority sells control. Tag-along rights allow minority shareholders to:
- Sell their shares on the same terms and conditions as the majority,
- Proportionally participate in the sale to a third-party buyer.
For Turkish founders, tag-along clauses can reassure foreign investors that an exit will be fair and synchronized.
6.4. Drag-Along Rights
Conversely, majority shareholders—often including the foreign investor—may require drag-along rights to force minority shareholders to sell when a suitable buyer offers to purchase 100% (or a controlling stake). A drag-along provision should address:
- Minimum valuation or price thresholds,
- Conditions (e.g. bona fide third-party offer, arm’s-length),
- Protection for minority shareholders (e.g. same price, same terms),
- Procedures for signing and closing the transaction.
Drag-along rights make it easier to deliver a clean exit to strategic buyers.
6.5. Put and Call Options
For foreign investors, put options (the right to sell shares to another shareholder at an agreed price or formula) can be a key protection mechanism, especially when:
- Certain milestones are not achieved,
- Regulatory changes alter the economic landscape,
- The relationship between partners breaks down.
For Turkish founders or majority shareholders, call options allow them to buy back shares in defined situations, such as:
- Material breach of the SHA,
- Violation of non-compete or confidentiality obligations,
- Death, incapacity or bankruptcy of a shareholder.
Option clauses should specify:
- Trigger events,
- Pricing methodology (fixed price, fair market value, independent valuation, EBITDA multiple, etc.),
- Payment terms and security (escrow, bank guarantee, etc.).
7. Dividends, Profit Distribution and Tax Considerations
7.1. Dividend Policy
A frequent source of tension between foreign investors and Turkish founders is dividend policy. A clear policy in the SHA can include:
- Minimum distribution of profits above a certain threshold,
- Conditions for retaining earnings for reinvestment,
- Required approvals for extraordinary or interim dividends,
- Timing of dividend payments and currency.
Because Turkish company law imposes certain rules on profit distribution and legal reserves, the dividend policy must be structured to comply with these mandatory provisions.
7.2. Withholding Tax and Double Tax Treaties
When a foreign shareholder receives dividends or interest from a Turkish company, withholding tax may apply. The ultimate rate can be influenced by:
- The domestic tax rate in Turkey, and
- Applicable double taxation treaties between Turkey and the shareholder’s home state.
The SHA cannot change tax laws, but it can:
- Allocate tax burdens between parties in certain scenarios,
- Address gross-up clauses for payments net of withholding,
- Regulate who will handle treaty-based relief or refund procedures.
Working closely with tax advisors is essential, as poor structuring can undermine the economics of the deal.
8. Deadlock, Termination and Dispute Resolution
8.1. Deadlock Situations
Deadlock arises when shareholders or board members cannot agree on crucial decisions. This is common where foreign and local partners each have veto rights. A well-drafted shareholders agreement with a foreign partner in Turkey should:
- Define what constitutes deadlock (e.g. failure to approve budget after specified attempts),
- Require an initial negotiation or mediation step,
- Provide mechanisms to break deadlock, such as:
- Casting vote of an independent director,
- Purchase options (Russian roulette, Texas shoot-out),
- Trigger of a drag-along or put/call scenario,
- Sale of the business.
The chosen method should reflect the parties’ relative bargaining power and preferences.
8.2. Termination of the Shareholders Agreement
The SHA should specify when and how it ends, including:
- Termination upon IPO or sale of all shares,
- Termination when only one shareholder remains,
- Termination for cause (material breach, insolvency, regulatory changes),
- Consequences of termination (survival of confidentiality, non-compete, non-solicitation and dispute resolution clauses).
Care is needed to ensure termination of the SHA does not automatically dissolve the company unless that is expressly intended and consistent with Turkish law.
8.3. Dispute Resolution: Courts vs. Arbitration
Choosing the right forum is critical:
- Turkish Courts
- Advantage: close to the company’s seat, familiar with local law and practice, easier to obtain interim measures in Turkey.
- Disadvantage: possible language barriers for foreign parties; duration of proceedings; potential unfamiliarity with complex cross-border arrangements.
- International Arbitration (e.g. ISTAC, ICC)
- Advantage: flexibility, expertise, neutrality, enforceability under the New York Convention; possibility to choose language and seat.
- Disadvantage: higher cost; need for specialized counsel.
Many cross-border transactions adopt a hybrid solution:
- Turkish law as governing law (or a mix where appropriate),
- International arbitration with Istanbul or a neutral city as seat,
- Express reference to the enforceability of interim measures and cooperation with Turkish courts.
9. Compliance, Confidentiality, Data Protection and Non-Compete
9.1. Compliance and Corporate Governance
Foreign investors are often subject to stringent compliance requirements in their home jurisdictions (anti-bribery, sanctions, AML). The SHA should:
- Impose compliance obligations on the Turkish company and local partners,
- Require implementation of internal policies (anti-corruption, whistleblowing, KYC),
- Allow the foreign investor to conduct compliance audits.
Non-compliance can be grounds for:
- Termination of the SHA,
- Exercise of put options,
- Claims for indemnity or damages.
