ABSTRACT

The pre-emptive right granted to shareholders in joint stock companies is a fundamental safeguard aimed at ensuring the continuity of the existing shareholding structure during capital increase processes. However, depending on the company’s financial status, investment plans, or long-term strategic objectives, the limitation of this right may arise under certain circumstances. The Turkish Commercial Code allows the limitation of pre-emptive rights only on the condition that it is based on justified grounds and that specific procedural rules are complied with. In this article, the legal grounds, conditions of application, and legal consequences of such limitation will be addressed.

Keywords: Joint Stock Company, Pre-Emptive Right, General Assembly, Board of Directors, Limitation, Removal

1. INTRODUCTION

In the narrow sense, the pre-emptive right is a shareholder right that entitles shareholders to acquire the newly issued shares in a capital increase, in proportion to their existing shareholding, before external parties¹. Under the Turkish Commercial Code numbered 6102 (“TCC”), the pre-emptive right is defined as a privilege granted to joint stock company shareholders to preserve their existing shareholding ratios during capital increases.

With the entry into force of TCC on July 1, 2012, significant structural changes were introduced in the regulations regarding pre-emptive rights. Within this scope, the adoption of the registered capital system has been permitted also for non-public joint stock companies; and clarity has been provided regarding which corporate body is authorized to determine the duration for exercising the right to acquire new shares. Furthermore, invoking share transfer restrictions as a justification for limiting this right has been prohibited, and efforts have been made to establish a balance in line with the principle of equal treatment. Thus, with the new system, not only has the protection of shareholders’ existing share ratios been secured, but also the potential for abuse in the capital increase process has been reduced².

In this article, within the framework of the aforementioned regulations, the legal grounds and application of the limitation of pre-emptive rights will be elaborated, and how such rights may be limited in a manner that protects shareholder interests, as well as under which conditions such limitations will be valid, will be examined

2. CAPITAL INCREASE IN JOINT STOCK COMPANIES AND THE PURPOSE OF THE PRE-EMPTIVE RIGHT

In joint stock companies, the concept of capital is addressed within the framework of two different systems. While the principal capital refers to the amount of capital specified and fully committed in the company’s articles of association, the registered capital defines the ceiling amount that a company may increase its capital up to. The pre-emptive right can be exercised under both capital systems; however, by its nature, it becomes operative only in the case of external capital increases. Indeed, external capital increase refers to the process whereby new shareholders join the company with the aim of increasing the company’s equity. In such cases, the shareholding ratios of existing shareholders may change. The purpose of the pre-emptive right in such capital increases is to enable existing shareholders to preserve their current shareholding ratios³.

3. LIMITATION OF THE PRE-EMPTIVE RIGHT

Although the pre-emptive right serves to protect shareholders’ rights, it may also prolong the capital increase process, raise costs, and hinder companies from securing capital swiftly⁴. Therefore, the limitation of the pre-emptive right may emerge as a favorable privilege for the protection of the company. In cases where the allocation of new shares to third parties takes precedence over the existing shareholders’ pre-emptive rights, the limitation of such rights may come into question⁵.

On the other hand, a disproportionate limitation of the pre-emptive right may weaken shareholders’ fundamental financial and managerial rights, such as the right to receive dividends and the right to vote at the general assembly. For such reasons, the limitation of the pre-emptive right has been explicitly and definitively regulated under the TCC system, thereby safeguarding the interests of company shareholders.

A. TYPES OF LIMITATION OF THE PRE-EMPTIVE RIGHT

The limitation of the pre-emptive right may occur in two forms: restriction or removal. As can be understood from the wording of Article 461 of the TCC, the fundamental principle is that the pre-emptive right shall not be limited. However, in exceptional cases, limitation or removal of the pre-emptive right is permitted. Yet, in order to prevent such limitation or removal from being exercised arbitrarily, the relevant procedures have been subjected to specific rules⁶.[1]

Accordingly, limitation of the pre-emptive right may arise in such a way that only a certain portion of shareholders may benefit from the right to acquire new shares, or that some share classes may be completely excluded from this right. Full removal of the pre-emptive right means that all shareholders are deprived of the opportunity to acquire new shares and the right becomes entirely inapplicable. Both of these practices are integral parts of the capital increase resolution and must be evaluated and resolved jointly⁷.

