PLEDGE OF JOINT STOCK COMPANY SHARES: LEGAL FRAMEWORK AND IMPLEMENTATION PROCESSES

ABSTRACT

Joint stock companies constitute one of the fundamental building blocks of capital markets within the dynamic structure of commercial life. The shareholding structure of these companies serves not only as a means of representing ownership but also as an important tool in securing economic relations. Particularly, the fact that joint stock company shares hold material value and can be easily transferred has led to their widespread use as collateral in legal transactions. The pledge of shares has found a broad application area in commercial life as an effective method used by creditors to secure their claims in debt relations.

Although the Turkish Commercial Code numbered 6102¹  (“TCC“) does not contain specific provisions regarding the pledge of joint stock company shares, the general pledge provisions set forth in the Turkish Civil Code numbered 4721² (“Civil Code“) establish the fundamental principles of these transactions. Whether the shares are certified or not directly affects the scope of the rights subject to the pledge and the procedure for establishing the pledge. This study will explain the concept of pledge and comprehensively examine the procedures for establishing a right of pledge over joint stock company share.

Keywords: Joint Stock Company, Pledge of Share, Right of Pledge, Bearer Share Certificate, Registered Share Certificate, Certificated Share, Uncertificated Share

I. INTRODUCTION

In line with the developments in the commercial world, there has been a significant increase in the number of company establishments. Accordingly, as the importance of joint stock companies in commercial life grows, their shares inevitably become more frequently involved in legal transactions. The fact that joint stock company shares hold material value and are transferable has led to their frequent use in collateral transactions. The ability of shareholders to pledge their shares in a joint stock company to meet their financial needs demonstrates that pledge of share is a significant financing instrument.

II. THE CONCEPT OF PLEDGE

Pledge is a limited real right that authorizes the creditor to collect its receivables by converting the pledged value into cash in the event of non-performance, partial or poor performance by the debtor³. Although the pledge of shares in joint stock companies is not specifically regulated under the TCC, it is carried out in accordance with the general rules on pledge stipulated in the Civil Code.

Under the Civil Code, the right of pledge is categorized into two main types: real estate (immovable) pledge and personal property (movable) pledge. Since joint stock company shares represent shareholding rights, whether they are embodied in certificates or not, the right of pledge established on shares is considered a pledge over rights. In this respect, the pledge established on the share is in the nature of a pledge established on the right and is subject to the principles regarding the movable pledge⁴. According to the Civil Code, in addition to tangible assets, receivables and rights that are not classified as tangible assets are also included within the scope of movable pledge types. Accordingly, the pledge established over joint stock company shares is regarded as a pledge on rights arising from shareholding and is subject to the provisions of “pledge on receivables and other rights” set forth in Articles 954 and following of the Civil Code.

Although it is stated that the pledgee will establish a pledge over rights arising from shareholding, this does not apply to all shareholding rights. For instance, rights that cannot be converted into cash, such as participation in management (attendance at the general assembly, voting rights), protective shareholder rights (litigation rights, minority rights), and informational rights (right to access information, right to examine and audit), cannot be subject to pledge. Only rights related to assets that can be converted into cash (dividend rights, liquidation proceeds) fall within the scope of the pledge. Moreover, in the event that a pledge is established on a share, there will be no change in the shareholding status of the pledgor.

III. ESTABLISHMENT OF RIGHT OF PLEDGE ON JOINT STOCK COMPANY SHARES

The procedures for establishing a right of pledge over joint stock company shares vary depending on whether the shares are embodied in certificates and the type of share certificates. Additionally, in order to establish the right of pledge, the act of disposal must be performed following the realization of the promissory transaction.

A pledge agreement is defined as a legal transaction in which a person undertakes the obligation to establish a pledge on a joint stock company share in favor of a creditor⁵. The written form is a validity requirement for the pledge agreement⁶, which is executed between the pledgor, who provides the share as collateral, and the creditor, who seeks to secure their claim⁷. The pledge agreement regarding certificated joint stock company shares corresponds to a promissory transaction, while the pledge agreement regarding uncertificated shares constitutes an act of disposal. The pledgor may be the debtor of the secured obligation or a third party. However, due to the accessory nature of the right of pledge, the pledgee can only be the creditor of the obligation secured by the pledge.

A. Establishment of Right of Pledge on Uncertificated Shares

According to the Civil Code, assignable receivables and other rights may be pledged. Unless otherwise provided, the provisions regarding pledge requiring delivery apply to such pledges⁸. Accordingly, the pledge of the economic rights granted by uncertificated shares in joint stock companies is possible⁹. As stated in Article 954 of the Civil Code, a written pledge agreement must be executed for the establishment of a right of pledge on an uncertificated share. This pledge agreement, unlike the promissory transaction, constitutes an act of disposal. Upon the execution of the written pledge agreement between the pledgor and the creditor, the right of pledge is established on the company share¹⁰.

According to capital market legislation, dematerialization refers to the electronic registration of capital market instruments instead of issuing physical certificates. Dematerialized shares are also considered uncertificated shares. Pursuant to Article 47 of the Capital Markets Law numbered 6362¹¹, collateral agreements concerning capital market instruments registered with the Central Securities Depository (“CSD“) are executed in writing¹². These agreements constitute an act of disposal, and the right of pledge is established upon their execution by the parties. Additionally, for the right of pledge on dematerialized shares to be enforceable against third parties, it must be reported to the CSD.

B. Establishment of Right of Pledge on Certificated Shares

Share certificates may be bearer or registered¹³ and are classified as negotiable instruments. In establishing a right of pledge on a share certificate, the provisions of the Civil Code regulating the pledge of negotiable instruments apply.

The pledge of bearer share certificates is affected by endorsing the certificate with a “for pledge” annotation and delivering it to the creditor¹⁴. The transfer of possession to the creditor is mandatory for the establishment of the right of pledge.

In the pledge of registered share certificates, a written pledge agreement must be executed between the parties and/or a pledge endorsement must be made on the registered certificates, followed by the delivery of these certificates¹⁵.

V. CONCLUSION

The establishment of a right of pledge on joint stock company shares serves as an important instrument in commercial law, providing financial flexibility for shareholders and a reliable security mechanism for creditors. This study has examined the legal framework concerning pledge of share transactions, addressing the procedural differences based on whether the shares are certificated and the type of share certificates.

Turkish law allows for the application of pledge transactions on joint stock company shares within the general pledge regulations under the Civil Code. While a written pledge agreement is crucial for uncertificated shares and notification to the CSD is necessary for dematerialized shares, for certificated shares, the endorsement and delivery process take precedence. Compliance with formal requirements,the transfer of possession, and the alignment of the parties’ intentions are essential for the validity of these transactions.

While pledge of share allows shareholders to pledge their shares as collateral to meet their financial needs, they also offering creditors a reliable security measure. This contributes to the vitality of capital markets and strengthens commercial relations. However, understanding the legal nature and procedural requirements of pledge transactions is of great importance for both shareholders and creditors.

In conclusion, the pledge of joint stock company shares stands out as an indispensable legal tool for both investors and financial institutions. This mechanism enhances financial mobility for shareholders while providing a reliable security measure for creditors, ensuring compatibility with the dynamic structure of commercial life.

References

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12. Capital Markets Law, Article 47/1 ↩︎
13. Turkish Commercial Code (TCC), Article 484 ↩︎
14. PULAŞLI, p. 2429 ↩︎
15. Av. Dr. Umut KOLCUOĞLU, Anonim Şirketler Pay Rehni Kurulması İşlemleri, Nasıl Bir Ekonomi Gazetesi, December 2023 ↩︎