Pre-emptive Right

The pre-emptive right, called the “right to acquire new shares” in the Turkish Commercial Code, allows each shareholder in a capital increase to acquire new shares first, in proportion to its existing holding. A shareholder’s percentage and voting power therefore cannot be reduced by a capital increase against its will.

Exercise

In a joint stock company, each shareholder has the right to acquire newly issued shares in proportion to its existing shares (TCC Art. 461). The board of directors sets how the right is to be exercised and gives shareholders at least fifteen days. Unexercised shares may, as a rule, be sold to others at no less than par value. In a limited liability company, shareholders also have the right to acquire new shares in proportion to their holdings in a capital increase.

Restriction

The pre-emptive right may only be restricted or removed by a general assembly resolution where there are justified reasons. The affirmative votes of shareholders representing at least 60% of the share capital are required (TCC Art. 461/2). No shareholder may be unfairly advantaged or disadvantaged by the resolution. Bringing in a new investor, financing the business and granting shares to employees are accepted in practice as justified reasons.

In joint stock companies under the authorised capital system, the board may also restrict pre-emptive rights if authorised by the articles. This speeds things up for companies that raise frequent funding rounds.

Importance in Investment Transactions

• In each funding round, existing shareholders must not exercise their pre-emptive rights or the right must be restricted; this is usually undertaken in the investment agreement.
• For a SAFE or convertible note to convert, existing shareholders must undertake not to exercise their pre-emptive rights.
• Investors, in turn, ask for their own pre-emptive rights to be preserved so that they can maintain their stake in later rounds (pro rata right).

The pre-emptive right differs from the right of first refusal, which applies to sales of existing shares, and from anti-dilution protection, which protects against price falls.