B. COMPETENT CORPORATE BODY

TCC does not directly and explicitly regulate which corporate body of a joint stock company is authorized to limit the pre-emptive right. However, in view of the distinction made in Article 461 of the TCC, it can be stated that the capital system to which the company is subject is a determining factor in identifying the competent body. If the company is subject to the principal capital system, this decision is taken by the general assembly, whereas if it is subject to the registered capital system, the decision may also be taken by the board of directors.

To better understand the rationale for this distinction, it is necessary first to examine which corporate body is authorized to make capital increase decisions. This is because the exercise or limitation of the pre-emptive right is directly linked to the capital increase process.

In the principal capital system, the decision to increase capital is made by the general assembly. Therefore, in this system, the decision to limit the pre-emptive right also falls within the competence of the general assembly. However, the situation differs in the registered capital system. In this system, the company’s capital is increased, when needed, by a resolution of the board of directors. This authority must be based on an express authorization clause included in the company’s articles of association⁸.

The protection of the pre-emptive right is, in principle, guaranteed under the TCC, and limitation or complete removal of this right is allowed only in exceptional cases. In order for such an exception to apply, the legislator requires the fulfillment of two fundamental conditions simultaneously:

• the general assembly must adopt the decision with an increased quorum (affirmative vote of at least 60% of the principal capital), and
• the relevant limitation or removal must be based on justified grounds

Nevertheless, the fulfillment of these conditions does not permit the limitation or removal to be exercised arbitrarily. Furthermore, no person shall be unjustly benefited or harmed through the limitation or removal of the pre-emptive right⁹.

In cases where the articles of association grant the board of directors the authority to limit or fully remove the pre-emptive right, the board is obliged to prepare a detailed report that sets out the justified grounds upon which the decision is based, the reasons for issuing the new shares with or without a premium, and the basis for determining the applicable premium amount. The registration and announcement of this report in the trade registry is also mandatory, in order to ensure transparency toward shareholders and to allow for legal scrutiny of the decision¹⁰.

C. PRINCIPLES TO BE FOLLOWED IN LIMITING THE PRE-EMPTIVE RIGHT

In the preamble of Article 461/2 of the TCC, it is stated that the provision is based on four fundamental principles aimed at protecting shareholders and strengthening the right to acquire new shares. These principles are listed as follows:

• The pre-emptive right cannot be limited through the articles of association,

• The right can only be limited upon the existence of justified grounds,

• The limitation cannot be carried out for the purpose of benefiting specific persons or causing loss to certain shareholders,

• The right can only be limited through a resolution adopted with an increased quorum, and thus it constitutes a minority right¹¹.

According to these principles, which are clearly stated in the preamble of the article, one of the most important points to be considered in the limitation of the pre-emptive right is that this process must not be carried out arbitrarily.

The law, by stipulating that the pre-emptive right may only be limited on the basis of justified grounds, aims to prevent the abuse of this right. The justified grounds for the limitation of the right must be linked to the actual needs of the company and commercial necessities. For instance, situations such as a public offering or a strategic merger may be considered justified grounds. However, it is not possible to limit this right solely based on the personal or group interests of any shareholder. This is of utmost importance for the protection of the equal rights of shareholders and the adoption of a fair governance approach. Moreover, since the limitation of the pre-emptive right may only be affected with the approval of a qualified majority, it must be ensured that such decisions are made in line with the interests of the company and all shareholders.

4. CONCLUSION

The pre-emptive right stands out as a fundamental right aimed at maintaining internal corporate balance during capital increases by allowing shareholders to preserve their existing shareholding ratios. However, in light of economic and structural necessities, the limitation of this right may, in certain cases, become a requirement for the benefit of the company.
In this context, this article has addressed the relationship of the pre-emptive right with external capital increases, its applicability under the registered and principal capital systems, the legal grounds for its limitation, and the impact of arbitrary and disproportionate limitations on shareholder rights. The types of limitation and the principles to be followed in their implementation have also been explained. As a result, the balance between the pre-emptive right and the interests of the company is a matter that must be carefully considered in each concrete case, and decisions concerning the limitation of this right must be assessed in both procedural and substantive terms in accordance with the principle of the rule of law.

