Actions to Enforce Minority Shareholder Rights under Turkish Commercial Code

Introduction

Joint stock company (=anonim şirket) is described in Turkish Commercial Code (Law numbered: 6102 – OG 14/2/2011, 27846) as a company whose capital is predetermined and divided into shares and whose liability for its debts is limited to its assets.

Joint stock companies are beneficial to many such as shareholders, employees, creditors, other business entities, customers/consumers, governments. So, these entities must be protected from all kinds of risks and dangers as much as possible. Disputes inside the company also threat the wellbeing of it. One of the main disputes arising in joint stock companies is “minority-majority dispute”. This conflict arises mainly because of discriminatory actions of majority.

Turkish Commercial Code (=TCC) like all other commercial codes in the world, stipulates that the majority of shares is necessary and enough to take decisions in general assembly meeting and board of directors meeting (TCC art. 418, 390). Majority decides to elect board members, increase share capital, distribute dividends etc. The company is controlled by the majority and it misuses this position quite often. Majority excludes minority from decision making process, does not elect minority as board members, minority shareholders are not employed in the company and company does not share information with them and dividend/profit is not distributed properly. Majority, also, tries to dilute the share percentage of minority by way of increasing share capital.

Considering the difficult position of minority in the company, we should look at the options minority might have to enforce its rights. Minority shareholders have some legal options to get and sustain their rights. Some of the rights and power are solely given to a particular minority (10% of all shares) and others are given to any shareholder regardless of the number of shares.

Minority may also use these rights and powers to force or persuade majority to compromise and either to stay in the company by some protection or leave the company by getting the real value of their shares.

Firstly, let’s have a look at the rights and powers which are given to minority shareholders who have at least 10% of all shares (this is 5% in publicly held joint stock companies).

Rights and Powers of Minority Shareholders Who Hold at Least One-tenth (10%) of the Capital

• Convocation of the General Assembly Meeting

Shareholders, who hold at least one-tenth of the capital, (in publicly held companies, one-twentieth of the capital) may request the board to call a general assembly meeting by specifying, in writing, the reasoning and agenda thereof or, if the general assembly has already decided to meet, they may request the items, which they wish to resolve on, be included in the agenda. Shareholders, who hold a lower capital proportion, may be entitled to the right to call a meeting by the articles of association (TCC art. 411/1).

If the board agrees to call a meeting, the general assembly shall be called on to hold a meeting no later than forty-five days; otherwise, the requesting shareholders shall call a general assembly meeting (TCC art. 411/1).

If the board rejects the request to call a meeting or include certain items to the agenda or if the board does not approve the request within seven business days; the commercial court of the company’s domicile may, at the request of the same shareholders, order convocation of the general assembly. If the court requires a meeting, an administrator shall be appointed to set an agenda and call a meeting according to the provisions of the Law. In its ruling, the court shall determine the duties of the administrator and powers for preparation of the necessary documents for the meeting. Unless it is obligatory to hear an oral argument, the court shall render a decision without hearing an oral argument. The court’s judgment on this matter is definitive (TCC art. 412/1).

• Postponement of Meeting

Upon request of the shareholders, whose holding in aggregate equals one-tenth of the capital (in listed companies, one-twentieth of the capital), discussions on the financial statements and matters related thereto may be postponed for a month by the decision of the chairman without having to pass a general assembly resolution. The postponement shall be notified to the shareholders via an announcement as specified in Article 414 (1) and shall be published on the website. The second meeting shall be called in accordance with the procedure provided by the law (TCC art. 420/1).

• Right to request a special audit

Where necessary for exercise of shareholding rights, any shareholder may request the general assembly to have specific matters, even if they are not on the agenda, clarified by means of a special audit provided that he has already exhausted his right to information or inspection. If the general assembly approves this request, the company or any shareholder may apply to the commercial court of the company’s domicile within thirty days for appointment of a special auditor (TCC art. 438).

If the general meeting rejects the request, shareholders whose holding in aggregate equals at least one-tenth of the capital, (in publicly held joint stock companies, one-twentieth of the capital) or the shareholders, whose shares in the nominal value of at least one million Turkish Lira, may apply to the commercial court, within whose territory the company’s registered office is located, within three months for appointment of a special auditor. The applicants shall be entitled to have a special auditor appointed if they make a persuasive case that the founders or the organs of the company have violated the law or the articles of association and thereby harmed the company or the shareholders (TCC art. 439).

