ARTICLE – CALL OPTION AGREEMENT ON SHARES OF A JOINT STOCK COMPANY

Abstract

A call option agreement on shares of a joint stock company is an agreement that grants the option holder the right to purchase the shares subject to the agreement at the price and on the date determined in the agreement, at option holder’s unilateral will. However, due to the relative nature of the agreement, it is not possible to assert it against third parties. Accordingly, under Turkish law, call option agreements do not have corporate effect, and the most secure way to preserve the contractual right would be to obtain a call option agreement with deterrent penalty provisions and a guarantee from the transferor to cover failure to transfer the shares pursuant to the call option agreement. Furthermore, an escrow agent mechanism may be used to prevent the transfer of the shares to third parties in the event of a dispute between the parties regarding the call option agreement. It is important to note that these mechanisms are not definitive solutions to restrict the transfer of shares to a third party.

Keywords: Call Option Agreements, Call Right, Share Certificate, Joint Stock Company, Share Transfer Restrictions

I. INTRODUCTION

In principle, registered share certificates in joint stock companies may be transferred without any restriction. The realization of such transfer depending on the choice of the transferee in the future due to the current market situation, financial reasons or other commercial arrangements between parties lead us to the concept of call option or call right. In this study, the nature of call option agreements, their reflections in Anglo-Saxon law and Turkish law, the problems that may arise in the transfer of shares and the practices regarding alternative solutions to these problems are analyzed.

II. CALL OPTION AGREEMENTS

A. Call Option Agreements Under Anglo-Saxon Law

In Anglo-Saxon law, agreements are formed by the exchange of mutual declarations of will, and the subject matter of a call option agreement is constituted by another agreement. The agreement that constitutes the subject matter of the call option agreement is characterized as the main agreement and the call option agreement is defined as an option agreement established in order to guarantee that the main agreement is established at the option holder’s discretion¹.Thus, with the call option agreement, the investment to be made by the option holder is left at its own initiative and offers the opportunity to evaluate alternative investments.

B. Call Option Agreements under Turkish Law

“A call option right entitles the holder to purchase shares at a price determined by the parties as to the amount or how it will be calculated at a specified maturity.”² Accordingly, a call option is a right that gives the right holder the right to purchase the shares in question with a unilateral declaration of will, in other words, it is a formative right³. Accordingly, it is irrelevant whether the person who grants a call option to the other party under a call option agreement accepts the option holder’s declaration of will or not. This is because a call option agreement grants one party the right to purchase the shares at a price whose amount or method of calculation is specified in the agreement within the specified term, and imposes an obligation on the other party to sell the shares in question at the relevant price in the event that the call right is exercised⁴.

Although the call right gives the right holder the right to acquire the shares of the company under the conditions set forth in the agreement and the call option agreement is valid under the Turkish Code of Obligations numbered 6098⁵, it does not have a corporate effect in Turkish law and only creates a contractual obligation to transfer the shares to the other party⁶. In this context, the fact that the call option is a relative right may cause various problems in practice.

III. REFLECTIONS AND PROBLEMS OF CALL OPTION AGREEMENTS UNDER TURKISH LAW

First of all, for a legally valid share transfer to take place in a joint stock company, the registered share certificates must be endorsed in the name of the transferee and the share certificates must be physically delivered by the transferor to the transferee (transfer of possession) in accordance with the relevant provisions of the Turkish Commercial Code numbered 6102⁷. Additionally, in order for the new shareholder to assert its shareholding rights (voting rights, dividend distribution rights, etc.) against the company, the transferee must be registered as a shareholder in the share ledger of the company⁸. According to the mandatory provisions of the Turkish Commercial Code, since keeping the share ledger is one of the non-transferable duties and powers of the board of directors⁹, it will not be possible for the board of directors to authorize a third party to keep the share ledger of the company. Therefore, in the event of a possible share transfer in the future, the company’s board of directors must register the new shareholder in the company’s share ledger in order to exercise the shareholding rights.

In practice, if the option holder wishes to exercise the purchase right established by the call option agreement, there is no obstacle under Turkish commercial law for the debtor not to fulfill its obligation or for the shareholder to transfer the shares subject to the agreement to a third party before the option holder exercises its right. In the event that the shares are transferred to a third party, it is not possible for the option holder to assert its right against a third party due to the fact that the purchase right established by the agreement is a relative right as explained above. Therefore, in the event that the party obliged to transfer the shares under the call option agreement breaches its obligation, it is not possible to impose any remedy under Turkish commercial law¹⁰.

On the other hand, if the party to the call option agreement who is obliged to transfer the shares breaches its obligation, there are several remedies that can be provided under Turkish law of obligations.

IV. REMEDIES IN CASE OF BREACH

A. Specific Performance

In theory, if the breaching party does not voluntarily endorse and deliver the share certificates, the option holder has the right to forcibly take over the certificates through the execution offices¹¹. However, Turkish execution offices do not execute such a takeover and there is no precedent in practice. On the other hand, this remedy is only applicable in the event that the share certificates are not endorsed and delivered to the option holder and does not restrict the transfer of the shares to a third party prior to option notice. For these reasons, specific performance is not considered as an applicable legal remedy under a call option agreement.

B. Penalty And Compensation

In the call option agreement, it is possible to determine certain penalty and compensation provisions in case of breach of the transfer promise. If such provisions are included in the agreement, in the event of a breach, a penalty or compensation will be paid in the amount specified in the agreement, and it would be beneficial to obtain a guarantee such as a bank letter of guarantee to guarantee the penalty or compensation. However, although penalty and compensation provisions are included in the agreement and deterrence against breach will be provided, this practice does not absolutely prevent the transfer of shares to a third party.

C. Handing Over the Share Certificates to the Escrow Agent

The shares that are the subject of call option agreements may be held by an escrow agent. An escrow agreement may stipulate that the escrow agent will hold the share certificates and deliver them to the transferee upon the fulfillment of the conditions in the call option agreement. However, even if the escrow agent delivers the share certificate to the transferee, in order for the shareholder to assert its shareholding rights, the share certificates must be registered in the share ledger of the company, and the board of directors of the company may refrain from registering the transferee in the share ledger. In this case, the transferee may file a lawsuit before the relevant Turkish court in order to be registered in the share ledger. In this context, the escrow agent mechanism may prevent the transfer of shares to third parties. However, although the escrow agent mechanism is widely used abroad, currently there is no business in Türkiye that provides escrow agent services. Therefore, in the current situation in Türkiye, the escrow agent mechanism is not common but real persons or businesses located abroad can be used as escrow agents.

D. Writing the Beneficiary on the Back of the Share Certificate

In practice, it is observed that the name of the option holder and the option right are written on the back of the share certificate in order to prevent the transfer of shares to third parties. Thus, it is intended to prevent transfers against third parties. However, in order to assert share transfer restrictions against third parties in joint stock companies, the relevant share transfer restrictions must be included in the articles of association¹². Since the writing in question does not have such a legal effect, it will not be effective unless the third party is in malicious intent, and the option holder will not be able to claim ownership since it does not have possession of the shares. In addition, this practice is incompatible with the basis of the call option agreement. Because the purpose of the call option agreement is that the exercise of the option holder’s right is at its own initiative.

References

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3. Yılmaz, p.101-103 ↩︎
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6. Nilsson, p. 228 ↩︎
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8. Ali Murat Sevi, Anonim Ortaklıkta Payın Devri, 4th Baskı, Ankara 2018, p.273 ↩︎
9. Turkish Commercial Code, Article 375 ↩︎
10. Nilsson, p. 256-276 ↩︎
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12. Turkish Commercial Code, Article 490 ↩︎