The Turkish Commercial Code No. 6102 ("TCC") Art. 202/2sets forth certain solutions for shareholders where the dominant company unlawfully exercises control over the dependent companies. The exercise of control, as per this article, may occur through merger, division, conversion, termination decisions taken by the dependent company through the exercise of control or important decisions such as issuing securities. In accordance with said article, the shareholders who dissent from certain transactions in the dependent company through the exercise of control may request from the court that damages arising from the dissented transaction be compensated, or that their shares be purchased. This regulation is a significant regulation and requires further examination since it is intrinsic to the TCC and entitles the shareholders to exit the company. This article will examine the contravention of the law regulated under Art. 202/2 TCC, the causes of action, parties, claims and the required security to be deposited related to this action.
The Contravention of Law as Regulated under Art. 202/2 TCC
The contravention of law regulated under TCC Art. 202/2 is based on the rendering of decisions in the absence of explicit just cause with respect to the dependent company. However, these decisions are not just any kind of decisions taken by the dependent company, but only important decisions stipulated in said paragraph. In accordance with Art. 202/2 TCC "transactions such as merger, division, conversion, termination, issuing securities and important amendments to articles of association, which are initiated through the exercise of control and without any clear just cause" are included in the scope of the article. Even though these transactions are transactions exclusively within the authority of the general assembly, the law maker, in order to prevent the circumvention of the law, specifies that this article shall also be applied where these decisions are taken by the board of directors. These transactions are not numerus clausus. Nevertheless, transactions that change the shareholding structure, terminate the company, change the financial structure or that bring important amendments to the articles of association (for instance amendments which may be concluded through qualified majority) form the limits of the article's scope.
The contravention of the law will arise where these decisions taken by the general assembly or the board of directors of the dependent company do not have clear just cause. Accordingly, if the decisions contribute to the development or progress of the dependent company, or if they are considered necessary for the interest of the company, it may be asserted that there is just cause. Moreover, while assessing the just cause, the examination of the merger or conversion reports will be important since these reports set forth the purpose and the benefits of said transaction. Within this scope, a judgment regarding the presence of just cause may be reached through the examination of these reports. It is observed that said article, even though it entitles the shareholder to file a lawsuit, reviews just cause with respect to the dependent company. However, scholars hold that shareholders' interest is important and must be considered since the damage to shareholders must be compensated.
As stipulated in the first sentence of Art. 202/2 TCC, in order for these decisions to be found in violation of the law and for the shareholders to make their claims, they must occur through the exercise of control. Within this context, the fact that whether the general assembly or the board of directors decisions have been taken through the controlling company's exercise of its direct or indirect voting power should be analyzed.
Conditions for Claiming Compensation or the Purchasing of Shares
In accordance with TCC Art. 202/2, shareholders who have cast negative votes against the general assembly resolution and recorded such votes in the minutes of this resolution in connection with transactions such as merger, division, conversion, termination, issuing securities and important amendments to articles of association which are initiated through application of control and without any clear reasonable grounds concerning the dependent company, or who have objected in writing to the board resolution on the same and similar subjects, may request from the court that their damages be compensated by the controlling enterprise, or at least that their shares be purchased at stock exchange value, if possible. If there is no such value or if the stock exchange value is not just, then at actual values or at a value to be determined in accordance with a method that is generally accepted.
At this point, the first dispute concerns whether the request for compensation and the purchasing of shares constitute independent lawsuits. Tekinalp states that the action on compensation and the action on the purchase of the shares are separate cases, and that the plaintiff may not file the two lawsuits together; they may only be alternatives to one other. However, there are those who contend that such a lawsuit may be filed as a single lawsuit, claiming compensation for damages or that the shareholders' shares be purchased.
As seen in said provision, certain conditions must be fulfilled in order to file this action. The conditions are that (i) the existence of a general assembly or board of directors' resolution, as set forth under Art. 202/2 TCC, (ii) the resolution must lack clear reasonable grounds with regards to the dependent company, (iii) the resolution is taken as an act of control by the dominant company, (iv) the shareholder(s) casts a negative vote in the general assembly resolution and records this in the minutes or objects in writing to the board resolution and (v) the resolution is damaging to the shareholder.
The plaintiff in this lawsuit is the shareholder of the dependent company. The shareholder must hold the title of shareholder on the date when the relevant general assembly resolution is taken in order to file the lawsuit. A shareholder who does not satisfy the conditions set forth under Art. 202/2 TCC may not file suit. In compliance with this, the shareholder, during a general assembly resolution must cast a negative vote and record this in the minutes; regarding a board resolution, he must object in writing as soon as he becomes aware of the relevant resolution. Pursuant to said provision, the shareholders who have abstained from voting or whom did not attend the meeting do not have a right to file a lawsuit. However, with regards to the shareholders whose attendance in the general assembly has been prevented, they may be granted a right to file an action in order to protect their interests. In addition, the shareholder filing an action against the dominant company must be damaged or will be damaged upon the materialization of the transaction.
The defendant is the dominant enterprise that enacts the resolutions due to the voting power it has in the general assembly, or in case of a board resolution, the dominant enterprise represented by the board of directors, or which elected the board of directors.
When the action set forth in Art. 202/2 TCC is taken, the amount of money covering the possible losses by plaintiffs or the purchase value of the shares shall be deposited in the name of the court as security in a bank to be determined by the court. Until the security has been deposited, no proceeding may be conducted in relation to the general assembly or board of directors' resolution. As understood from the article, the money deposited by the defendant is not subject to any demand and the execution of the resolution is prevented if the security is not deposited. This deposit secures the compensation, which will be paid at the end of the action.
Compensation for Shareholder's Damages
The shareholders in the action filed pursuant to Art. 202/2 TCC, may request compensation for the damages resulting from the unlawful exercise of control. The aim of this provision is to compensate the damages incurred by shareholders, thus compensation of the dependent company's damages does not constitute the subject of this action. The judge shall rule for the compensation of the shareholder's damages where he/she is convinced that the conditions set forth in the provision are satisfied. The damages to be compensated shall be damages which have actually occurred.
Another claim which may be asserted by shareholders, pursuant to Art. 202/2 TCC, is the request for the purchase of their shares. The shareholder possesses the right to exit the company through this mechanism, as set forth in Art. 202/2 TCC. In order to file this action, it is required that the shareholder's interests are damaged without just cause and the partnership relation has become unbearable. In order for the judge to rule for the purchasing of the shares of the shareholder, the shareholder fulfilling the conditions stipulate in this article must file an action with this request. Accordingly, all of the shares of the shareholder shall be purchased if the claim is settled in their favor. The shares shall be purchased at stock exchange value if possible, or if there is no such value or if the stock exchange value is not just, at actual values, or at a value to be determined in accordance with a method that is generally accepted. When calculating the value of the shares, restrictions such as pledges and attachments over the shares must be taken into account.
Jurisdiction and Statute of Limitations
A claim requesting compensation or the purchase of shares must be filed within two years commencing from the date of the general assembly resolution or the publication date of the board of directors' resolution. The competent court is the court of the place of domicile of the defendant.
This regulation, which is a new regulation in Turkish law, enables the recovery of the damages to shareholders or purchasing of their shares in the event of unlawful use of control, pursuant to Art. 202/2 TCC.
1 Ünal TEKİNALP, Sermaye Ortaklıklarının Yeni Hukuku, İstanbul 2013, p. 589.
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.