• It is the spirit and not the form of law that keeps justice alive.
    Earl Warren

DISSOLUTION OF A JOINT STOCK COMPANY ON JUSTIFIED GROUNDS

Summary

The annulled Turkish Commercial Code numbered 6762 (“Old Code”) did not include any provision regarding the right to demand the dissolution and liquidation of a joint stock company on justified grounds. Nevertheless, Article 531 of the new Turkish Commercial Code numbered 6102 (“TCC”) has established a new minority right which entitled the minority shareholders of the joint stock companies (representing at least one tenth of the capital and one twentieth of the capital in publicly-held companies) with the right to request the court to dissolute and liquidate the company under justified grounds. In addition to that, alternative remedies are also acknowledged by the TCC and entitled the courts to decide on other reasonable solutions instead of dissolution and liquidation by adjudicating payment of actual values of minority shareholders’ shares in order to enable such shareholders to exit the company. As the alternative remedies are not exhaustively listed, the TCC left an open door for other alternative resolutions to be shaped by case law within the future years.

Procedure

The competent court is the commercial court of first instance and the burden of proof regarding the presence of justified grounds is on the plaintiff. The lawsuit for dissolution and liquidation of a joint stock company is a constitutive lawsuit and simple procedures of trial shall be applied. In case the claim of the minority shareholder is accepted by the court, the court decision in that respect shall proactively be binding for all the shareholders and be served as a definitive judgment. Although claims under Article 531 are not subject to any lapse of time, the claims which can be defined as claim of receivables arising from shareholders’ rights are subject to the statute of limitation of five years.

Justified Grounds

Justified grounds should be handled as a concept of termination of the continuous liability relationship according to the principle of good faith. The facts existed before the enforcement date of the TCC can also be put forward as an evidence for the justified grounds claimed by the minority shareholder. Moreover, the negligence of the board of directors is not required for existence of the justified grounds. Below are the particular examples to the justified grounds which are established by Swiss case law and Turkish doctrine:

(i) Violation of the Financial Rights:

  • Overtaking of all board membership by the majority shareholders;
  • The exaggerated salaries or per diem paid to the majority shareholders who are in the board of directors;
  • Granting loans and giving guaranties in favor of the majority shareholders favor and in a way that is detrimental to the company’s interest;
  • Refraining from profit distribution or regular decrease on the distributed profits;
  • Limitation of the preferential rights in contradiction to the principle of equal treatment without any justified grounds.

(ii) Violation of the Rights other than The Financial Rights

  • Direct or indirect violation of the right of the shareholder/representative to attend the general assembly;
  • Continuing violation of the preferential rights and individual rights, especially the right to request information and review;
  • Continuous and gross violation of the minority rights in relation to the participation at the management of the company;
  • Poor management and profit losses arising from such management;
  • Unlawful and repeated refusal of the notified demands of the minority.

(iii) Other Examples of Justified Ground

  • Rendering the purpose of company impossible;
  • Change of the corporate structure (merger, demerger, alteration of legal form).

Secondary Precaution

The dissolution of the company is an ultimate and exceptional legal remedy; hence application of it is regarded a last resort by the courts. It should only be implemented in cases where solution through more remote remedies, such as the annulment of a general assembly resolution or liability lawsuit, are impossible or continuation of the company cannot be imposed upon the minority shareholders even if the interests of the company’s employees and third parties are objectively and comprehensibly are considered. However, this should not be understood that dissolution and liquidation of the company may only be possible if all other alternatives are tried and wasted.

Principle of Proportionality

The dissolution and liquidation should be proportional when the consequences for the other shareholders (including the employees, creditors and the third parties) are compared with unjust treatment suffered by the minority shareholders. Therefore, the judge should mindfully evaluate the conflicting interests of the different parties (minority shareholders, majority shareholders, other shareholders, company employees and creditors etc.) while determining whether the grounds for the dissolution and liquidation are existent.

The Decision of Another Reasonable Solution

The judge, on his own discretion, may decide on another suitable solution instead of dissolution and dilution of the company regardless of any request submitted by the parties to the court in that respect. The facts of the relevant case and the balance of interests should be reasonable, proportionate and should also have an effective power of sanction in order for a court to decide on an alternative solution instead of liquidating the company.

i) Alternative solutions under the case law

  • Enabling minority shareholder to exit the company by selling his shares: Temporary acquisition of shares by the company over the actual value determined on the latest date before the decision and acquisition.
  • Partial demerger: Demerger of the company and incorporation of a new company where the minority shareholder will be the only shareholder and the capital of such company will be equal to the actual value of minority shareholder’s shares.
  • Amendment of the articles of association.
  • Partial liquidation.
  • Forcing the company to distribute profits.
  • Granting the right to be represented at or to be a member of the board of directors.
  • Termination of the guaranties given in favor of the majority shareholders.
  • Termination of the liability relationship (obligatio) between the company and the majority shareholders and repaying payments in that respect to the company.
  • Revocation of the board which caused the misuse of the control and violation of the minority shareholder’s rights and appointment of objective/disinterested third parties to the board by the court


Conclusion

To sum up the above-stated explanations, it can be concluded that, together with the enforcement of the TCC, the minority shareholders are now granted with a fundamental right to request the dissolution and liquidation of the company on justified grounds or, alternatively, exit the company by forcing the company to purchase their shares when their shareholding rights are exploited by the majority shareholders. As there is no exhaustive list with respect to the definition of justified grounds, case law decisions should be taken account and each case should be determined according to the facts of the concrete case. The decision of dissolution and liquidation is, on the other hand, regarded as a secondary precaution that should be decided in accordance with the principles of proportionality and by considering the conflicting interests of the different parties. As the alternative remedies are not limited with the statute, neither does with case law; it is most likely that they will further be shaped by case law within the upcoming years.

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