When providing financing, the credit & finance institutions, i.e. banks, require the party, seeking the utilization of loan, to provide themselves with several securities. In such finance transactions, the banks require the individuals or corporations, who/which request an amount of loan from the bank, to sign guaranty, mortgage, assignment, insurance agreements as securities, along with the loan/credit facility agreements. In case the party to receive the loan is a joint stock company, the banks also usually require the borrower company to pledge their shares in favor of the bank against the requested capital to be loaned.

Legal Base of Share Pledges under Turkish Law

Generally, pledge is a right that gives the creditor the right to collect the receivable by converting the value of the pledge into money, in case the debtor (i) does not duly perform their obligation or not at all or (ii) performs their obligation partially.

Turkish law does not specifically regulate any provisions on share pledges of corporations. This being the case, the general provisions of pledge are applied, which have been regulated under Turkish Civil Law1 ("TCL"), for the establishment of pledges on the shares of corporations.

When it comes to the corporations acting as pledgors, the provisions of the pledge in movable properties are applied as provided in Article 939 of TCL. Accordingly, pursuant to 954 of the TCL, the pledge of shares of joint stock companies is established on the rights of the shareholders. In accordance with Article 960 of the TCL, the authority to represent the pledged shares at the general assembly meetings of the shareholders belongs to the shareholders, not the pledgees. On the other hand, however, the provision provided under Article 427 of the Turkish Commercial Code2 states that the shareholders' rights can be assigned to the pledgees with the pledged shares by the execution of an agreement to such effect. Therefore, provided that an agreement exists between the parties, the right to vote or participate to the general assembly meetings can be transferred to the pledgee, while it is not possible for the parties to a share pledge agreement to transfer any other shareholders' rights, which cannot be converted to money.

Establishment of the Share Pledge

Pursuant to Article 955 of TCL, the conditions for the establishment of the share pledges are different for the shares, for which the certificates have been issued, and the shares without any certificates. Accordingly, in order for the pledge to be duly established over the shares having share certificates, the share certificate shall be transferred by the pledgor to the pledgee; and execution of a share pledge agreement would not constitute the establishment of the pledge, but would only constitute obligations to be fulfilled by both parties.

On the other hand, the execution of a share pledge agreement in writing shall mean the establishment of the pledge over the shares, for the ones which do not have any share certificates.

The shares of a joint stock company can be certified in two (2) different ways: (i) bearer shares, (ii) registered shares.

  1. When the shares have bearer share certificates:
    In accordance with Article 956 of the TCL, the delivery of the issued share certificates to the pledgee satisfies the condition for the establishment of the pledge over the shares with bearer share certificates. The delivery here means the actual transfer of the bearer share certificate's possession to the pledgee. In this case, the annotation of the pledgee in the share ledger and the notification by the pledgee to the company are not required for the duly establishment of the pledge.
  2. When the shares have registered share certificates:
    For the establishment of a pledge over a share, for which a registered share certificate has been issued, the delivery shall be made through an endorsement of pledge, which may be attested on the share certificate by stating "the worth herein is pledged" or "the worth herein is warranted" or with a blank endorsement, or there should be a written declaration for the transfer of the registered certificate along with the delivery of the certificate.

Crucial Points to Consider When Signing Share Pledge Agreements

In loan transactions, the banks generally require a Share Pledge Agreement to be signed by the parties prior to the establishment of the pledge. In such agreements, the banks, as the pledgee, usually require all rights of the pledgor relating to the pledged shares, including but not limited to the voting rights (except for the property rights), to be exercisable by the pledgee and not the pledgors, although such rights are not transferred automatically by law if the parties do not agree for such in writing. When they agree to do so, the banks, as the pledgee, usually draw provisions in the agreements, with which following the demands of the pledgee in this respect, the pledgor becomes obliged to give power to the pledgee in order for the pledgee to use their voting rights, and the banks become entitled to exercise the voting rights as they deem fit in their sole and absolute discretion.

The banks can also restrict the pledgor specifically on their rights to use their shares freely. As an instance, in some cases, the pledgors shall not vote to decrease the share capital of their company or shall not take any action in this respect without the prior written consent of the pledgee. Also, if and when agreed, the pledgee can restrain the pledgor on selling, assigning, transferring, exchanging or otherwise disposing of, or agreeing to sell or otherwise benefiting from all or any of the pledgors' rights including the priority rights to subscribe to any capital increase of their company and any interest in and/or to the pledged shares.

Since the foregoing instances can be included in agreements, the pledgor as the legal owner of the shares, must be very careful when signing the share pledge agreement, because if they fail to meet their obligations and go into default, the banks, as the pledgee, may enforce the pledge and sell the pledged shares or any part thereof in part or in entirety, along with using any or all rights granted to them under the provisions of the relevant share pledge agreement.


1. Turkish Civil Law; numbered 4721 and dated November 22, 2001, published in the Official Gazette numbered 24607 and dated December 8, 2001.

2. Turkish Commercial Code; numbered 6102 and dated January 12, 2011, published in the Official Gazette numbered 27846 and dated February 12, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.