A foreign investor purchasing a minority stake in a Turkish company should not focus only on the percentage of shares being acquired.
A minority shareholder may own a valuable part of the company but still have limited influence over management, financing, dividends or major business decisions.
For this reason, minority investor protection should be planned before the investment is completed.
1. Understand Your Statutory Minority Rights
Under the Turkish Commercial Code, shareholders representing at least 10% of the capital in a non-public joint stock company generally qualify for certain statutory minority rights. For publicly traded companies, the threshold is generally 5%.
For example, qualifying minority shareholders may request that the general assembly be convened or that certain matters be added to the agenda.
These rights provide important protection, but they may not be sufficient for every foreign investment.
2. Negotiate Board Representation
A foreign investor should consider whether it will have the right to appoint a representative to the board of directors.
Board representation may provide:
- access to management information;
- greater oversight of company activities;
- participation in strategic decisions; and
- early awareness of potential problems.
This can be particularly important where the foreign investor owns 20% or 30% of the company but the remaining shares are controlled by one majority shareholder.
3. Negotiate Veto Rights
Certain important decisions can be made subject to the minority investor’s approval.
These may include:
- major borrowing;
- sale of significant assets;
- capital increases;
- issuing new shares;
- changing the business activity;
- entering major related-party transactions;
- distributing dividends;
- acquiring another company; and
- selling the company.
These provisions are generally included in a Shareholders’ Agreement and, where appropriate, reflected in the company’s Articles of Association.
4. Protect Against Dilution
One important risk for a minority investor is dilution.
If new shares are issued and the foreign investor does not participate in the capital increase, its ownership percentage may decrease.
The investment documents should therefore regulate:
- pre-emption rights;
- capital increases;
- new investors;
- convertible instruments; and
- circumstances in which existing shareholders may be diluted.
5. Secure Information Rights
A minority shareholder should receive sufficient information to monitor the company.
The Shareholders’ Agreement may provide regular access to:
- financial statements;
- management reports;
- bank information;
- budgets;
- tax information;
- major contracts; and
- litigation reports.
Without effective information rights, a foreign investor located outside Turkey may have difficulty understanding what is happening inside the company.
6. Protect Against Related-Party Transactions
Majority shareholders may also control other companies.
The investor should therefore consider restrictions on transactions between the target company and:
- majority shareholders;
- directors;
- family members;
- affiliated companies; and
- other related parties.
Such transactions should ideally be conducted on commercial terms and, for significant transactions, require minority investor approval.
7. Include Tag-Along Rights
A tag-along right can be particularly valuable for a minority shareholder.
For example, if the majority shareholder sells its shares to a third-party investor, the minority shareholder may have the right to sell its shares under the same or similar conditions.
Without such protection, the foreign investor could remain inside the company with a completely new majority shareholder it did not choose.
8. Create an Exit Mechanism
The Shareholders’ Agreement should explain how the foreign investor can exit the investment.
Possible mechanisms include:
- right of first refusal;
- tag-along rights;
- put options;
- agreed valuation mechanisms;
- third-party sale procedures; and
- buy-out arrangements.
Exit rights are especially important in private companies where there may be no easy market for minority shares.
9. Turkish Law Provides Additional Judicial Protection
In serious cases, statutory remedies may also be available.
For example, qualifying minority shareholders may request the appointment of a special auditor under certain conditions.
In cases involving serious and justified reasons, shareholders representing the statutory minority threshold may also seek dissolution of a joint stock company. The court may, instead of dissolution, order the payment of the real value of the claimant’s shares or another appropriate solution.
These remedies can provide important protection where relations between shareholders become fundamentally unworkable.
Conclusion
A foreign investor purchasing a minority share in Turkey should not rely only on statutory shareholder rights.
The strongest protection usually comes from combining Turkish company law with a carefully drafted Shareholders’ Agreement.
Before investing, the foreign shareholder should consider:
board representation, veto rights, information rights, dilution protection, related-party controls and exit rights.
Minority shareholder protection is much easier to negotiate before the investment funds are transferred than after a dispute has already started.
This article provides general information and does not constitute legal advice.
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