• Issuance of Share Certificates

If the minority so requests, the registered share certificates shall be issued and delivered to the owners of registered shares. (TCC art. 486/3).

As far as bearer shares are concerned, the board shall issue the share certificates and distribute them to the shareholders within three months from the date their prices are fully paid. Board resolution regarding issuance of bearer share certificates shall be registered and announced and then, published on the company’s website. Information on bearer share owners and their shares shall be given to Central Registry Agency before the certificates distributed to shareholders. Interim share certificates may be issued until the share certificates have been issued. Provisions applicable to registered share certificates shall apply, by analogy, to interim certificates (TCC art. 486/2).

• Dissolution due to Just Cause

If there is a just cause, the shareholders representing at least one-tenth of the capital (in publicly held joint stock companies, at least one-twentieth of the capital) may apply to the commercial court, within whose territory the company’s registered office is located, for dissolution of the company. The court may order, instead of dissolution, that the claimant shareholders be paid the real value of their respective shares (values as at the closest time to order) and expelled from the company or any other solution as appropriate and acceptable for the specific case (TCC art. 531).

Rights and Powers of Any Shareholder

• Right to Information and Inspection

No later than fifteen days prior to the general assembly meeting, financial statements, consolidated financial statements, annual activity report of the board, audit reports and profit distribution proposal of the board must be made available for inspection by the shareholders at the registered office and branch offices of the company. Among these documents, financial statements and consolidated financial statements shall be kept available for one year for review of the shareholders at the registered office and branch offices of the company. Any shareholder may request that a copy of the income statement and balance sheet be given to him at the cost of the company (TCC art. 437/1).

At the general assembly meeting, any shareholder may request the board to provide information regarding the company’s business and may request the auditors to provide information regarding the methods and results of the audit. The duty to provide information also applies to the controlled companies of the company as per Article 200. The information provided must be true and diligent within the context of the honesty and accountability principles. If a shareholder is given information on a matter out of the general assembly meeting by virtue of his capacity as a shareholder, the same information shall be provided to any other shareholder upon request to the same extent and detail, even if it is not an agenda-related information. In such a case, the board shall not have the right to apply paragraph (3) of this Article (TCC art. 437/2).

Information provision may only be refused where it would result in disclosure of company’s trade secrets or jeopardize other interests warranting protection (TCC art. 437/3).

In order for a shareholder to inspect the commercial books and communications of the company inasmuch as they are related to the shareholder’s inquiry; the general assembly must explicitly approve it, or the board must pass a resolution in respect thereof. Upon approval, the inspection may alternatively be carried out by an expert (TCC art. 437/4).

If a shareholder could not obtain information within the context of this paragraph since his request for information or inspection have remained unanswered or denied or delayed unjustly, he may apply to the commercial court of the company’s domicile, within ten days after the denial or, in other circumstances, within a reasonable time. The application shall be processed according to the simple trial procedure. The court may order the information be provided outside the general assembly meeting and the method thereof. The court’s judgment on this matter is definitive (TCC art. 437/5).

The right to information and inspection may not be cancelled or limited by the articles of association or a resolution passed by an organ of the company (TCC art. 437/6).

• Cancellation or Nullity of General Assembly Resolutions 

Another way of affecting the decision making process of majority is challenging the general assembly decisions by filing a lawsuit in the court. Let’s say, majority wants to proceed with increasing share capital so that there will be dilution of shares on part of the minority. The probable action against this resolution in court may affect this decision.

Any shareholder who was present at the meeting and voted against the resolution and then had his objection recorded in the minutes, may challenge the general assembly resolutions, which violate the law or the articles of association or especially the principle of honesty, by filing a lawsuit for cancellation against the company before the commercial court of the company’s domicile, within three months from the resolution date (TCC art. 445, 446).

Any shareholder (whether voted negatively or not), who claims that; the meeting was not duly called, or the agenda was not duly announced; or unauthorized persons have participated in the meeting in person or by proxy and cast votes therein; or he was unjustly prevented from participating in the general assembly meeting and voting; and the general assembly resolution has been adopted due to presence of the foregoing illegalities may initiate legal proceedings, too.