References

---

1. Mustafa Yavuz, “Anonim Şirketlerde Rüçhan Hakkı ile Bu Hakkın Sınırlandırılma Esasları”, Gümrük Ticaret Dergisi, 2021, p.13. ↩︎
2. Preamble of TCC Article 461. ↩︎
3. Yavuz, p.14. ↩︎
4. Nihan Değirmencioğlu Aydın, “Anonim Şirketlerde Rüçhan Hakkı.”, On İki Levha Yayıncılık, 2021, s. 215. ↩︎
5. Aydın, p. 216. ↩︎
6. Mustafa Yavuz, p.18. ↩︎
7. Adıgüzel, p. 3. ↩︎
8. TCC Article 460/4 ↩︎
9. TCC Article 461/2 ↩︎
10. TCC Article 461/2 ↩︎
11. Preamble of TCC Article 461. ↩︎

ABSTRACT

Committees established within the board of directors, in accordance with corporate governance principles, are formed to enhance specialization, efficiency, and transparency in decision-making processes, thereby contributing to the board of directors’ ability to fulfill its duties more effectively. Although the specifics regarding these committees are regulated by the relevant legislation, their structure, areas of responsibility, and working methods may vary depending on the needs of each company, within the framework set by said legislation. The effectiveness of the committees depends on the clarity of their mandates, the formation of an appropriate member composition, and the establishment of a regular workflow. In this context, independent board members, in particular, play a critical role both by serving on committees and by maintaining the balance between the general assembly and the board of directors. This study comprehensively addresses the contributions of the committees and independent members to corporate governance within the framework of the relevant legislation

Keywords: Independent Board Member, Committees, Company Management, Corporate Governance Principles, Corporate Governance Communiqué

1. INTRODUCTION

The global development of the economy and commerce, the transformation of large-scale joint stock companies into multi-stakeholder structures, and the increasing number of publicly held companies have made it necessary to ensure the protection of investors, minorities, and other stakeholders. In order to safeguard these groups and ensure that companies are managed with a professional management approach, an effective corporate governance system must be established.

The concept of corporate governance does not have a definitive definition due to its dynamic and constantly evolving nature. However, it can generally be defined as a modern and contemporary form of management that prevents arbitrary decision-making by company management and ensures fairness, transparency, responsibility, and accountability¹.

Article 365 of the Turkish Commercial Code² numbered 6102 (“TCC“) states that the board of directors is responsible for the management of joint stock companies. Therefore, establishing an effective corporate governance structure is the responsibility of the board of directors. The effective functioning of this structure established by the board of directors is ensured through the committees affiliated to the board of directors.

This study examines the function, structure, and contributions to corporate governance of the committees established within the board of directors in accordance with the corporate governance principles. In this context, a detailed overview of the subject will be presented within the scope of the TCC, the Capital Markets Law³numbered 6362 (“CML“), the Corporate Governance Communiqué⁴ (II-17.1) (“Communiqué“), and the Corporate Governance Principles (“Principles“) attached to the Communiqué.

2. THE ROLE OF COMMITTEES IN THE IMPLEMENTATION OF CORPORATE GOVERNANCE PRINCIPLES

The corporate governance regulations within the TCC are limited, and the legislator has delegated the regulatory authority in this area to the Capital Markets Board (“Board”). This is stated in Article 1529 of the TCC as follows: “In publicly held joint stock companies, the corporate governance principles, the essentials of the board of directors’ statement regarding this matter, and the rules and results of the companies’ rating in this regard shall be determined by the Capital Markets Board.” The second paragraph of the same article also stipulates that other institutions may issue regulations, limited to their own areas of responsibility, with the approval of the Board⁵.

Article 17 of the CML, in parallel with the TCC, mandates that the Board shall determine the corporate governance principles, the content and publication of corporate governance compliance reports, the rating of companies’ compliance with these principles, and the procedures and principles regarding independent board memberships in publicly held partnerships. Furthermore, the Board is authorized to require publicly held partnerships, whose shares are traded on the stock exchange, to comply partially or fully with corporate governance principles based on their characteristics, to establish the procedures and principles related to this matter, and to make relevant decisions.

