Although the squeeze out right has a longstanding presence in the international legal system, it has been introduced into Turkish Law for the first time with the New Turkish Commercial Code ("TCC") No. 6102 under Article 2081 of the TCC. The aforesaid right has been regulated under the general provisions regarding the commercial companies within the TCC and may also be used for corporate groups.
Purpose of the Regulation
The right approach for presenting the purpose of the controlling shareholder's squeeze out right may be through the subject of the controlling-minority shareholder(s) relationship. In this respect, the main purpose of this regulation is to provide for the efficient management of the business in question with fewer obstacles and costs, through the purchase of shares of the minority, who has not been an efficient part of the company, at a reasonable price, by the majority shareholder2.
Terms of Exercising the Squeeze Out Right in Turkish Law
a) The Controlling Company holding at least 90% of the shares and voting rights within capital companies
As per Article 208 of the TCC, the controlling company that would like to use the squeeze out right should directly or indirectly hold at least 90% of the shares and voting rights of the capital company. Since the squeeze out right can solely be implemented by a court decision, this percentage must be preserved until the date of the court decision3. On the other hand, share and voting right criteria shall be taken into consideration together while calculating the ratio determined by TCC. From the perspective of exercising the squeeze out right, it does not matter how the ratio is exceeded. Consequently, the ratio may be exceeded by methods such as dealing with the target company, collecting shares from the market, tender offer etc.4
b) Prevention of operation of the company by minority shareholder(s)'s actions against good faith
The minority shareholder(s) might abuse their provided minority rights in order to obtain benefits that are disproportionate to their legal status. To that end, they may file lawsuits regarding the annulment of general assembly resolutions, they may choose to not attend the meetings when the qualified majority is required to do so, or they may obstruct the decision making process by continually voting against resolutions. The behaviours which may result in a squeeze out of the minority shareholder(s) are illustrated through examples under Article 208 of the TCC. According to this provision, the controlling shareholder may apply to the court for the squeeze out of the minority shareholder(s), if the minority shareholder(s) prevent the company from running its business, do not act in good faith, create perceptible disruption or act in a reckless manner. The judge may evaluate whether the said actions are against good faith or not and the controlling shareholder shall have the burden of proof during the litigation.
c) Purchase of the Minority Shares
The share value to be paid to the minority shareholder(s) determined by the court is taken into consideration by the TCC when the controlling shareholder exercises its right of squeeze out. Article 208 of the Turkish Commercial Code states that, if available, the controlling shareholder may purchase the shares of the minority shareholder at stock-exchange value, and if such a value does not exist, they may be purchased at the value stated under Article 202/2. The second clause of Article 202 states that while the share value may be determined through the stock-exchange value, if this is not possible or if the stock exchange value does not correspond to a fair value, the share value may be determined through the net value (the balance sheet value)5, or through a value to be determined based on a commonly accepted method.
d) Decision of Squeeze Out and Transfer of Shares
Pursuant to Article 208 of the TCC, in the event of the specified conditions met, the controlling shareholder shall apply to the court for the squeeze out of minority shareholder(s). Therefore, during the process, which is started by the controlling shareholder filing a lawsuit against the minority shareholder(s), the court shall examine two important points and render a positive judgment. The first of these points is whether or not the ratio determined by TCC is exceeded by the controlling shareholder, and the second point is whether or not the minority shareholder(s) acted against the good faith principle through some unfavourable actions. In cases where these two conditions are met together, the court may rule for the squeeze out of the minority shareholder(s). Together with this decision, the shares belonging to the minority shareholder(s) will be transferred to the controlling shareholder. Apart from that, upon transfer of the minority shares to the controlling shareholder, a regulation guaranteeing the payment of the share value payment to the minority shareholder(s) have not been set forth under Article 208 of the TCC. In other words, there is a danger that the minority shareholder(s) will not be able to get their share value after being squeezed out. In order to eliminate this kind of danger, we are of the opinion that the court should rule an interlocutory judgment about the payment of the share values within a determined time period and to a place of deposit determined by the court, before ruling the transfer of ownership6. Within this interlocutory judgment, a warning should also be stated that a non-suit sentence may be ruled by the court in case the share values are not deposited within the determined time period.
1 Article 208 of TCC – If the controlling company holds, directly or indirectly, at least 90 percent of shares and voting rights in a joint stock company and if the minority prevents the company from running its business, does not act in good faith, creates perceptible disruption or acts in a reckless manner, the controlling company can purchase the shares of the minority at stock exchange value, if any, or at the value determined in accordance with the method set forth in paragraph 2 of Article 202.
2 Aslan, Ayşegül, Hâkim Ortağın Azınlık Paylarını Satın Alma Hakkı (Squeeze-out Right), Sermaye Piyasası Kurulu Ortaklıklar Finansmanı Dairesi (Capital Markets Board Department of Corporate Finance), Yeterlilik Etüdü (Competence Study), Ankara 2005, p. 5.
3 There is no expression regarding the manner of exercising the squeeze out right in the text of the article. However, before the enactment of TCC No. 6102, within the draft dated November 2005, it is clearly stated that the right to purchase should be exercised through the court. Later, with the modification made by the Justice Commission, the expression "application to the court" has been removed from the text, and it is stated that the share value shall be determined according to Article 202/2 of the TCC. Hence, the provision text was adapted this way. Therefore, we are of the opinion that the right to purchase within the scope of Article 208 may only be exercised through court, due to the fact that the right enacted under referred Article 202/2 can only be exercised through the court, and, further, the supervision of the claimed just cause shall only be done by the court.
4 Çelik, Aytekin, Anonim Şirketlerde Ortaklıktan Çıkarılma (Squeeze Out in Joint Stock Companies), 2. Edition, January 2012, p. 226.
5 Real value is defined as the balance sheet value based on the possible sale value of the assets. Tekinalp, Ünal (Poroy, Reha/Çamoğlu, Ersin) Ortaklıklar ve Kooperatif Hukuku (Law of Companies and Cooperatives), Updated 11. Edition, Istanbul October 2009, N. 1185.
6 In this respect see Okutan Nilsson, Gül, Türk Ticaret Kanunu Tasarısına Göre Şirketler Topluluğu Hukuku (Law of Corporate Groups Pursuant to the Draft Turkish Commercial Code), August 2009, p. 443
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