Shareholder activism in Turkey

Dunya Executive - - BUSINESS BY LAW - DR. UMUT KOLCUOĞLU MANAGING PARTNER KOLCUOĞLU DEMIRKAN KOÇAKLI ATTORNEYS AT LAW ukolcuoglu@kolcuoglu.av.tr

Shareholder activism is on the rise globally. Several new activist campaigns have been launched in recent years employing new strategies and tactics. We often hear about corporate battles in multinational companies initiated by activist shareholders but shareholder activism is not well known in Turkey. Still, it may be worth touching on this concept and elaborating on how shareholder activism may emerge in Turkey in the context of corporate law.

“Shareholder activism” is defined as actions of shareholders who attempt to use their shareholding rights to influence a company’s activities or bring change within the company. Activist shareholders tend to intervene in the company’s management by putting pressure on the board and executives. The motives driving such intervening activities are generally financial, such as to maximize the company’s potential and increase profit. Activist shareholders may also interfere with the management to alter the company’s environmental, operational or social policies in line with the shareholders’ ethical or political views. Shareholders may also conclude that the management is doing a poor job and attempt to gain control of the company and replace its leadership or force a major corporate change.

This pressure may appear in various forms. For instance, activist shareholders may try to gain control of the board, to remove all board members or to change the company’s entire management policy. The level of pressure and involvement depends on the investor type. Institutional investors and hedge funds are the most assertive and domineering shareholders, often forcing wholesale changes to board members in the pursuit of policy which they believe will attract high profit in short term. Shareholders in publicly held companies usually opt to lobby for other shareholders to withhold their votes from certain board member candidates. The lightest level of pressure is in having a say on remuneration, where shareholders influence board members by using their power to alter their financial benefits.

Shareholder activism can affect companies positively. If management cooperates and creates a joint strategy with activist shareholders, the activism has the potential to benefit the company and strengthen its financial and social status. However, in practice the opposite occurs. The shareholders’ intervention causes upheaval in the company. If management disagrees with the shareholders, it will passively or actively resist and cause conflict in the company. This conflict may force other shareholders to take a stand, which may block the company’s decision making processes and trigger chaos.

Under Turkish corporate law, the board of directors is the ultimate corporate body authorized to carry out the company’s day-today business. The Turkish Commercial Code creates a buffer between shareholders and board members by removing the requirement of being a shareholder in the company to become a board member, which has enabled the implementation of professional management teams. Thus, if a shareholder is not a board member, he or she can only be involved in high-level management during the general assembly meetings and in limited circumstances outside the meetings.

One may wonder why shareholders would want to further intervene in the company’s management given the general assembly, composed of shareholders, holds the exclusive power to appoint and dismiss board members. Shareholder activism is not always a collective action of the shareholders but rather “lobbying” by a small group of shareholders who cannot form the majority at the general assembly. Under Turkish law, a shareholder, not being a board member, has certain limited rights stemming from his or her shareholding, which may be used as a tool for shareholder activism. A shareholder may attend the general assembly meetings, cast votes, request information from the management on the company’s activities or request a special audit. If a shareholder or group of shareholders hold at least 10 percent of the shares in joint stock corporations (5 percent in publicly held companies) the Turkish Commercial Code gives them further shareholding rights such as calling for a general assembly meeting, inserting items into the meeting agenda and the right to be represented at the board.

While all these shareholding rights do not enable the shareholder to interfere in day-to-day operations, force the board members to resign or have the board take decisions in line with the shareholder’s views, they may trigger shareholder activism in the company and influence the board or executive management’s actions. Turkish corporate law does not set out any protections against these interventions or lobbying activities, which may end up creating chaos in management. If the company becomes the target of such activist movements, it should carefully consider the activist shareholders’ proposals and address the issue by engaging with other shareholders before or during a general assembly meeting.

Activist movements are rarely seen in Turkey as most companies are small-scale, family-owned businesses. Low percentages of free float in publicly held companies also limits activist movements among shareholders. However, if the investment climate becomes more structured in Turkey, the need for legal reform in this area may emerge in the near future to avoid the potential downsides of shareholder activism.

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