• Voting Agreements under Turkish Law
  • June 15, 2017
  • Introduction
    In principle, shareholders exercise their right to vote in general assembly meetings in accordance with the ratio of the total nominal value of their shares to the company's share capital. Each shareholder is entitled to one vote, even if it has only one share. Shareholders who do not possess a sufficient number of shares to have a meaningful role in the company's management need the support of the other shareholders, which they can provide by means of voting in the same vein as such shareholder, in general assembly meetings. In order to secure such other shareholders' voting support, a voting agreement is usually entered into between these parties. A voting agreement can be defined as an agreement that contains an undertaking as to vote in a certain direction or via a specific representative, not to vote completely or partially, or to give abstaining vote in the general assembly meeting(s) of a company1. This Newsletter article examines the legal characteristics, types, validity and limits of voting agreements, as well the consequences attached to the failure to comply with the provisions thereof.
    Legal Characteristics and Types of Voting Agreements
    Voting agreements are subject to the provisions of the law of obligations. As it is not possible to burden the shareholders with any obligation other than the payment of the share value and the related premium, if any, as per Article 480 of the Turkish Commercial Code numbered 61022 ("TCC"), it would not be appropriate to regulate a voting agreement under the articles of association3.
    Voting agreements are usually classified by legal scholars in several groups in terms of obligations of the parties, capacities of the parties to the agreement, and continuity of the voting undertaking4:
    (i) In terms of obligations of the parties:
    * Unilateral voting agreements: Only one party gives an undertaking as to its voting right.
    * Reciprocal voting agreements: Both parties give an undertaking to each other as to voting in a certain direction.
    * Multilateral voting agreements: Two or more shareholders give an undertaking as to voting in a certain direction.
    (ii) In terms of capacities of the parties:
    * Voting agreements between the shareholders
    * Voting agreements between the shareholders and third parties
    * Voting agreements between the shareholders and the company
    (iii) In terms of continuity of the voting undertaking:
    * Non-continuous (one-time) voting agreements: Parties give a voting undertaking for a specific general assembly meeting or a specific agenda item of a general assembly meeting.
    * Continuous voting agreements: Parties give a voting undertaking not limited to a specific general assembly meeting or a specific agenda item of a general assembly meeting. Such an undertaking is usually given for a limited period of time.
    Validity and Limits of Voting Agreements
    Voting agreements are not subject to any statutory condition as to form. Limits of the freedom of agreement determine the validity of voting agreements5. As per Article 27 of the Turkish Code of Obligations numbered 60986 ("TCO"), voting agreements that are in violation of the mandatory provisions of the laws, ethics, public order, personal rights, or those that contain a subject matter which is impossible to achieve, are null and void.
    It is possible to enter into voting agreements for the votes attached to all or a part of a shareholder's shares. As the right to vote is attached to the share, itself, but not the shareholder, the shareholders are free to cast each of their votes in different directions and, therefore, provide a voting undertaking in relation to their certain shares.
    Certain types of voting agreements are examined, below, in terms of their validity:
    * Voting Agreements for an Indefinite Period of Time: Some legal scholars are intended to deem the voting agreements made for a very long period, or an indefinite period of time, as invalid on the grounds of violation of personal rights7; while others believe that a long period would not automatically render the agreement invalid, the agreement must, at the same time destroy or substantially limit the economic freedom of the subject shareholder in a given specific case8.
    * Voting Agreements regarding the Votes to be cast in Board of Directors/Managers Meetings: There are differing views of legal scholars on voting agreements regarding the votes to be cast in board of directors meetings of joint stock companies and board of managers meetings of limited liability companies. According to Çamoğlu, votes of the members of boards of directors cannot be subject to voting agreements, as the representation agreement between the member of the board of directors and the company, as well as the diligence and loyalty obligation of the board of directors member, constitute an obstacle against such undertakings9. On the other hand, Moroğlu argues that both the voting agreements and the votes cast by members of boards of directors in violation of the diligence and loyalty obligation are valid, yet lead to the contractual liability of the relevant member of the board of directors towards the company10.
