A foreign investor buying shares in a Turkish company should not rely only on the company’s Articles of Association.
A Shareholders’ Agreement (SHA) can regulate the relationship between shareholders in much greater detail and is commonly used in Turkish joint ventures and investment transactions. Türkiye’s official investment guidance also notes that shareholders’ agreements are commonly used to govern relationships between joint venture parties.
1. What Is a Shareholders’ Agreement?
A Shareholders’ Agreement is a private contract between shareholders that regulates their rights and obligations toward each other.
Under Turkish law, shareholders’ agreements are not specifically regulated as a separate contract type under the Turkish Commercial Code. They operate primarily as contractual arrangements between the parties.
This makes them particularly useful for foreign investors who want additional protection beyond ordinary statutory shareholder rights.
2. Board Representation
A foreign investor may negotiate the right to appoint one or more board members.
This can help the investor:
- monitor management;
- participate in strategic decisions;
- obtain information about the company; and
- protect its investment.
This is particularly important for minority investors.
3. Veto Rights
The agreement may provide that certain important decisions cannot be taken without the foreign investor’s approval.
These may include:
- major borrowing;
- sale of important assets;
- capital increases;
- issuing new shares;
- major investments;
- related-party transactions; and
- changes to the company’s main business.
These are often referred to as reserved matters.
4. Share Transfer Restrictions
A Shareholders’ Agreement can regulate what happens when one shareholder wants to sell its shares.
Common mechanisms include:
- right of first refusal;
- pre-emption rights;
- tag-along rights;
- drag-along rights;
- put options; and
- call options.
Such provisions are frequently used in Turkish shareholders’ agreements.
5. Protect Against Dilution
A foreign investor should consider what happens if the company later issues new shares.
The agreement can regulate:
- capital increases;
- new investors;
- pre-emption rights; and
- dilution protection.
Without proper protection, a 25% investment could become a much smaller percentage after future financing rounds.
6. Information Rights
Foreign investors, particularly those based outside Turkey, should ensure that they receive regular information about the company.
The agreement may require delivery of:
- financial statements;
- budgets;
- management reports;
- tax information;
- major contracts; and
- litigation updates.
This allows the investor to monitor the business without being physically present in Turkey.
7. Dividend Policy
Shareholders may disagree about whether profits should be distributed or reinvested.
A Shareholders’ Agreement can establish principles concerning:
- dividend distributions;
- reinvestment;
- reserves; and
- financing needs.
This can prevent future disputes about company profits.
8. Deadlock Mechanisms
When shareholders have equal or similar voting power, disagreements can prevent the company from functioning.
The agreement may therefore provide a mechanism for resolving a deadlock, such as:
- negotiation;
- mediation;
- buy-out procedures;
- put or call options; or
- sale of the company.
Deadlock provisions are particularly important in 50/50 joint ventures.
9. Exit Rights
Foreign investors should consider their exit strategy before making the investment.
The Shareholders’ Agreement may regulate:
- sale of shares;
- valuation methods;
- tag-along rights;
- drag-along rights;
- buy-out mechanisms; and
- third-party sales.
A profitable investment can still become problematic if the investor has no practical way to exit.
10. Shareholders’ Agreement vs. Articles of Association
This distinction is important.
The Articles of Association govern the company at the corporate level.
A Shareholders’ Agreement generally creates contractual obligations between the shareholders who signed it. It does not automatically bind future shareholders or third parties, and a corporate resolution may remain valid even if it breaches the Shareholders’ Agreement.
Therefore, where legally possible, important protections should also be reflected in the company’s Articles of Association and corporate structure.
Conclusion
A foreign investor purchasing shares in a Turkish company should consider having a detailed Shareholders’ Agreement before completing the investment.
The agreement can protect the investor through:
board representation, veto rights, information rights, dilution protection, share transfer rules and exit mechanisms.
The best time to negotiate these protections is before the investment funds are transferred, not after a disagreement has already started.
This article provides general information and does not constitute legal advice.
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