Turkey: The Right To Request The Dissolution Of The JSC And Squeeze Out The Minority

Last Updated: 30 August 2013
Article by Ertugrul Bayramogullari

Introduction

For the first time, together with the New Turkish Commercial Code ("TCC") no 6102, it is possible to define the right to request the dissolution of the Joint Stock Company ("JSC") for just cause1, being one of the most effective and important rights that has been given to minority up to date. The most important reason that strengthens this judgment is, within time it has been experienced that most of the minority rights are deemed insufficient when it comes to the effective limitation of the majority power. On the other hand, the disincentive characteristic of the mentioned right prevents the breach of minority rights through exercise of power on the minority by the majority. Likewise, the majority shareholders who will face the threat of dissolution upon breach of minority rights, will choose not to abuse their rights in order not to lose their position and the benefits they are getting from the company.2 It is also possible to execute other ways of solution that leads to squeezing out a shareholder in order to prevent the dissolution of a joint stock company for just cause that has been set forth in TCC Article 531.

Just cause

The concept of just cause finds its source within the general provisions and it describes a situation that gives a possibility to terminate a relationship in continuous legal relationships.3 According to the dominating opinion in theory and practice, the good faith rule set forth under Article 2 of Turkish Civil Code lays underneath this right.4 The reason for having the concept of 'just cause' is to provide ways of solutions for circumstances which may come up later because of the social or economical progresses that are unforeseen by the legislator while drafting the legislation. For this reason, defining the 'just cause' for every single case or creating limitations by specifying just causes conclusively contradicts with this concept's reason of existence. Hence, the circumstances which may be classified as just cause are not defined under the Article 531 of TCC5, but there are numerous examples within the doctrine. The following situations may be considered as just cause with regard to the dissolution of the JSC: Mismanagement of the company; the minority and/or shareholders that continuously cannot get results after using their rights to demand information; permanent poor financial condition6; the company not serving its purpose; arbitrary and unfair discrimination of the shareholders; devoting the opportunities of the company to the majority shareholders; shifting profits and financial opportunities to the other companies controlled by the majority; deadlocking of the general assembly or board of directors meetings.7

Procedure

In order to decide on squeeze out in accordance with the Article 531 of TCC, a claim has to be made regarding the dissolution of the JSC with a just cause. In the absence of a just cause, a ruling for the dissolution of the JSC or any other alternative solutions cannot be made. In addition to that if it is possible to settle the disputes along with the alternatives envisaged by law or by articles of association, a ruling for dissolution of the JSC with a just cause or to squeeze out cannot be made as well. In other words; squeeze out must be applied before the dissolution of the JSC with a just cause and after other alternatives. Because, termination of a legal relationship with a just cause shall be the latest solution of the dispute to be solved, and shall be a secondary formula after seeking another alternatives for the solution of the legal dispute between the parties.8

The mentioned right to file a lawsuit, may only be used for the purpose of protecting the minority. Thus, for the situations which may be solved in alternative ways, the dissolution of the JSC shall be the latest solution to be applied even though the causes are just. The lawsuit for the dissolution of the JSC with a just cause shall be filed against the company's legal entity by the minority at the commercial court, where the company headquarter is located. There is no specific lapse of time stated under Article 531 of TCC for bringing a lawsuit regarding the dissolution of the JSC with a just cause. However, filing this lawsuit long time after the occurrence of the just cause may constitute a contradiction against good faith.9. The burden of proof regarding the existence of the just cause belongs to the plaintiff shareholders.

Currently, Article 531 of TCC gives the court a broad power of discretion, in order to solve conflict of interests.10 The rulings that may be made instead of squeeze out and the dissolution of the JSC, will occur together with practice11.

Decision of squeeze out from shareholding

In accordance with Article 531 of TCC, the court primarily assesses the case of the minority by looking into the existence of a just cause, and in case of a following affirmative decision, it shall try to find an appropriate and acceptable solution for the case. If the court cannot find an appropriate and acceptable solution, it shall decide on the squeeze out of the plaintiff shareholders or the dissolution of the JSC. While deciding, the court shall take all shareholders into consideration and investigate if there are any economic or social benefits in maintaining the company. Accordingly, if it does not see any economic or social benefits in maintaining the company, it may decide on the dissolution of the company. As this would be the hardest decision to make, it should be the last solution.

Payment of the real value of shares to the squeezed out shareholders

Squeezing out the plaintiff shareholders should not be considered as a sanction and therefore the share values shall be paid completely to squeezed out shareholders. On the other hand, even though it has been stated that the share value on the date closest to the decision date shall be taken into consideration; there is no explanation as to how and by whom the payment shall be made.12

Footnotes

1 TCC Article 531- (1)In presence of just causes, the shareholders representing at least one-tenth, and one-twentieth in publicly traded companies, of the capital may demand the dissolution of the company from the commercial court of first instance where the headquarters of the company is located. Instead of dissolution, the Court may decide to squeeze out the plaintiff shareholders by paying share value on the date closest to the decision date or on another appropriate and acceptable solution.

2 Erdem, Nuri, Anonim Ortaklığın Haklı Sebeple Feshi, 6102 Sayılı Yeni TTK Hükümlerine Göre (Dissolution of Joint Stock Companies with a Just Cause, in Accordance with the New TCC no 6102 Provisions), İstanbul 2012, p. 8-15;

3 Erdem p. 75;

4 Erdem p. 86.

5 Legislative Intention of Article 531 of TCC; "... Just cause is not defined within the draft, there are also no examples of just causes so the nature and the definition of this concept shall be explained within judicial decisions and the doctrine..."

6 Tekinalp, Ünal, Yeni Anonim ve Limited Ortaklıklar Hukuku ile Tek Kişi Ortaklığının Esasları (New Joint Stock and Limited Liability Companies Law and Principles of One-Person Companies), 2. Edition, Istanbul 2012, p. 193

7 Legislative Intention of Article 531 of TCC stated some examples of just cause by taking the Swiss doctrine into consideration: "...calling the general assembly to meeting unlawfully several times, continuous violation of the minority and individual rights, prevention of exercising the right to demand information and inspection, continuous loss that the company is making, continuous decrease of the profit distribution..."

8 Erdem, p. 211.

9 Erdem, p. 180.

10 Legislative Intention of Article 531 TCC: "...Duty to assess the claimed causes as just belongs to the Court. The Court does not have to decide on dissolution even it finds the causes as just...".

11 "For instance, the court may rule on putting a provision with the articles of association setting forth the profit distribution or profit distribution from the reserve funds, in joint stock companies that do not distribute profit even it is making profit or distributing insufficient profit." Tekinalp, p. 191.

12 Legislative Intention of Article 531of TCC: "...The judicial decisions and comments within the doctrine will determine who will pay the plaintiff and how and will these shares can be acquired temporarily by the Company...".

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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