Other than cancellation of general assembly resolutions, another option is nullity of decisions. General assembly resolutions shall be null if they: a) remove or restrict the right to participate in general assembly meetings, the minimum voting right, the right to sue or any other inalienable right provided by law, b) restrict a shareholder’s right to information, inspection and control beyond the legally permissible degree, or c) disregard the basic essentials of joint stock companies or violate the provisions on capital protection (TCC art. 447).

Where a general assembly resolution is challenged by filing a lawsuit for cancellation or annulment, the court may, having heard the board members, decide on rescission of that resolution (TCC art. 447).

• Nullity of resolutions of Board of Directors

The validity of board resolutions may be challenged before court. In particular, resolutions which, a) are in breach of the principle of equal treatment, b) are not in compliance with the basic essentials of joint stock companies and do not safeguard the principle of capital protection, c) are in breach of the rights -in particular the inalienable rights- of the shareholders or restrict or hamper their exercise, d) fall within the non-delegable authorities of other organs and pertain to delegation of these authorities shall be deemed null and void (TCC art. 391).

• Dissolution of the Company due to Lack of Organs

If, for a long time, one of the statutory organs of the company has been absent or the general assembly has been unable to convene; upon request of the shareholders, creditors of the company or the Ministry of Customs and Trade, the commercial court of the company’s domicile shall, having heard the board, give time for the company to make the situation compliant with the law. If the failure cannot be fixed within the specified time, then the court shall decide on dissolution of the company. Once the lawsuit is filed, the court may order establishment of necessary measures upon request of either party (TCC art. 530).

• Dividend Distribution

In joint stock companies, general assembly is authorised to decide on distributing dividend or not (TCC art. 408/2-d). It is argued whether the courts may decide the dividend to be distributed upon application of shareholders even when there is no such resolution of general assembly. In many decisions of the court of appeal, it is said that the courts cannot decide on dividend distribution although there are a few decisions saying otherwise. Even in this legal situation, we advise minority shareholders to act in this regard to kind of pressure majority.

• Lawsuit Against Board Members

Board members and third parties in charge of the management are obliged to perform their duties prudently as expected from a prudent director and safeguard the interests of the company in compliance with the principle of honesty (TCC art. 369/1).

Lawsuit against board members is one of the most effective ways of pressure on majority since board members are elected by majority. Most of the times, majority shareholders are board members, themselves.

If board members negligently breach their obligations stipulated by law and the articles of association, they shall be liable both to the company and to the shareholders as well as the creditors of the company for the damage incurred therefrom (TCC art. 553/1).

Any shareholder shall be entitled to claim compensation for the losses incurred by the company. In this respect, a shareholder may only demand that the compensation be paid to the company (TCC art. 555/1).

Where more than one person is liable to recoup the same loss, each shall be liable for that loss jointly with the others, to the extent that the loss is personally attributable to him depending on his negligence and as the case may be (TCC art. 557/1).

The general assembly resolution on discharge shall prevent the shareholders, who have voted for the discharge or acquired shares despite being aware of such resolution, from taking action against the material facts explained in the resolution on discharge. Other shareholders’ right to take action shall be time-barred six months after the discharge date (TCC art. 558/2).

• Temporary Injunction – Appointment of a Trustee

In all above-mentioned proceedings, the plaintiff may also ask for temporary injunction from the court. As a temporary injunction, a trustee may be appointed to manage and represent the company. This may be called as “managing trustee”. The courts may appoint a trustee to supervise the operations of the company. Other than that, the court may prohibit the company to sell any of its assets especially real property and other registered assets such as vehicles.

• Conclusion

Lawyers who represent minority shareholders in a dispute must observe the persons involved with it very carefully and form a good strategy to achieve determined goal. They must go over all the actions minority may take one by one and decide on timing of the actions. The reaction of the majority shareholders also must be calculated. All the actions must be aligned with each other in regard to timing and consistency. The goal is to force majority to compromise to buy out the minority as paying real value of shares to them or a balanced relationship in the company by applying certain mechanisms such as increasing quorums, providing privilege to minority to appoint certain board members, special exit rules and distribution of certain part of net profit.

In any case, we strongly advice all shareholders (some of them shall take minority position in the company) to have a shareholder’s agreement which provides minority with more power. This will prevent many of the possible future disputes before even they arise.