Turkey: Amendments Introduced By The Draft Turkish Commercial Code As Regards The Invalidity Of General Assembly Resolutions

Last Updated: 17 August 2009
Article by Riza Gumbusoglu

I - INTRODUCTION

The Turkish Commercial Code dated June 29, 1956 and numbered 6762 (the "TCC") has been in force since January 01, 1957. Although the TCC was substantially responding to the needs of Turkey at the time it was enacted, it merely responds to the current needs of the modern world. In the second half of the twentieth century, when the TCC was applicable, incidents which can be considered important, and even extra-ordinary for a commercial code have occurred and an era having permanent consequences started. At that time, reforms in relation to commercial law in general or a specific section of the commercial law have been made throughout Europe and the world; amendments to commercial codes were made more frequently than in the past and nearly every country introduced changes to their commercial codes to some extent during this period. Moreover, new doctrines were introduced with respect to specific commercial law issues and several reports and drafts were prepared in order to amend, modify, and modernise various commercial codes partially or entirely. These modifications affected both the theory and the practice of commercial law.1

The developments which took place in Europe and the rest of the world made it inevitable that the TCC would need similar changes. The Draft Turkish Commercial Code (the "Draft Code") which has been prepared for this purpose includes not only amendments to the existing provisions, but also innovative new provisions. However, this article concerns only the changes brought by the Draft Code regarding the invalidity of general assembly resolutions. In this article, first the current legislation on the invalidity of the general assembly resolutions will be explained and then the relevant amendments introduced by the Draft Code will be analyzed.

II - THE CURRENT TURKISH COMMERCIAL CODE

The TCC (Articles 381-384, 361/III) only describes the circumstances under which a resolution adopted by a general assembly may be cancelled. There are no specific provisions with regard to "non-existence" and "nullity" cases which are therefore subject to general provisions.

According to Article 381 of the TCC, a court action for cancellation can be brought within three months against a general assembly resolution which is illegal or violates the articles of association or the principles of good faith. As specified in this provision, "illegality" means any condition which is against the law other than the cases of non-existence and nullity.

Pursuant to Article 381 of the TCC, the following persons can file a court action for cancellation: (i) shareholders, (ii) board of directors, and (iii) each member of the board of directors or each auditor, provided that the implementation of the resolution which is subject to cancellation action leads to the personal liability of such director or auditor. However, as concerns the rights of shareholders to file a cancellation action against a general assembly decision where unauthorised persons attend the general assembly meeting and participate in the voting, Article 361 differs from the provisions of Article 381.

Pursuant to Article 381/I (1) of the TCC, shareholders who are not present at the general assembly meeting may bring a court action for the cancellation of a resolution, on the grounds that persons who are not entitled to attend the general assembly meeting participated in the voting of such resolution. However, if a shareholder attends a general assembly meeting, the right to sue for cancellation of the resolution is possible only if his/her opposition to the resolution in question was included in the minutes of the general assembly. On the other hand, Article 361/III states that if persons who are not entitled to attend a general assembly meeting have taken part in the voting, each of the shareholders has the right to request the cancellation of the resolution from the court even if she/he has not opposed the resolution beforehand. In this respect, it is clear that Article 361/III (as opposed to Article 381/I (1)) enables a shareholder who attended the general assembly, but whose opposition to a resolution was not included in the minutes, to bring a court action for the cancellation of such resolution.

The participation by unauthorised persons in a resolution adopted at a general assembly meeting is against the law. On this basis, a lawsuit for cancellation may be filed. However, this issue is regulated differently with contradictory provisions under Articles 381/I (1) and 361/III of the TCC. Article 381 aims to specify which persons are entitled to file a lawsuit for cancellation. Article 361/III specifies a certain reason for cancellation as follows: "...the persons claiming that the persons who are not entitled to attend a general assembly have taken part in the voting...". Shareholders alleging that unauthorised people attended a general assembly meeting are permitted to bring a lawsuit for cancellation within three months as of the date of the meeting. Pursuant to Article 381, this is a reason for absolute cancellation; in other words, the defendant joint stock company cannot have the claim dismissed by proving that such participation by unauthorised people does not have any effect on the adoption of the resolution. Article 361/III does not foresee a time limit, but does entitle a joint stock company to prove that the participation in question has not affected the adoption of the resolution. This contradiction can be eliminated either by amending the Articles so that they no longer contradict, or by abolishing Article 361/III.2

Scholars have criticised this contradiction arising from the provisions of Articles 381/I (1) and 361/III. Therefore, as it will be analyzed below, the Draft Code (Article 446) addresses the issues of who can sue, and the conditions under which they may sue, in a single article. In this way, the Draft Code eliminates the contradiction between Articles 381/I (1) and 361/III under the current legislation.

