Turkey: Enforcing Squeeze Out On The Shareholders Of The Subsidiary After A Case Of Liability

Last Updated: 30 August 2013
Article by Ertugrul Bayramogullari

Together with the increase of economic concentration, conflicts of interest do not occur only between the majority and the minority shareholders, but also occur between the dominant (controlling) company and the subsidiary's shareholders within the corporate groups. On the other hand, the dominant company has to exercise its dominant power on the subsidiary in compliance with the laws. Otherwise, the shareholders of the subsidiary may demand compensation for the loss of the subsidiary by applying to court pursuant to Article 202/1/b of TCC1. As a result of so called "case of liability", it is also possible to implement solutions resulting in squeezing out the shareholders of the subsidiary who are in the plaintiff position2.

Case of Liability

According to the Article 202/1/b of TCC; liability of compensation arises for the dominant company if i) the dominant company exercises its dominant power unlawfully, ii) the dominant company causes loss for the subsidiary, iii) there is a connection between the exercise of dominant power in an unlawful way and the loss and iv) the dominant company does not compensate for this loss3.

The dominant company is obliged to compensate for the loss which occurred due to exercising dominant power on the subsidiary in an unlawful way. However, if it is proved that the transaction damaging the subsidiary may also be exercised by the prudent directors of an independent company who protect the interests of the company, the dominant company shall not be obliged to and shall not be held liable to compensate for the loss4. In other words, the transaction staying within the frame of duty of care is a reason for compliance with law and prevents the rise of liability for the dominant company (TCC art. 202/1/d).

Causing a loss for the subsidiary by means of exercising dominant power unlawfully is not sufficient to file a case of liability5. While the dominant company cannot lead the subsidiary to perform transactions which may create losses, this restriction about the exercise of dominant power disappears as long as one condition is fulfilled. This condition is "either to adjust the loss of the subsidiary within that fiscal year or to recognize a right to demand with a corresponding value to the subsidiary at least until the end of that fiscal year, by means of determining how and when the loss would be adjusted" (TCC art. 202/1/a).

Procedure

Only the shareholders of the subsidiary and their creditors may file a case of liability and this is not possible for the subsidiary itself6. Regardless of the share proportion within the company, every single shareholder of the subsidiary may file a case of liability against the dominant company. The dominant company itself and the members of the Board of Directors who are responsible for the losses occurred shall be the counter party of the case. If the court rules compensation as a judgment, this compensation shall be paid to the subsidiary (TCC art. 202/1/e, 555/1). The court of jurisdiction and the competent court is the commercial court of first instance where the headquarters of the dominant company is located (TCC art. 202/1/e, 561/1). If the headquarters of the dominant company is located abroad, than the competent court is where the headquarters of the subsidiary is located. This case shall be filed in two years as of when the plaintiff learns about the loss and its responsible, and in any case in five years as of when the loss occurred. However, if the criminal lapse of time is longer, this lapse of time shall also be applied to the case of adjustment (TCC art. 202/1/e, 560/1)7.

Squeeze Out

The subject of the case of liability is to compensate the losses of the subsidiary but furthermore the court has also been authorized to apply different ways of solutions. Accordingly, the courts may perform various types of solutions including squeeze out. Pursuant to Article 202/1/b of TCC, it is also possible for the subsidiary's shareholders to apply to court in order to request the purchase of their shares by the dominant company or to find some other appropriate, acceptable solutions instead of compensation of losses of the subsidiary. If there is no other suitable solution regarding the conflict of interest between the dominant company and the subsidiary, the court may rule on purchase of shares of the subsidiary's shareholders by the dominant company. We are of the opinion that the solution of squeeze out shall be applied when the unlawful behaviors of the dominant company are continuous and these behaviors cannot be resolved by a solution other than squeeze out.

Payment of Share Values to the Shareholders

Negative behaviors of the shareholders do not lead to application of squeeze out on the shareholders of the subsidiary as a result of adjustment cases. Instead, exercise of dominant power by the dominant company on the subsidiary in an unlawful way causes the decision to enforce a squeeze out by the court. Therefore, squeeze out ruling shall not be applied as a sanction but it shall be applied in order to solve conflicts of interest. Thus, as a consequence of these cases, upon the decision to enforce squeeze out on the shareholders of the subsidiary, the share values shall be fully paid. In case of a ruling on purchase of the shares, all shares of plaintiff shareholder shall be purchased. It has been stated under Article 202/1/b of TCC that the purchase of the shares shall be executed in line with the rules set forth under the second paragraph of the same article.

Footnotes

1 TCC article 202/1(b) – If adjustment shall not be performed within the fiscal year or a right of claim equal to such demand shall not be recognized; every shareholder of the subsidiary may demand compensation of the losses of the company, from the dominant company and its members of the Board of Directors who are responsible of the losses. If it's equitable, the judge may rule on request or ex officio that the shares of the plaintiff shareholders shall be purchased by the dominant company or on another solution which may be appropriate and acceptable instead of a compensation in accordance with the second clause of this article.

2 Çelik, Aytekin, Anonim Şirketlerde Ortaklıktan Çıkarılma (Squeeze Out in Joint Stock Companies), 2. Edition, January 2012, p. 278.

3 Okutan Nilsson, Gül, Türk Ticaret Kanunu Tasarısına Göre Şirketler Topluluğu Hukuku (Law on Corporate Groups Pursuant to the Draft Turkish Commercial Code), August 2009, p. 327.

4 Okutan Nilsson, p. 261.

5 Çelik, p.313.

6 Legislative Intention of the TCC Article 202; "...Right of litigation has not been acknowledged for the subsidiary, and instead this opportunity is provided for the shareholders and the subsidiary's creditors. Furthermore, the opinion of to bring the Board of Directors of the subsidiary and of the dominant company against each other will not be a true legal policy started to dominate."

7 Çelik, p.315.

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.

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Ertugrul Bayramogullari
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