EXIT FROM PARTNERSHIP VIA SHARE TRANSFER IN LIMITED LIABILITY COMPANIES 3 May 2024

In limited liability companies, partners may exit the partnership by transferring their company shares. This article explains under what conditions shareholders can transfer their shares in limited liability companies, considering the relevant provisions of the Turkish Commercial Code.

What are the Validity Conditions for Share Transfers?

Article 595 of the Turkish Commercial Code (“TCC”) regulates how share transfers in limited companies should be conducted. The first sentence of paragraph 1 of this article sets forth the conditions for the validity of the share transfer: "The transfer of the capital shares and transactions that create transfer obligations shall be made in writing and the signatures of the parties must be notarized." The commitment transaction regarding the share transfer and the disposition transaction can be carried out under the validity conditions stated in this article, either in a single contract or in two separate contracts. However, non-compliance with the required formal condition renders the transfer agreement absolutely void.

Furthermore, TCC Article 595(2) stipulates the final condition necessary for the validity of the share transfer: "Unless otherwise provided in the company agreement, the transfer of the capital shares requires the approval of the general assembly of partners. The transfer becomes valid with this approval." According to the wording of this provision, it must be acknowledged that the share transfer will take effect and have consequences with the approval of the general assembly. Additionally, it is possible to obtain this general assembly approval before the transfer agreement is signed.

For the share transfer to be considered validly transferred, the general assembly must, unless otherwise stipulated in the company agreement, decide in favor of the transfer with the absolute majority of the represented shares at the meeting, as per TCC Article 620. Meanwhile, TCC Article 595(3) allows partners to refuse approval of the share transfer without any justification unless otherwise provided in the articles of association. Moreover, a provision may be included in the company's articles of association to completely prohibit share transfers, as permitted by TCC Article 595(4). However, to prevent uncertainties about whether the share transfer will take effect and have consequences, the lawmaker has mandated that decisions by the General Assembly not to approve the share transfer must be made within three months; otherwise, approval will be deemed to have been implicitly given. In any case, a partner's right to exit the limited company with just cause is reserved.

Additionally, the company's articles of association might stipulate additional payment or ancillary performance obligations; however, the person acquiring the share might not be able to provide the required security due to doubts about their payment ability. In such cases, the General Assembly may refuse to approve, regardless of whether there is a provision in the company's articles of association.

What Provisions Must Be Included in the Share Transfer Agreement?

The second sentence of TCC Article 595(1) imperatively specifies the content of the transfer agreement under the numerus clausus principle: "Additionally, the transfer agreement must specify any additional payment and ancillary performance obligations; if the non-compete obligation has been intensified or extended to cover all partners, this aspect, along with rights to offer, preemption, repurchase, and purchase, as well as conditions related to contractual penalties, must also be stated.

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