Invalidity Cases in general: Non-Existence, Nullity and Cancellability

1. Non-Existence

Pursuant to the TCC, a resolution may be defined as a "general assembly resolution" when it includes two elements. The first element is that there shall be a "general meeting" at which shareholders or their proxy holders gather as a general assembly. The second element is that there shall be a resolution adopted by the shareholders or their proxy holders comprising the general assembly. If these elements do not exist, a resolution cannot be considered a "general assembly resolution" since a breach of mandatory rules on form and procedure results in non-existence of a general assembly resolution. For example, in cases where resolutions have been adopted without complying with the required meeting or decision quorum; or where no invitation has been issued by the authorized persons; or where the commissary of the Ministry of Industry and Trade has not been present and has not undersigned the minutes of the general assembly, etc. the non-existence of a general assembly resolution may be alleged.

In order to determine a general criterion for non-existence, it can be said that a breach of the mandatory rules on form and procedure results in a case of non-existence. However, if the mandatory rule aims only to protect the shareholders' interests, its violation cannot be regarded as non-existence or nullity, but instead constitutes a case of cancellability.3

The non-existence of a general assembly resolution can be claimed by everyone who has a legal interest in such allegation, without being bound by a specified time period, by way of an objection or a lawsuit. Since a non-existent general assembly resolution is deemed ineffective ab initio given the fact that the formal requirements to convene a general assembly meeting have not been fulfilled, the lawsuit related to such a matter is in the nature of a declaratory lawsuit.4

2. Nullity

The general provisions on the case of nullity are set forth under Articles 19 and 20 of the Code of Obligations numbered 818 and dated April 22, 1926 (the "TCO"). If a general assembly resolution is valid in terms of its form and procedure, however, its subject matter is against Articles 19 and 20 of the TCO, in other words if its subject matter is contrary to mandatory or moral rules, or is not viable, then such resolution shall be considered null. If these rules are breached, the cancellation of the resolution cannot be subject to a court action since in such a case, the resolution shall be considered null. The aim is to protect the public order and interest. Moreover, a resolution shall be considered null when its subject matter conflicts with a conclusive judgment.5

Similar to the case of non-existence, resolutions can be declared null by a court action, without being subject to the lapse of three months' time set forth under Article 381 of the TCC.

3. Cancellability

As explained above, the TCC regulates only cases of cancellability, whereas general provisions apply to cases of non-existence and nullity. The circumstances under which general assembly resolutions can be cancelled are set forth under Article 381 of the TCC as follows; conflict with (i) law, (ii) articles of association, and (iii) principles of good faith. The term "conflict with law" in the context of Article 381 means any breach of legal provisions which does not result in non-existence or nullity.

Unlike cases of non-existence and nullity, bringing an action for cancellation of a resolution is subject to a strict time limit. Pursuant to Article 381 of the TCC, a court action can be brought against the general assembly resolutions conflicting with law or the articles of association or, in particular, principles of good faith within the three-month time limit starting from the date of such general assembly resolution.

It is important to note that, in order to ensure legal security in cases where doubt exists, instead of considering a resolution as non-existent or null, inclination towards the cancellability of such resolution must be opted6.

III - THE DRAFT TURKISH COMMERCIAL CODE:

Article 445 of the Draft Code sets out the cancellation reasons, Article 446 describes the persons entitled to bring a court action for cancellation and Article 447 specifies nullity conditions.

The current system of cancellation reasons under the TCC has also been adopted by the Draft Code. In this sense, Article 445 of the Draft Code states that a court action can be brought against a general assembly resolution conflicting with law or articles of association or, particularly, principles of good faith within three months' period starting from the date of such general assembly resolution.

The persons entitled to bring a court action for cancellation are stated under a single article as follows:

a) Shareholders who have been present at the general assembly meeting and voted against the resolution and had their opposition recorded in the minutes,

b) Shareholders, regardless of whether they were at the general assembly meeting or voted against the resolution; who claim that the invitation procedure has not been complied with, the agenda has not been announced properly, or that persons unauthorised to attend the general assembly meeting (or their proxies) have taken part in the general assembly meeting and the voting, or that they have unfairly been prevented from participating to the general assembly meeting and the voting, and that the above mentioned violations have affected the adoption of the resolution.

c) Board of directors,

d) Each director, if the fulfilment of the resolution gives rise to his/her personal liability.