The Board has established comprehensive and detailed regulations regarding corporate governance principles through the Communiqué and the Principles. Article 1 of the Communiqué defines the scope of partnerships subject to the Principles. According to this article, the following are not subject to the provisions of the Principles:

1. Publicly held partnerships whose shares are not traded on the stock exchange,
2. Partnerships traded on markets and platforms other than the National Market, Second National Market, or Corporate Products Market⁶,
3. Partnerships applying to the Board for an initial public offering, whose shares will be traded on markets and platforms other than the National Market, Second National Market, or Corporate Products Market,
4. Partnerships considered to be resident abroad according to Decree No. 32 on the Protection of the Value of the Turkish Currency⁷.

For partnerships other than those listed above, the mandatory provisions of the Principles are specified in Article 5 of the Communiqué. Among these mandatory provisions are the committees that must be established under Article 4.5.1 of the Principles to ensure that the board of directors effectively fulfills its duties and responsibilities. Therefore, the establishment of committees affiliated with the board of directors is an indispensable and mandatory element in the implementation of the Principles.

Article 4.5.1 of the Principles mandates the establishment of the audit committee, the early risk detection committee, the corporate governance committee, the nomination committee, and the remuneration committee. If the nomination and remuneration committees cannot be established, the corporate governance committee shall assume their duties. Article 4.5.2 of the Principles states that the responsibilities, working procedures, and membership of the committees shall be determined by the board of directors and disclosed through the Public Disclosure Platform (“PDP”).

It is important to note that partnerships whose shares are offered to the public for the first time or that apply to the Board for their shares to be traded on the stock exchange must comply with the mandatory provisions of the Principles as of the date of the first general assembly following the commencement of trading of their shares on the stock exchange. Additionally, the Board classifies partnerships into three groups based on their systemic importance, considering their market value and the market value of their publicly traded shares. Upon transitioning between these groups, partnerships must comply with the obligations of the new group as of the date of the first general assembly following the publication of the Board’s decision regarding their inclusion in the new group in the Board’s bulletin.

Committees established under the board of directors are essentially sub-units that perform research, advisory, and preparatory functions for the board and do not have the status of separate entities⁸. To better understand the matters related to these committees, the concepts of “non-executive board membership” and “independent board membership” will be addressed first. Subsequently, the responsibilities, composition, and working principles of each committee will be examined individually.

3. THE RELATIONSHIP BETWEEN NON-EXECUTIVE BOARD MEMBERSHIP AND THE CONCEPT OF INDEPENDENCE

The concept of being “executive” essentially refers to actively participating in the daily operations of the company. Executive members, who play an active role in daily affairs within the company’s organizational structure, have a more significant influence on management and administration. Non-executive members, on the other hand, fulfill supervisory and oversight duties related to management⁹.To ensure effective oversight and supervision within companies, Article 4.3.2 of the Principles stipulates that non-executive members must constitute a numerical majority on the board of directors.

In Turkish law, non-executive board membership is regulated as a general concept, and independent board membership is defined based on the distinction between executive and non-executive roles¹⁰. This distinction is articulated in Article 4.3.3 of the Principles as follows: “Among the non-executive members of the board of directors, there shall be independent members who possess the ability to perform their duties without being influenced by any external factor.”  Similarly, Article 4.3.4 specifies that the number of independent members within the board of directors must not be less than one-third of the total number of members. To qualify as independent members, non-executive members must meet certain criteria, which are outlined in Article 4.3.6 of the Principles. Independent members are required to satisfy all these criteria.

The importance of independent membership becomes evident in the context of investor protection. Shareholders cannot directly monitor the company’s management, internal operations, and business activities. Therefore, the presence of independent board members is crucial for overseeing the company’s administration and management and safeguarding the interests of shareholders. By undertaking roles in committees affiliated with the board of directors, independent board members gain better access to internal company information, enhance their oversight capabilities, and contribute to minimizing risks in company management through their committee-based recommendations to the board. Consequently, the Communiqué and the Principles mandate the presence of independent board members on the board of directors and its affiliated committees.

