A Quick Guide to Pre-emptive Rights in Limited Liability Companies Following a Capital Increase

Introduction

The pre-emptive right is granted to shareholders to ensure they maintain their proportional ownership following a capital increase. This right safeguards shareholders from potential dilution of their equity and influence within the company. This article provides a comprehensive guide for exercising the pre-emptive right for limited liability company shareholders, while briefly addressing the main principles for the restriction and removal of the right.

Pre-emptive Right

The pre-emptive right allows shareholders to acquire newly issued shares in proportion to their existing share of capital. This right prevents a reduction in the percentage of shares held by a shareholder due to a capital increase. Without this right, the newly issued shares could be sold directly to third parties or selectively to some shareholders. Shareholders who are unable to acquire the newly issued shares proportionally may experience a reduction in their influence  within the company.[1] The pre-emptive right for limited liability company shareholders is regulated under Article 591 of the Turkish Commercial Code (TCC) No. 6102.

Exercise of the Pre-emptive Right in Limited Liability Companies

In limited liability companies, each shareholder’s capital share is defined and verified by the share ledger or by a share certificate if the shares are bonded. Pursuant to Article 591/3 of the TCC, shareholders must be granted a minimum period of 15 days to exercise their pre-emptive rights. This period may be extended by the board of managers or the general assembly. If the right is not exercised within the specified period, it is forfeited. The pre-emptive right is exercised through a unilateral declaration of intent, provided that the exercise complies with legal requirements; no approval by the company is necessary.

In joint-stock companies, the board of directors announces a resolution determining the principles for exercising the pre-emptive right, and the 15-day period starts from this announcement. By analogy, in limited liability companies, the board of managers must similarly announce a resolution determining the general principles for the exercise of the pre-emptive right. If such a resolution is not made and the shareholder is unable to use the pre-emptive right, this constitutes an unlawful violation of the shareholder's right, and any resulting damage must be compensated.[2]

Additionally, it should be noted that the exercise of the pre-emptive right is based on the par value of the shares in question. This is indicated in the preamble of Article 461 of the TCC, which regulates the pre-emptive right in joint-stock companies.

The main principles concerning the exercise of the pre-emptive right in limited liability companies can be summarized as follows:

1. The capital increase from external sources must comply with the law.
2. The board of managers must announce a resolution determining the principles for exercising the pre-emptive right.
3. The resolution must specify a minimum period of 15 days. If no period is specified, the right must be exercised within 15 days.
4. The pre-emptive right is exercised by a unilateral declaration of intent.
5. The right is exercised proportionally to the shareholder's existing share in the capital and based on the par value of the shares.
6. By exercising the right, the shareholder's percentage of the share capital is protected.
7. The pre-emptive right not exercised within the specified period is forfeited.

Restriction and Removal of the Pre-emptive Right

Pursuant to Article 591/2 of the TCC, the pre-emptive right may be restricted by a general assembly decision for justifiable reasons. Acquisitions of enterprises, parts of enterprises, subsidiaries, and employee participation in the company are listed as examples of justifiable reasons[3], though the provision does not limit these reasons exclusively.

The general assembly resolution to restrict the pre-emptive right must be adopted by a qualified majority, which requires the presence of the absolute majority of the entire share capital and the affirmative votes of at least two-thirds of the votes represented, as specified in Article 621 of the TCC. The validity of the decision regarding the removal or restriction of the pre-emptive right depends on compliance with the law, the articles of association, principles of honesty, and the principle of equal treatment.

Conclusion

Following a capital increase through external sources, shareholders of a limited liability company may exercise their pre-emptive rights under Article 591 of the TCC. The right is exercised by a unilateral declaration of intent within the specified period and based on the par value of the shares. In the presence of justifiable reasons, the general assembly has the authority to restrict or remove the pre-emptive right. By exercising this right, shareholders maintain their ownership and influence within the company after the capital increase.

With thanks to Can Ergül for his contribution.

References

Bahtiyar, M. Ortaklıklar Hukuku. Beta Basım Yayın.

Moroğlu, E. Anonim Ortaklıklarda Sermaye Artırımı. On İki Levha Yayıncılık.

Şener, O. H. Limited Ortaklıklar Hukuku. Seçkin Yayıncılık.

Şener, O. H. Ortaklıklar Hukuku. Seçkin Yayıncılık.