The established Turkish legal practice has been codified and nullity conditions, in particular, have been clearly specified under Article 447 of the Draft Code which reads as follows;

"The general assembly resolutions which, in particular;

a) restrict or eliminate shareholders' rights of participation to a general assembly meeting, their rights to vote, their rights to sue, and their indefeasible rights deriving from law,

b) restrict shareholders' rights to obtain information, to inspect and control except within the limits allowed by law,

c) distort the main structure of a joint stock company or conflict with the provisions on the preservation of capital are regarded as null.

According to the reasoning of Article 447 on "nullity", in order to harmonize the Draft Code with the TCO, the Draft Code adopts the terms "nullity" and "null." The terms of "voidness" and "invalidity" are also correct, but are broader terms.

Null resolutions adopted at a general assembly meeting are deemed ineffective ab initio and they cannot be rendered effective post facto. In addition, they are taken into account ex officio by a court. They can be asserted in the form of a defense, and may also constitute the subject matter of a declaratory court action without being subject to any time limit. On the other hand, null resolutions have an important drawback relating to transaction security. Indeed, they bear the risk of being subject to a declaratory court action even years after the resolution is taken. This, in turn, leads to major concerns for shareholders, creditors and potential investors. The declaration of nullity of a general assembly resolution by a court, after a long period of time, would cause the retroactive annulment of several transactions which were established on the basis of the subject resolution. Therefore, courts should give their judgment on nullity cautiously, after assessing the case in depth and besides, it is also important that the legislator clearly draws the line between nullity and cancellability. In this context, the referenced provision, i.e. Article 706 (b) of the Swiss Code of Obligations, has been strongly criticised. It is asserted that the aforementioned provision does not draw the line clearly and does not lift the threat in question. Nevertheless, a helpful proposal has not been made concerning this matter.

It would not be correct for the Draft Code to enumerate the resolutions which are considered null in an exhaustive manner. If it did, several resolutions which may be regarded as null might fall outside the scope of the provision. That is because it is not possible that all potential nullity cases and conditions could be laid down and defined under the abovementioned provision. Thus, it is most appropriate for null resolutions to be divided into two categories; (i) resolutions which are considered null due to their form and (ii) resolutions considered null due to their subject matter. The cases and conditions of the null resolutions included in the first category should be determined by jurisprudence and doctrine. In contrast, the null resolutions covered by the latter category are specified clearly in a non-exhaustive manner by giving examples of such cases. The system established for the determination of null resolutions of the first category (form-related nullity) has been adopted with the presumption that courts will be cautious about possible drawbacks and threats and exercise due diligence in determining the null resolutions. Hence, under Article 447, null resolutions are set forth in categories. The term "in particular" in the Article indicates that null resolutions do not consist of only the resolutions which are listed under the Article; in other words, the Article is not meant to comprise an exhaustive list. In this respect, the term "in particular" provides a relative limit and the chosen resolution categories indicate that this issue is handled cautiously and in a refraining approach by the legislator. Refraining is a principle contained in the provision. The concept of "in particular" also has a restrictive function. The group of resolutions considered null due to their subject matter covers the resolutions which eliminate or restrict shareholders' rights with particular benefits, and which distort the main structure of a joint stock company, and which are contrary to the principle of preservation of capital. In determining the null resolutions other than those stated, the principle of "nullity being secondary" applies. In other words, a resolution is declared null on the basis of general legal provisions and principles, provided that the cancellation of the resolution does not constitute a sufficient sanction due to specific reasons. The principle of refraining should be considered, especially in the ascertainment of the null resolutions due to formal reasons. (deficiency and fault).

VI. CONCLUSION

While the Draft Code has not introduced any changes with respect to the reasons of the cancellability of resolutions, it has combined two separate issues into a single article: "the persons entitled to bring a court action for cancellation" and the "cancellability reasons". In this way, the contradiction between Articles 381 and 361 of the TCC has been prevented, and a clear and coherent provision has been drafted. In addition, the nullity conditions which are not explicitly regulated under the current Code, but have been applied in the legal practice for many years, are codified and the distinction between null resolutions and cancellable resolutions has been drawn.

Footnotes

1. The general reasoning of the Draft Commercial Code

2. Poroy/Tekinalp/Çamoğlu; Ortaklıklar ve Kooperatif Hukuku, 10. Tıpkı Basım, p. 423 et seq.

3. Poroy/Tekinalp/Çamoğlu; ibid, p. 416

4. Moroğlu; Anonim Ortaklıkta Genel Kurul Kararlarının Hükümsüzlüğü, Dördüncü Bası, p. 124

5. Poroy/Tekinalp/Çamoğlu; ibid, p. 416; Moroğlu, age. p. 20, 21, 127 et seq.

6. Poroy/Tekinalp/Çamoğlu; ibid, p. 417

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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