In joint-stock companies, where management is in the hands of the majority shareholder, there may be conflicts of interest between the majority and the minority, which lead to the depreciation of the company. Beyond that, the minority shareholders may act against the company. To ensure internal peace, Turkish Commercial Code no. 6102 ("TCC") also grants rights to the majority shareholders while protecting minority rights. The most effective method in case of abusing minority rights is the right to squeeze-out regulated under the TCC 208. The right to squeeze-out of the minority serves to ensure internal peace of mind and the formation of strong companies.
Article 208 of the TCC regulates a squeeze-out right specific to the group of companies. According to this article, the parent company, which has at least 90% of the shares and voting rights in the affiliate company, may squeeze-out the minority shareholders from the company by purchasing the shares.
What are the requirement for using this rights? The law seeks certain conditions to be fulfilled to exercise the right to squeeze-out granted to the parent company. These conditions can be listed as follows:
i) There must be a parent company (i.e., a dominant company) and an affiliate company (i.e., a subsidiary company).
A parent company is a company that has a controlling authority in another company, which is an affiliate company. According to the TCC 195, the parent company may establish control over the affiliate company in three ways: by holding the majority shares, by making contracts with other shareholders, by having specific rights given by the articles of association of the company.
ii) Only the parent company can use the squeeze-out right.
iii) The parent company must hold at least ninety percent of the shares and voting rights of the affiliate company, directly or indirectly.
iv) There must be a just cause for the removal of the minority shareholders.
Minority shares may exercise their rights within the company against the parent company and the affiliate company. Some of the minority rights may adversely affect the functioning of the company if abused are: To initiate annulment lawsuit against the decisions of the general assembly, to file a lawsuit against the members of the board of directors, to cast negative votes regarding matters necessitating unanimity. Nevertheless, the squeeze-out right may prevent the minority from using their rights in a way that harms the affiliate company by violating the good faith principle. In Article 208, it is justified that if the minority prevents the company from working, acts in a violation of the good faith, or creates noticeable distress, the parent company can squeeze-out the minority.
Exercise of the Right of Squeeze-Out Does not Require the Acceptance of the Minority
Through this right, the parent company can purchase minority shares without the acceptance of the minority. On the other hand, the parent company can exercise this right only in the case of the stipulated conditions. The law does not foresee any way except Article 208 of the TCC. Since this article is a mandatory rule, the articles of association of the company shall not contain any regulations that restrict, make it easier, or eliminate the exercise of this right.
It is not explicit in the article how this right may be exercised, whereas the squeeze-out right is exercised through courts. In making its decision, the court will first look at whether the shares of the parent company have exceeded the determined ninety percent threshold. Subsequently, the court will assess whether minority shareholders act contrary to the good faith principle.
The judge shall also determine the prices of the minority shares. According to Article 208, if there is no stock-exchange value of the shares, the parent company shall purchase the shares by paying the actual values of the shares or the values determined according to a generally accepted method per the second paragraph of Article 202. On the other hand, the Capital Market Law, entered into force after the TCC, regulates that Article 208 of TCC will not apply to publicly held companies. Hence, in determining the value of the shares, the stock-exchange value cannot be a reference; in all cases, the actual value specified in Article 202 shall be taken as the basis.
As a conclusion, by exercising the squeeze-out right, the parent company, which owns ninety percent or more of the shares, will become the sole shareholder in the affiliate company where the minority hinders the company's development or threatens its progress.
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.