9.2. Confidentiality and Non-Disclosure
Effective cross-border cooperation requires exchange of sensitive information:
- Business plans, know-how and technology,
- Client lists and commercial terms,
- Internal policies and manuals.
Confidentiality clauses should:
- Clearly define what is confidential,
- Set limits on use and disclosure,
- Provide for injunctive relief and damages for breaches,
- Address confidentiality obligations of affiliates and advisors.
9.3. Data Protection and Personal Data Transfers
If the company processes personal data (employees, customers, users), both Turkish data protection law and foreign regimes (such as GDPR) may apply. The SHA can:
- Require the company to comply with all applicable data protection rules,
- Allocate responsibility for data breaches, investigations and fines,
- Regulate cross-border data transfers to the foreign shareholder and its group.
9.4. Non-Compete and Non-Solicitation
To protect the joint venture or investment:
- Founders and key managers are often subject to non-compete and non-solicitation obligations,
- Limitations must be reasonable in scope, duration and geography to be enforceable under Turkish law,
- The SHA may link breaches to contractual penalties, buy-out options or termination.
10. Negotiation and Implementation Roadmap
To structure an effective shareholders agreement with a foreign partner in Turkey, parties can follow a step-by-step roadmap.
10.1. Step 1 – Term Sheet / Letter of Intent
- Agree on core commercial terms: valuation, shareholding percentages, capital commitments, exit horizon.
- Outline key governance features: board composition, veto rights, information rights.
- Identify sector-specific regulatory issues and approvals needed.
10.2. Step 2 – Legal and Financial Due Diligence
The foreign investor should:
- Review the company’s AoA, historical resolutions and share ledger,
- Check compliance with licensing, tax, employment and data protection laws,
- Verify litigation, liens and encumbrances on shares or assets.
Findings should feed into representations and warranties and indemnity provisions in the SHA.
10.3. Step 3 – Drafting the Shareholders Agreement and Updating the AoA
- Draft a comprehensive SHA reflecting the negotiated terms and due diligence results,
- Amend the AoA to include key rights (privileged shares, board structure, quorum, transfer restrictions),
- Prepare ancillary documents: powers of attorney, share transfer agreements, employment/management contracts.
Consistency between all documents is critical: contradictions can create enforceability risks.
10.4. Step 4 – Signing and Closing
- Ensure parties sign in compliance with Turkish form requirements (e.g. notarization where necessary),
- Obtain board and shareholder approvals, regulatory consents and clearances,
- Register changes with the Trade Registry and update company records.
Foreign shareholders may need apostilled corporate documents and sworn translations, which should be factored into the timetable.
10.5. Step 5 – Ongoing Governance and Monitoring
After closing, both the foreign partner and Turkish shareholders should:
- Implement governance procedures (board meetings, information flow, approval processes),
- Monitor compliance with covenants and financial obligations,
- Periodically review the SHA in light of changes in law, market conditions or business strategy.
11. Common Pitfalls and Practical Tips
When preparing a shareholders agreement with a foreign partner in Turkey, parties should be especially careful to avoid the following pitfalls:
- Ignoring Mandatory Turkish Rules
- Even if the SHA is governed by foreign law, Turkish mandatory rules on capital protection, corporate organs and registration continue to apply.
- Not Aligning the AoA and SHA
- If key rights (e.g. transfer restrictions, privileges) remain only in the SHA, enforcing them at corporate level can be difficult.
- Vague or Unrealistic Exit Mechanisms
- Put/call options without a clear valuation formula or process can lead to disputes and may be challenged as unenforceable or contrary to public policy.
- Over-broad Non-Compete Clauses
- Excessively wide restrictions in time, geography and scope may be struck down or significantly limited by courts.
- Unclear Deadlock and Dispute Resolution Provisions
- If there is no clear mechanism to resolve deadlock, an otherwise promising partnership may become unworkable.
- Lack of Tax and Regulatory Structuring
- Failing to consider withholding tax, double tax treaties and sector-specific regulations can erode the economic benefits of the investment.
Practical tips:
- Involve both Turkish counsel and counsel from the foreign investor’s jurisdiction, especially for complex deals.
- Draft the SHA and AoA in parallel; do not treat the AoA as a mere formality.
- Use clear, simple English, especially where not all parties are native speakers.
- Include well-defined valuation mechanisms (independent expert, agreed formulas, adjustment mechanisms) for exits and options.
- Periodically revisit the SHA as the company grows, new investors enter and the regulatory environment evolves.
12. Conclusion
A shareholders agreement with a foreign partner in Turkey is much more than a standard corporate contract. It is the central document that:
- Translates commercial expectations into binding rights and obligations,
- Harmonizes Turkish corporate law with international investment practice,
- Protects both foreign investors and local founders from foreseeable risks, and
- Provides a clear roadmap for governance, funding, profit sharing and exit.
Careful drafting, attention to Turkish legal specifics, and alignment between the AoA and the SHA are essential. When these elements are in place, foreign investors can participate in Turkish companies with confidence, and Turkish entrepreneurs can attract international capital without losing control of their business vision.
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