In a company with foreign partners, the shareholders’ agreement is the single most important document for resolving disputes that may arise between the parties down the line. Setting up a company with foreign partners in Turkey became significantly easier after Foreign Direct Investment Law No. 4875 entered into force in 2003. However, if a separate shareholders’ agreement is not drawn up alongside the articles of association, serious legal gaps can open up around voting rights, profit distribution and exit terms.
The basic framework for companies under Turkish law is set out in the Turkish Commercial Code No. 6102, in force since 2012. The Code does not regulate in detail the mutual expectations of partners, nor their cultural and legal differences. In partnerships involving Arab capital, this gap becomes more visible where management style and contracting culture diverge.
What Is the Difference Between the Articles of Association and a Shareholders’ Agreement?
The articles of association is the official document registered with the trade registry, while the shareholders’ agreement is a private law contract signed between the partners that is not filed with the registry. The two complement each other but do not serve the same function.
In a limited liability company set up in Istanbul for real estate development, the Turkish partner ran the day-to-day operations while the Gulf-based partner could only obtain information at the annual general assembly. The articles of association said nothing on the matter, since it contained only the minimum elements required by law. Had a separate shareholders’ agreement been signed between the parties, information rights, the frequency of meetings and which decisions required prior approval could have been defined clearly in advance. The choice between setting up a limited liability company or a joint stock company is itself a decision that affects this balance; the structural differences between the two are covered in our article on choosing between a limited liability company and a joint stock company.
What Risks Arise from Language and Legal Culture Differences?
Translation discrepancies between Arabic and Turkish texts can lead to serious disputes over how a contract is interpreted.
In one case, a shareholders’ agreement was negotiated solely on the basis of an Arabic draft and only translated into Turkish afterward. A clause on the timing of profit distribution was understood differently in each language version, leading to a dispute between the partners that dragged on for months. Specifying from the outset which language version governs and which law applies largely eliminates this type of risk. Drafting commercial contracts consistently and verifiably in both languages is a decisive factor here.
How Can Voting Rights and Management Authority Be Secured in a Shareholders’ Agreement?
A minority partner’s right of approval over major decisions and a guaranteed seat on the board of directors can usually only be secured through a separate shareholders’ agreement.
Consider a structure where a Gulf investor holding roughly one third of the company’s capital had no approval rights over decisions such as the company taking on new debt or disposing of major assets. In that structure, the majority partner could make those decisions unilaterally. An approval clause added to the shareholders’ agreement ensures the minority partner has a say in strategic decisions. A broader discussion of how such disputes tend to escalate after a company is formed can be found in our article on disputes between company partners and preventive legal measures.
Why Should Share Transfer and Exit Terms Be Set Out in Advance?
If exit terms, share transfer procedures and the valuation method are not defined in advance, the parties are left to take these issues to court once a dispute arises.
In a two-partner trading company, when the Turkish partner wanted to grow the business while the Arab partner wanted to withdraw their investment, there was no provision setting out to whom, or at what price, the shares would be transferred. The process remained deadlocked for months until an independent valuation report was produced. Provisions such as a right of first refusal, tag-along rights and a defined valuation method prevent this kind of deadlock; the mechanics of this process are explained in detail in our article on a foreign investor’s exit from a company through share transfer and valuation.
Which Dispute Resolution Mechanism Should Be Preferred?
The parties should determine in advance, within the contract, whether a dispute will be referred to the Turkish courts or to arbitration.
Some partnerships involving Arab capital prefer institutional arbitration, being more familiar with the commercial arbitration culture in their own region, while other partners find the Turkish courts more predictable in terms of process. Institutional frameworks such as the Istanbul Arbitration Centre, established in 2015, give the parties the option of conducting international arbitration within Turkey if they so choose. Whichever method is selected, the competent court or arbitral institution and the governing law must be stated explicitly in the contract; otherwise this very uncertainty becomes part of the dispute. We have covered the importance of ongoing legal oversight for similarly structured companies in more detail in our article on legal advisory services for Middle East-linked companies in Turkey.
The key points to consider when drafting a shareholders’ agreement for a company with foreign partners can be summarized as follows.
- Setting out separately the voting, information and approval mechanisms not covered by the articles of association
- Determining which language version governs the contract and which law applies
- Defining share transfer, right of first refusal and valuation method in advance
- Explicitly choosing between court proceedings or arbitration for dispute resolution
Each of these provisions tends to matter not when the company is formed, but typically when the parties want to go their separate ways. The shareholders’ agreement should therefore be viewed not as a formality completed on day one, but as a safeguard that comes into play at the company’s most critical moment.
In practice, the timing of the shareholders’ agreement is as important as its content. An agreement drafted while the company is still being formed, before any dispute has arisen between the parties, allows both sides to negotiate calmly. By contrast, raising these issues only after a dispute has already surfaced causes the parties to take adversarial positions and delays resolution. For this reason, it is advisable for a shareholders’ agreement in a company with foreign partners to be addressed together with the articles of association at the very outset of the incorporation process, or at the start of any major structural change (such as the admission of a new partner, a capital increase, or an expansion of the line of business).
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