The term of office for independent members on the board of directors is three years, and according to Article 4.3.5 of the Principles, re-election of independent members is permissible. Furthermore, any circumstance that jeopardizes the independence of an independent member must be immediately reported to the board of directors for public disclosure through the PDP. This matter must also be simultaneously reported to the Board in writing.

4. COMMITTEES AFFILIATED WITH THE BOARD OF DIRECTORS

Pursuant to Article 4.5.3 of the Principles, committees must consist of at least two members. In committees with two members, both members must be non-executive board members; in committees with more than two members, the majority must be composed of non-executive board members. It is stipulated that the chairs of the committees must be independent board members. Additionally, it is stated that individuals with expertise in the relevant field may serve as members of committees, except for the audit committee, even if they are not members of the board of directors.

Furthermore, the Principles state that to ensure the effective functioning of the committees, it is preferable that a board member does not serve on more than one committee, and that all necessary resources and support required for the committees to fulfill their duties must be provided by the board of directors. Committees may also seek independent expert opinions on matters they deem necessary for their activities, and the cost of such consultancy services shall be borne by the company.

All work carried out by the committees must be documented in writing and recorded. Committees must convene at the frequency specified in their working principles and submit reports to the board of directors, detailing their activities and meeting outcomes.

4.1.  Audit Committee

Pursuant to Article 4.5.9 of the Principles, the audit committee oversees the company’s accounting system, the public disclosure of financial information, the independent audit, and the functioning and effectiveness of the company’s internal control and internal audit systems. The selection of the independent audit firm, the preparation of independent audit agreements, the initiation of the audit process, and all phases of the audit firm’s work are carried out under the supervision of the audit committee. Furthermore, the audit committee determines the independent audit firm from which services will be procured and the services to be obtained from such firms, and submits these determinations to the board of directors for approval.

The audit committee’s evaluations regarding the compliance and accuracy of the annual and interim financial statements, which are to be disclosed to the public, with the company’s accounting principles are submitted in writing to the board of directors, along with the opinions of the company’s responsible executives and the independent auditors.

Article 4.5.3 of the Principles stipulates that all members of the audit committee must be selected from among independent members. This committee, composed entirely of independent members, conducts its activities by convening at least four times a year, on a quarterly basis. Disclosures regarding the activities and meeting outcomes of the audit committee must be included in the company’s annual report.

4.2. Corporate Governance Committee

This committee monitors compliance with corporate governance principles within the company, engages in improvement efforts, and provides recommendations to the board of directors in these areas. It operates to ensure the functionality of the corporate governance mechanism within the partnership, to monitor whether corporate governance principles are being implemented, to investigate the reasons if they are not being applied, to identify conflicts of interest arising from non-compliance with corporate governance principles, and to determine criteria for improving practices¹¹.

The committee also supervises the activities of the investor relations department. Therefore, it plays an important role in establishing a functional governance structure and acts as a bridge. Consequently, it is essential that the members of this committee are professionals with relevant expertise, possess the necessary experience, and are independent¹².

As previously mentioned, if the company does not have separate nomination and remuneration committees, the corporate governance committee will assume the duties of those committees. Given its broad scope of duties, the committee is considered to have an active and significant role in ensuring the functionality of the company’s corporate governance mechanisms.

4.3. Nomination Committee

Regulated in two separate paragraphs under Article 4.5.11 of the Principles, the nomination committee works on establishing a transparent system for identifying, evaluating, and training suitable candidates for the board of directors and for executive positions with administrative responsibility, and for setting policies and strategies in this area.

The committee also monitors the work of the individuals it nominates throughout their term of service and regularly evaluates the structure and efficiency of the board of directors, submitting recommendations for changes to the board of directors where necessary. The nomination committee plays a critical role in ensuring continuity and oversight in the performance of the board and senior management, contributing directly to the company’s future and its performance trajectory¹³.

4.4. Early Risk Detection Committee

As regulated under Article 4.5.12 of the Principles, the early risk detection committee is responsible for identifying, at an early stage, the risks that may endanger the existence, development, and continuity of the company, for taking necessary measures regarding identified risks, and for managing risk. The committee reviews the company’s risk management systems at least once a year.

