Start-Up Series #3 of 4 – Shareholder’s Agreement for Start-Up

Recently, we came together with startups and entrepreneurs through many different centers. Each of the entrepreneurs has valuable ideas, the determination to magnify those ideas and unlimited potential, but there are many obstacles before them in reaching their full potential. To solve these obstacles easily, you need to build your project and/or your idea on solid grounds. The first step of this is to prepare more carefully the “Shareholders’ Agreement” to be signed between you and your companion/partner. Here in this article, we are writing to provide information on how to regulate the Shareholders’ Agreement.

  1. What’s Shareholders’ Agreement?

Partnership refers to the structure created by one or more real or legal persons to achieve a commercial purpose per the Turkish Commercial Code. The shareholding structure in Turkey is mainly based on the trust relationship is being established orally, based on this trust structure is caused by the uncertainties that occur when things do not go according to the plan. The easiest way to overcome such controversial processes with the least damage; is to create a basic written resource that shows how to solve problems, which partner puts which value to the enterprise, and generally how and by whom all business and transactions related to the enterprise will be carried out. The name of this written source is; Shareholders’ Agreement.

Shareholders’ Agreement; from the very beginning of the startup adventure, even without establishing a company, the distribution of rights, obligations and responsibilities of the partners, the cooperation required for the growth of the startup, regulating which rights of the startup will be held when the partnership is liquidated, and regularly dealing with the disputes between partnerships through the eyes of a lawyer; it is the most valuable contract that can be signed regarding the partnership. Besides, since the company’s articles of association are subject to certain restrictions within the framework of the Turkish Commercial Code, the contract in which the relationship between the partners can be clearly expressed is the Shareholders’ Agreement.

  1. Which Issues Can Be Regulated with the Shareholders’ Agreement?

Every issue from A to Z regarding the partnership can be regulated by the shareholders’ agreement. How your enterprise will be incorporated, how much capital will be invested and what its share will be in the company, how industrial rights such as trademarks and patents can be managed, how profits will be distributed, how your venture will be represented in front of third parties, how it will be managed, and which issues can be taken unanimously are some of the topics that can be organized within the framework. Apart from this, how the partnership will be terminated and how the material and moral values can be shared are among the other important issues that should be regulated within the framework of Shareholders’ Agreements in general. In addition, the penalties to be paid in the event that the partners do not fulfill certain obligations within the framework of the Shareholders’ Agreements or the roles they should take in the later stages of the initiative may be included in the contract.

Therefore; a partnership that takes the first steps of its initiative by creating a brand without establishing any company; will be able to regulate who will register the trademark, that if this person becomes a corporation and the enterprise becomes a joint stock company, he has to transfer this trademark to the company, and if this transfer does not take place, how much compensation he should pay to other partners.

  1. Benefits of the Shareholders’ Agreement to Partners

While every initiative takes its first steps with hope and high trust between the partners, it is a common situation that conflicts arise between the partners as the process progresses. Therefore, it is of great benefit to basing the venture activities on a legal basis by signing a Shareholders’ Agreement in the first step towards partnership.

The biggest advantage in this context is that the existence of a written document that regulates the rights and obligations of the parties will provide great benefit and confidence in determining the management, order and strategy of the company, as well as in the possibility of a conflict between the partners. In addition, one of the biggest obstacles overlooked within the framework of the Shareholders’ Agreement in practice is the determination of the share distribution between the partners clearly and precisely from the first moment. This issue will also be of great benefit when the enterprise enters the incorporation process. In addition, one of the important benefits of the partnership agreement is how the share structure of them will be formed in case of joining of new partners in the future, or the conditions under which a partner will leave the company in case of leaving the company.

An important issue overlooked in the Shareholders’ Agreement is that it is not determined which partner is responsible for which issues. For example, if a partnership established between A and B or the company is represented only with the joint signature of A and B, it will naturally be ensured that the partners do not do anything unaware of each other. In another possibility, in a contract in which A has the obligation to develop the idea of the initiative and B has the obligation to fund it, the partners have the right to demand each other to fulfill these duties.

  1. Why Initiatives Should Be Incorporated?

Throughout the entire article, we talked about the necessity for each enterprise to sign a Shareholders’ Agreement and incorporate it at some point, if possible, at the first moment, so why is incorporation important?

Incorporation is above all a protective ground to ensure that the debts of the partnership remain above the legal personality of the partnership, not the person of the partners. In this direction, it acts as a lifeline for entrepreneurs when the partnership has become unable to pay debts, when it needs to be terminated. Indeed, a partnership; without establishing a joint stock company or a limited company, when it becomes deep in debt, the related debts may be demanded from the partners themselves, in other words, it will be possible for the partner to be liable for the debt with its own assets. However, the debt of a partner in a capital company will be limited by the capital commitment. So; in a company established with a capital of 50.000.-TL, A will not be liable with its own assets for any debt of the company after paying the amount (25.000.-TL if an equal share distribution is envisaged).

  1. Pre-Purchase Rights – Concessions and Aggravated Quorums

Some of the rights that are frequently included in the partnership agreement and that lead to the execution of the company structure in accordance with the will of the parties are pre-emption rights, privileges and aggravated quorums.

If these terms should be explained briefly; right to pre-purchase; in the event that a shareholder wishes to sell his shares, it is the first to give the other shareholders the right to offer the share transfer. Prerogative; it is the privilege that can be granted to some share groups and/or shareholders in the election of members of the board of directors and representation of the company, in voting, in profit distribution, in the rights to benefit from the liquidation share, or pre-purchase rights. Aggravated quorum; it is a regulation that connects a decision to be taken with an aggravated vote ratio and enables shareholders to make joint decisions in important activities of the company.

To exemplify the terms for easier understanding; let’s consider a limited or joint stock company established by A and B. Let A and B regulate the pre-purchase right in the contract they have signed between them. In this case; if A wants to sell his shares in the company for 50,000.- TL, he is obliged to give B the right to buy the shares for this amount before the sale. Therefore, it will be possible to purchase the shares by B and prevent the involvement of a third party that is not wanted by B in the venture.

In the example of dividend privilege provided by the articles of association; since B provides all the funding from the first moment of the enterprise, in case, the company distributes dividends; it may have the privilege of receiving more than the amount of its share.

In the case of aggravated quorum; in the event that capital increase in a company in which A, B and C are shareholders in equal proportions is unanimous; by taking this decision, two of the partners are prevented from reducing the share of the third partner in the company.

In this context, joint sales, forced sales, penal clauses and many different provisions are among the regulations that can be included in partnership agreements.

  1. Conclusion

The Shareholders’ Agreement is a very important contract that enables the initiative to take the first steps in accordance with the law, regulates the management, strategy, and the rights of the ventures against each other, determines the share structure of the venture, and blocks any future disputes. Therefore, the sine qua non of any initiative that aims to take its steps and reach its potential is the existence of a partnership agreement that regulates the relationship between partners. Finally, given the different nature of each initiative, it should be reminded that there is a great benefit in obtaining legal support in the arrangement of the partnership agreement.

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