Rejection of Share Transfer Approval: The Approach of the Court of Cassation

Dispute Subject to the Decision

The dispute brought before the Court of Cassation consists of two consolidated lawsuits.

In the event underlying the dispute, the plaintiff company sought to exit the partnership by transferring all its Group C shares, corresponding to 21.68% of the share capital of the defendant company. After fulfilling the notification obligation stipulated in the shareholders’ agreement, the plaintiff executed a share transfer agreement with a third-party company.

However, at a later board of directors’ meeting, the request for approval of the share transfer and its registration in the share ledger was unanimously rejected. In the first lawsuit, it was alleged that the rejection of the share transfer was unlawful.

In the second lawsuit, filed by the third-party company that was not a shareholder but intended to acquire the shares, it was argued that the board of directors had not been duly constituted since no member representing Group C shares attended the meeting, and therefore the board resolution rejecting the share transfer was null and void. It was further claimed that no valid rejection decision had been adopted within the statutory period.[2]

Decision of the Court of First Instance

The defendant company argued that the shareholder profile was of material importance and that this was regulated in the articles of association. It asserted that a person previously nominated by the plaintiff company as a board member but not elected is also the manager and owner of the company to which the shares were intended to be transferred, rendering that company a competitor. The defendant relied on a provision in the articles of association allowing the rejection of share transfers contrary to the shareholders’ agreement and requested dismissal of the lawsuits.

The court did not accept the plaintiff’s argument that the shareholder profile was only relevant at the establishment stage of the company. Although the company was established in 2005, the relevant provision of the articles of association was amended in 2017 and approved by the plaintiff company. Accordingly, the court concluded that the shareholder profile still carried importance. The court also determined that, pursuant to Article 490 of the TCC, the articles of association required unanimous approval of the board of directors for share transfers. Even if the member representing the Group C shares had cast a negative vote in the concrete case, unanimity could not have been achieved.

The court concluded that the reasons relied upon by the defendant company for refusing approval constituted just cause for rejection of the share transfer and dismissed both the principal and consolidated lawsuits.

Decision of the Regional Court of Appeal

The Regional Court of Appeal set aside the decision of the court of first instance, rendered a new judgment, and accepted both the principal and consolidated lawsuits separately. It recognized the validity of the share transfer and ordered its registration in the share ledger. The Regional Court of Appeal based its decision on the following grounds:

Validity of the Board of Directors’ Resolution

There was no board member representing Group C shares on the defendant company’s board, as a different candidate had been elected instead of the one nominated by the Group C shareholder (the plaintiff). Under the articles of association, the attendance and participation of a member representing Group C shares was required for board meetings in which approval of transfers of registered shares would be discussed. Since the request for approval of the transfer of registered shares was decided at a meeting held without the presence of a Group C representative, the resolution was deemed null and void.

Three-Month Statutory Period

Article 494/3 of the TCC follows as, “If the company does not reject the request for approval within three months from the date of receipt, or if the rejection is unjustified, approval shall be deemed to have been granted.” As the defendant company did not duly reject the request for approval of the share transfer, it was concluded that the transfer had been deemed approved.

Regulation of Just Cause in the Articles of Association

According to the justification of Article 493 of the TCC, just causes stipulated in the articles of association must fall within the categories specified by law and must be concretely formulated in line with those statutory grounds. Although the defendant company’s articles of association stated that shareholders play an important role in the company’s growth, success, economic independence, continuity of operations, and the protection of the shareholder circle, they did not regulate the specific conditions under which approval of a transfer could be denied.

Shareholders’ Agreement

The reference made in the articles of association to the provisions of the shareholders’ agreement was not deemed valid. Grounds requiring the rejection of approval for a share transfer must be explicitly set out in the articles of association. Due to the principle of privity of contract, the shareholders’ agreement could not be asserted against the plaintiff in the consolidated case.

Absence of Just Cause

Although the rejection decision emphasized the protection of the composition of the shareholder circle, this was found not to have been sufficiently concretized within the scope of Article 493 of the TCC. The articles of association did not contain a just cause requiring refusal of approval for the acquisition of shares by the plaintiff in the consolidated case.

Decision of the Court of Cassation and the Dissenting Opinion

The 11th Civil Chamber of the Court of Cassation found no violation of law in the decision of the Regional Court of Appeal and upheld it by majority vote.

One member of the Chamber dissented and stated, in summary, the following grounds in the dissenting opinion:

• The articles of association stipulate that the approval of all shareholders is required for a share transfer to be valid. However, the same unanimity requirement does not apply to the rejection of a share transfer. In other words, although the articles of association subject the approval of a share transfer to unanimity, they do not impose such a condition for its rejection. The member of the Court of Cassation stated that this distinction is clearly evident from both the wording and the purpose of the articles of association and therefore found the Regional Court of Appeal’s assessment—that unanimity was also required for the rejection of a share transfer—to be erroneous.
• The articles of association emphasize the importance of the identity of shareholders for the company’s economic independence and impose restrictions on share transfers accordingly. It was established that a person previously nominated as a board member by the Group C shareholder later became a shareholder of the company to which the shares were intended to be transferred. The dissenting judge argued that, given the importance of trust and willingness to work together, the rejection of that nominee had already been finalized as lawful, and therefore rejecting the transfer of shares to a company in which the same person was a partner clearly constituted just cause based on the company’s independence, trust relationship, and competition concerns.
• The dissent criticized the Regional Court of Appeal for simultaneously declaring the board resolution null and void and concluding that approval was deemed granted due to the absence of a decision within three months, noting that it is practically impossible to expect a decision within three months from a board that is considered non-existent.

Assessment and Conclusion

The decision confirms that the company’s power to approve or reject the transfer of registered shares is neither absolute nor discretionary. Pursuant to Article 493 of the TCC, rejection of a share transfer must be based on a just cause stipulated in the articles of association or accompanied by an offer to acquire the shares at their real value. The Decision is significant in clarifying the limits of the board of directors’ authority and is of a guiding nature regarding the balance between company interests and shareholders’ rights. For family-owned and non-public joint stock companies, where share transfer restrictions are frequently debated in practice[3], the Decision provides important guidance on how the balance between company interests and shareholders’ rights of ownership and disposition should be established.