The Turkish Commercial Code No. 61021 ("TCC") enables squeeze-out and exit rights of shareholders from joint stock companies in certain circumstances.
These rights are important in ensuring a balance of interest within the company. The legislative policy aims on the one hand to audit and control competition, and to control companies in a given market, but on the other hand encourages strong companies with a strong presence in the international arena (for example facilitated mergers and acquisition processes and tax incentives)2. The right to squeeze-out a minority with a material dissent of opinion also serves to establish a peaceful environment within a corporation and serves to establish a strong, concentrated company.
The TCC regulates the right to squeeze-out in company mergers and within group companies. Moreover, in the event the minority requests dissolution of a company for just cause, the TCC enables the courts to rule on squeezing out the claimant minority. One of the squeeze-out rights regulated under the TCC is specific to group companies. This newsletter article is in relation to the squeeze-out right regulated under Art. 208 granted to controlling companies.
Apart from the annulment of shares in the event shareholders failed to fulfill the obligation to fully pay up the share capital subscription, the TCC regulates for the first time the right to squeeze-out a shareholder from a joint stock company.
TCC Art. 208 grants a squeeze-out right specific to group companies. A controlling (dominant, parent) company in a group, which directly or indirectly owns at least ninety percent of the shares and of the voting rights of its subsidiary, may squeeze-out the remaining minority if such minority violates the good faith principle, causes trouble and acts recklessly, by purchasing its shares in the company.
This squeeze-out right may be exercised only if there is just cause. The legislative justification of the article states that it serves to end the disturbing actions of shareholders who continuously block the decision making of the company for various reasons, and to ensure peace within the company.
Relevance with Full Dominance
The right of the dominant company to squeeze-out the minority is regulated among provisions governing group companies right after those related to full dominance.
Full dominance is directly or indirectly owning all shares and voting rights in a company. In principle, in a group of companies the dominant company may not exercise its dominance over its subsidiary in such a manner that results in a loss incurred by the subsidiary; otherwise, any such loss must be compensated. Nevertheless, in the event there is full dominance, the dominant company may give instructions to its subsidiary even if such instructions may result in losses3. The legislative justification for TCC Art. 203 emphasizes that as a precondition of this article being applied, the dominant company must own one-hundred percent of the shares and rights of its subsidiary, and the justification further states that the squeeze-out right granted under Art. 208 completes this provision.
Indeed, Art. 208 grants the dominant company, which directly or indirectly owns ninety percent of the shares and voting rights of its subsidiary, the right to buy out the minority shares and thereby achieve full dominance. The TCC enables companies to achieve the freedom of management granted under Art. 2084.
TCC Art. 208 requires the fulfillment of certain pre-conditions in order to exercise squeeze-out rights.
- Only commercial corporations may exercise squeeze-out rights.
The article does not mention dominant undertakings along with dominant companies. Therefore, a squeeze-out right is granted to a dominant company, which owns ninety percent of the shares and voting rights in a subsidiary.
- The dominant company should directly or indirectly hold ninety percent of the shares and voting rights in its subsidiary.
Indirectly owned shares and voting rights should be construed as shares and voting rights held by the dominant company through its subsidiaries.
- There should be a just cause for squeezing-out the minority.
TCC Art. 208 considers reasons such as the minority preventing the operation of the company, acting against the good faith principle, causing substantial difficulties and acting recklessly as just causes for squeeze-out. Examples may be given such as abusing shareholding and minority rights, and harassing company managers. Nevertheless, it is very difficult to conclude when the exercise of rights, such as initiating annulment lawsuits against corporate body decisions and resolutions, casting negative votes regarding matters necessitating unanimity, postponing negotiations on the balance sheets and similar rights are to be construed as an abuse of such rights which violate the good faith principle5.
The Characteristics and Means of Exercise of this Right
The TCC foresees the squeeze-out right as an innovative right. The dominant company, through exercise of this right, may purchase the minority shares without obtaining the minority's consent or approval.
It is not explicit and clear from the wording of the article whether this right may be exercised through a unilateral declaration or whether it necessitates the issuance of a court order. The legislative justification of the article states that the decision is left to the courts in order to prevent any misuse; nevertheless the wording of the article is different than that of the draft commercial code of 2005, the year when its legislative justification was drafted. Nonetheless, Art. 208 refers to Art. 202/2 regarding how the purchase price should be determined, and the sell-out right regulated under Art. 202/2 may be exercised through a court order. Hence, the squeeze-out right granted under Art. 208 is an innovative lawsuit. The court should especially determine whether there is a just cause, as well as the share purchase price6.
The purchase price of the shares is the market price, in the absence of which the value should be determined in accordance with Art. 202/2. Pursuant to Art. 202/2, in the absence of a market share or if the market share is not equitable, the shares will be purchased based on their actual value or their value should be determined in accordance with a generally accepted valuation method.
TCC Art. 208 regulates the right of a dominant company within a group of companies to purchase minority shares and squeeze-out the minority, in order to achieve peace within the company. As specified in the legislative justification of the article, this provision aims to establish peace within the company and enables squeezing-out a problematic minority from the company. Simultaneously, dominant companies are granted an opportunity to obtain full control over their subsidiaries through this right.
1 Official Gazette, 14 February 2011, No. 27846. TCC entered into force on 1 July 2012.
2 Assit. Prof. Akın, TTK m. 208 Kapsamında Anonim Şirketlerde Azlığın Ortaklıktan Çıkarılması (Squeeze-Out of Minority from Joint Stock Companies under TTK Art.. 208), Gazi Üniversitesi Hukuk Fakültesi Dergisi (Gazi University Journal of the Faculty of Law) V. XVII, Year 2013, No. 1-2, p. 2.
3 Pursuant to TCC Art. 203 and Art. 204, the instruction should be compatible with the determined and concrete policies of the company group and it should not manifestly exceed the payment capacity of the subsidiary, endangering its existence or resulting in the loss of material assets.
4 (Assist.) Assoc. Prof. Okutan Nilsson, Türk Ticaret Kanunu Tasarısın Göre Şirketler Topluluğu Hukuku (Law of Group Companies Pursuant to the Draft Turkish Commercial Code), Levha Yayınları, Istanbul 2009, p. 437.
5 Akın, ibid, p. 14.
6 Okutan Nilsson, ibid. p. 442-444.
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