Türkçe
Many family businesses with the aim for institutionalization establish some rules in order to regulate the relations between the company shareholders to facilitate the management of the company and to make its existence long-term. Most of the time, these rules are gathered under the family constitution and signed not only by the shareholders, but by all family members. However, these family constitutions usually only determine the ethical rules for company management and do not contain any legal sanctions.
At this point; unlike the family constitution, the shareholders’ agreement, which legally binds all the shareholders of the company and their heirs under certain conditions, and enables legal sanctions to be applied in case of violation, appears as an alternative. Which one of these two legal documents, family constitution with ethical rules or shareholders’ agreement with precise and executory rules, should be preferred to prevent the blockages in the operations of the company, decision-making processes and most importantly, to prevent the risks related to the future existence of the company which may be jeopardized due to share transfers to be made with emotional decisions?
What are the Differences between Family Constitution and Shareholders’ Agreement?
There is no type of contract regulated under Turkish Law as “Family Constitution”. In terms of its legal nature, the Family Constitution is an atypical contract prepared within the scope of principle of freedom of contract.
Since, as a rule, companies are not parties to Family Constitutions, such agreements are not binding for companies. Although the Family Constitution is binding on the signing family members, it does not have a significant enforcement ability, since mainly contains ethical rules about the company management and there are no clear and precise duties and sanctions under the same. Therefore; signing a Family Constitution is often not effective and sufficient in solving the operational and managerial problems experienced by family businesses.
The Shareholders’ Agreement, on the other hand, is mostly binding on the companies since the company is made a party to the agreement. In addition; under the shareholders’ agreement, the rights and entitlements of the shareholders and the rules of share transfer are clearly determined, the procedures for the election of the management boards of the company and the rules for decision making procedures of such managers are set in detail and, most importantly, the legal sanctions that may be imposed on shareholders in case of violation of the terms of this agreement are regulated under such agreement. The shareholders’ agreement, which contains more binding and clear provisions in terms of its content and is therefore highly enforceable, can be much more effective in solving the basic problems experienced by multi-partner companies, including family companies.
Why is the Existence of Shareholders’ Agreement Important to Companies?
Most of the companies today have multiple partnership structures. In some cases, this situation prevents the company management and decision mechanisms from functioning properly. Differences of opinion among the shareholders make it difficult not only to the company’s business, but also to appointment of management staff, daily work routines and even personnel recruitment. In addition; as a result of share transfer decisions made with emotional approaches, company partners may encounter with unfamiliar new shareholders, and even the company shares may be sold to one of the competitors. This situation, of course, jeopardize the continuity of the companies. Especially, many family businesses unfortunately cease business without being transferred to other generations due to the adoption of emotional approaches instead of corporate approach and the conflict of interests within the family.
In that respect; in order to minimize all these risks, establishing clear rules and restrictions regarding company operation and share transfers and setting the sanctions to be applied in case of violation of these rules are also of great importance in terms of ensuring the continuity of multi-partner companies.
How to Determine the Content of the Shareholders’ Agreement and the Family Constitution?
The content of both the Family Constitution and the Shareholders’ Agreement can be freely determined by the parties within the scope of freedom of contract. In that respect; first of all, it is necessary to recognize the company, to determine the demands and needs of the shareholders correctly, and to analyze correctly which document is appropriate to prepare in line with these demands and needs.
Although the content of both legal texts can be freely determined, the provisions of the Turkish Commercial Code should also be taken into account when making arrangements regarding share transfers, election of company management and similar issues. In addition; it will be possible to make the necessary arrangements to ensure that the regulations made are also binding for the heirs, and in this way, it will be possible to ensure that the persons who will be shareholders as a result of the legal share transfers are bound by these predetermined rules.
Finally; regarding the matters agreed between the parties, the company’s articles of association may be amended, and accordingly, certain rules and restrictions agreed between the shareholders may also be binding on third parties.
ERKUT LAW OFFICE
For Turkish version, click here.