Accordingly, the general assembly and the board of directors will be able to develop foresight in the face of risks and threats that may affect the company and take precautions when necessary. The most significant difference between this committee and the audit committee is that while the latter conducts retrospective reviews, the early risk detection committee ensures the management of prospective risk. Considering the crises and fluctuations in the current global economy, this committee plays a critical role in ensuring the sustainability of the company¹⁴.

4.5. Remuneration Committee

The remuneration committee determines its recommendations concerning the remuneration principles of board members and senior executives by taking into account the company’s long-term goals. It sets remuneration criteria in connection with the performance of both the company and the relevant member, and submits its proposals concerning the remuneration to be paid to board members and executives with administrative responsibility to the board of directors, based on the degree to which such criteria are met. In doing so, it ensures the establishment of a transparent and formal remuneration procedure.

Essentially, since the authority to determine the financial rights of board members belongs to the general assembly pursuant to Article 408 of the TCC, the recommendations of the remuneration committee must be submitted by the board to the general assembly. It is possible, however, for the board of directors to determine the financial rights of executives who are not board members. As the committee determines financial rights based on performance, it naturally also serves a supervisory function over these executives¹⁵.

5. CONCLUSION

Board committees are corporate governance tools that are gaining increasing importance in modern company management, aiming to enhance the efficiency of managerial functions. These committees play a critical role in achieving the company’s strategic objectives by ensuring transparency and efficiency in organizational oversight and decision-making processes. Committees primarily serve advisory and preparatory functions for the board of directors; thus, they mostly act as consultative bodies and, although rarely, may also possess decision-making authority.

Independent board members contribute to the more objective supervision of companies and help establish healthier foundations in relationships with internal and external stakeholders. Beyond being a mere legal requirement, independent members serve an important supervisory function that safeguards the company’s long-term interests. The active participation of these members enhances the quality of decision-making processes in company management and ensures more solid foundations for the company’s growth. In Turkish law, a more detailed regulation of board committees and independent membership mechanisms will contribute both to the strengthening of corporate governance and to the increased effectiveness of internal control systems within companies. This process will not only support the sustainability of companies but also foster increased trust in the business world and promote more transparent corporate operations

References

---

1. Cafer Eminoğlu, Türk Ticaret Kanunu’nda Kurumsal Yönetim, 2014, p.7 ↩︎
2. Official Gazette dated 14.02.2011 and numbered 27846 ↩︎
3. Official Gazette dated 31.12.2012 and numbered 28513 ↩︎
4. Official Gazette dated 03.01.2014 and numbered 28871 ↩︎
5. Abdullah Bilgili, Kurumsal Yönetim İlkeleri Çerçevesinde Bağımsız Yönetim Kurulu Üyeliği, 2024, s.27 ↩︎
6. With the Borsa İstanbul A.Ş. (“BİAŞ”) Listing Directive (“Directive”) dated 20.11.2015, the names and structures of BİAŞ Equity Market segments were changed. Two new markets, named the “Star Market” and the “Main Market”, were established to replace the former National Market and Second National Market. Additionally, the name of the Corporate Products Market was revised to “Collective Investment Products and Structured Products Market.” Subsequently, on 19.09.2019, Article 12 of the Directive was amended, and the Collective Investment Products and Structured Products Market was abolished. However, the changes in market names made within BİAŞ have not yet been updated in the Communiqué. ↩︎
7. Official Gazette dated 11.08.1989 and numbered 20249 ↩︎
8. Evin Emine Demir, Anonim Şirket Yönetim Kurulu Bünyesinde Oluşturulan Komiteler, 2016, s.45 ↩︎
9. Aslı E. Gürbüz Usluel, İcra Kurulu, Türkiye Barolar Birliği Dergisi, Issue: 142, 2019, p. 373 ↩︎
10. Bilgili, op.cit., p. 54 ↩︎
11. Neslihan Akça, Sermaye Piyasalarında Kurumsal Yönetim İlkeleri, 2019, p.82 ↩︎
12. Bilgili op.cit., p.84 ↩︎
13. Tuğba Yılmaz, Kurumsal Yönetim İlkelerinin Uygulanmasında Yönetim Kurulu ve Yönetim Kuruluna Bağlı Komiteler, 2021, p.96 ↩︎
14. Yılmaz, op.cit, p.89 ↩︎
15. Akça, op.cit., p.83 ↩︎