    * Voting Agreements between the Shareholders and the Company: A voting undertaking from the shareholder of a company to the company, itself, means that the company's legal entity participates in, and affects, the constitution of its own will through voting agreements. This situation creates a violation of the principle of separation of powers between the decision and management bodies of the companies. Therefore, voting agreements between the shareholders of a company and the company itself should be considered invalid11.
    Consequences of Failure to Comply with the Provisions of Voting Agreements
    Failure to comply with the provisions of the voting agreements does not lead to any consequences in terms of the law of corporations, regardless of whether or not such provisions are regulated under the articles of association, as well. Breach of the provisions of the voting agreements cannot be alleged against the subject company; the votes cast are valid, despite violating the voting agreement; and the cancellation of the decision of the general assembly meeting taken, based on such votes cannot be requested12.
    In terms of the law of obligations, in the event of a breach by a shareholder of its voting undertaking, the counterparty will be entitled to seek compensation in accordance with the general provisions of the law of obligations, either material, or spiritual, or both, subject to the legal conditions of each such compensation.
    Whether or not the beneficiary of the voting undertaking can request specific performance of the undertaking to vote in a certain direction is a problematic issue. Despite the view that the beneficiary can request specific performance, and request the court to allow it to fulfil the obligation, itself, as per Article 113/1 of the TCO13, a counter-view argues that no option is available other than compensation as either the subject matter of the obligation becomes impossible to achieve in the event of one-time voting agreements, or it is unknown as to what direction the subject shareholder will cast its vote in the following general assembly meetings, in the event of continuous voting agreements14. There is no precedent that has become subject to a decision of the Courts of Appeal in Turkish practice.
    Conclusion
    In practice, voting agreements are entered into by the shareholders of a company usually with the other shareholders or third parties, whereby the shareholder(s) undertake(s) to vote in a certain direction for various objectives. Voting agreements are subject to the provisions of the law of obligations, and failure to comply with the provisions, thereof, does not lead to any consequences in terms of the law of corporations, regardless of whether or not such provisions are regulated under the articles of association, as well. Voting agreements are usually classified by the legal scholars in several groups in terms of the obligations of the parties, capacities of the parties to the agreement, and continuity of the voting undertaking. In the event of a breach by a shareholder of its voting undertaking; whereas, it is clear that the counterparty will be entitled to ask for compensation in accordance with the general provisions of the law of obligations, whether or not it can request specific performance of the undertaking to vote in a certain direction is still a much-debated issue.

    1 Erdoğan Moroğlu, Oy Sözleşmeleri, Gözden Geçirilmiş ve Güncellenmiş 5. Baskı, p. 3; Çamoğlu (Poroy/Tekinalp), Ortaklıklar Hukuku I, Yeniden Yazılmış 13. Bası, İstanbul 2014, p. 507.
    2 TCC (Official Gazette 14.02.2011, No. 27846) has entered into force on July 1, 2012.
    3 Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, Değişiklikler ve İkincil Düzenlemelerle Güncelleştirilmiş 4. Bası, p. 372.
    4 For more information on the types of voting agreements, please see Moroğlu, p. 34 ff.
    5 Çamoğlu (Poroy/Tekinalp), p. 508.
    6 TCO (Official Gazette 04.02.2011, No. 27836) has entered into force on July 1, 2012.
    7 Çamoğlu (Poroy/Tekinalp), p. 509.
    8 Moroğlu, p. 77.
    9 Çamoğlu (Poroy/Tekinalp), p. 507.
    10 Forstmoser/Meier Hayoz/Nobel, Schweizerisches Aktienrecht § 31 N. 36-40 (p. 360-361), cited from Moroğlu, p. 31-32.
    11 Moroğlu, p. 62.
    12 Gül Okutan Nilsson, Anonim Ortaklıklarda Paysahipleri Sözleşmeleri, İstanbul 2004, p. 289.
    13 Moroğlu, p. 108 ff.
    14 Çamoğlu (Poroy/Tekinalp), p. 509.