Preferred Shares

Preferred shares carry superior rights over other shares in certain matters. Venture capital investors often require preferred shares to protect their investment despite holding a minority stake. Turkish law refers to them as “privileged shares”.

Types of Privilege

Under the Turkish Commercial Code, a privilege is a superior right granted to certain shares by the articles of association in matters such as dividends, liquidation proceeds, pre-emption and voting (TCC Art. 478). Certain share classes may also be granted the right to be represented on the board of directors (TCC Art. 360). The most common privileges in investment transactions are:

• Dividend privilege: Priority or additional dividends at a set rate,
• Liquidation privilege: Priority payment in liquidation; see Liquidation Preference,
• Voting privilege: Different numbers of votes for shares of the same par value,
• Board representation: A share class nominating a board member.

Limits

• A voting privilege may grant at most fifteen votes per share; there are some exceptions where there are justified reasons (TCC Art. 479).
• Voting privileges do not apply to decisions on amending the articles, electing the auditor, release of liability and filing liability lawsuits.
• Veto rights over key decisions can be structured by raising quorums in the articles or requiring the affirmative vote of a share class; this must stay within the Code’s limits.
• General assembly resolutions that may impair the rights of preferred shareholders require the approval of a special meeting of preferred shareholders (TCC Art. 454).

Use in Funding Rounds

A new share class is usually created in each funding round (for example, Class A for founders, Class B for seed investors, Class C for Series A investors). Each class’s rights are defined in the articles of association. Rights that cannot be written into the articles are regulated in the shareholders’ agreement. Share classes and their rights should also be shown in the cap table.