Limited liability company ("LLC") is the most preferred kind of corporation in commercial life since it carries characteristics inherent both in sole-proprietorships and corporations. The main reason behind this is its complex nature comparing joint-stock companies and other partnerships.
The complex nature of the LLC may be witnessed among article 638-640 of Turkish Commercial Code ("TCC"). Yet, shareholders in the LLC are vested with right to withdraw and participate in withdrawal while the company is vested with right to dismiss a partner impairing the harmony within the company.
Right to withdraw and dismiss are foreseen in several situations pursuing the same motivation under TCC. These rights may be exercised by a shareholder or a company in case of merger&acquisition (restructuring), abuse of dominance in corporate groups and other several circumstances provided that other conditions are met.
The most common way of leaving a company, transfer of the shares, isn't studied here. In fact, transfer of shares isn't recognized as withdrawal in technical way among scholars.
We will very briefly touch upon Article 638 (withdrawal), 639 (participation in withdrawal), and 640 (dismissal) of TCC in this study.
I. Contractual Withdrawal
The right to withdraw may be inserted in the article of association ("AoA"). In this case, shareholders may exercise their right with a unilateral declaration of will. Therefore, approval by company is unnecessary.
Declaration of will may be implicit or explicit. Even some scholars claim that verbal declaration may also be made1. Partnership relations rely on the principle of pacta sund servanda. Therefore, we believe in that implicit declaration of will should be interpreted considering the fact that the main rule is continuity of the partnership and the exception is termination of partnership. In other words, implicit declaration of will should be subject to close interpretation.
As per article 638/1 of TCC, conditions to be met may be sought in order to exercise this right. For instance, shareholders may have right to withdraw if company fails to distribute profit three years consecutively. These rights will be subject to principle of good faith under article 2 of Turkish Civil Code even if shareholders have right to withdraw without any reason2.
Shareholders' legal identity is irrelevant in terms of these rights. Legal or real person shareholders may exercise it. However, a company acquired its own shares shall not exercise this right3.
II. Withdrawal Due to Just Cause
Just cause may constitute a legal basis for shareholders to withdraw from company. Unlike contractual withdrawal, withdrawal due to just cause isn't necessary to include in the AoA. Yet, this right aims to protect personal rights of shareholder.
Such right shall be exercised through legal action. Competent court is commercial court of first instance where company's headquarter is located at. As per 638/2 of TCC, interim measures may be requested from the court by any party to dispute.
Just cause isn't defined for LLC in TCC. However, this term is defined for collective companies in article 245 of TCC as follows:
Just cause is the removal of actual or personal reasons causing the establishment of company in a manner to make the obtainment of agreement subject impossible or difficult, especially cases like;
- The fact that a partner betrays company in the management affairs of company or issuance of its accounts,
- Non-fulfilment of the principal duties and obligations by a partner,
- The fact that a partner misuses the trade name or commodities of company for its personal benefits,
- The fact that a partner has lost the required ability or capability to perform the undertaken works of company due to a permanent sickness or another reason,
are just causes.
Nevertheless, just cause should be evaluated for each separate case since the company type, time, place and other factors may affect its validity. For instance, an act may constitute a just cause in a company in which personal features matter while in another company in which capital matters it may not.
Supreme Court, in this respect, sought for the injury among shareholders' relations that prevent them to continue the partnership4. A few examples to the understanding of just cause by the Supreme Court may be given as the divorce of the shareholders who are married5, failing to invite a shareholder to the general assembly6 or the lack of adequate technical information on company's practice area7.
C. Participation in Withdrawal
Participation in withdrawal entered into Turkish law by TCC. The purpose of the amendment is to make use of company's sources equally among shareholders as to cash payment. This right serves the purposes of equal treatment principle and procedural economy since it allows to handle more than one shareholder's leaving requests in one legal action.
Right to participation in withdrawal is regulated under article 639 of TCC. Since this right is bestowed by law, there is no need to insert in AoA.
Right to participate in withdrawal may both be used via legal action and unilateral expression of will. Legal classification of this action is controversial. In brief, it may be said that this action doesn't meet any type of case under Turkish procedural law. Therefore, it may be recognized as a sui generis legal action.
In order to benefit from article 639 TCC, (i) just cause shall be applicable to the shareholder requesting participation, (ii) the will of participation in withdrawal shall be duly notified. Article 639 includes the term just cause. However, it should be treated as cause foreseen in AoA as well as just cause in technical meaning.
Dismissal is a right vested to the company corresponding shareholders' right to withdrawal. LLC has a right to dismiss a shareholder who impairs the harmony in the company. The legislator aimed with this right to provide a balance between company and shareholder. Right to dismiss also serves the continuity of company.
I. Contractual Dismissal
Grounds may be envisaged in the AoA regarding dismissal. Unlike contractual right to withdrawal, dismissal without valid ground shall not be envisaged8. Grounds envisaged don't have to constitute just cause in technical meaning.
General assembly has exclusive right to ascertain that ground envisaged has been realized for a shareholder. Quorum for such resolution is at least two third of presenting votes and majority of entire capital having right to vote.
Shareholder who dismissed has right to file a lawsuit for nullity of general assembly resolution within three months upon receiving notification. Shareholder cannot put a claim in this lawsuit with respect to validity of the grounds envisaged in the AoA earlier. Nullity may rely on procedural faults.
II. Dismissal Due to Just Cause
Shareholder of LLC can be excluded from the company due to just cause even if any ground to dismiss isn't envisaged in the AoA. The legislator vested LLC with this right to save continuity of the company by moving away troublemakers.
Dismissal should be last resort for the company since it is closely related with shareholder's right to property9. In other words, if goal targeted may be achieved by another means, dismissal may be unlawful. Furthermore, equal treatment principle should be observed in exercising this right.
As referred above, just cause isn't defined for LLC and the court will evaluate in each individual case whether act in question constitutes just cause. Supreme Court jurisprudence suggests that abuse of manager position10, acquiring unjust profit from company's sources11, acting against anticompetition clause may constitute just cause12.
Dismissal due to just cause may only be decided by the court. In order to request dismissal of shareholder, the LLC has to make a resolution on this. At least two third of presenting votes and majority of entire capital having right to vote is sought for such resolution.
E. The Consequences of Withdrawal, Participation in Withdrawal and Dismissal
Following duly withdrawal, participation in withdrawal or dismissal, shareholder breaks up with the company in brief. The shareholder becomes as it were third party to the company. Legal consequences occur in different moments depending on the type of leaving.
Contractual withdrawal bears its consequences at the time of expression of will while withdrawal due to just cause requires court decision. If participation in withdrawal relies on other shareholder's contractual withdrawal, expression of will will be based on. If a shareholder participates in a withdrawal action before court, then the court decision's date will be based. Dismissal, however, bears its legal consequences on the date of general assembly resolution if contractual. Dismissal due to just cause comes to conclusion on the date of court decision.
The most significant consequence of withdrawal, participation in withdrawal and dismissal is a right of the leaving partner to claim a cash payment equivalent to actual value of her share. Regardless of cause of leaving, leaving shareholder have a right to request a cash payment as per article 641 of TCC. Leaving cause (contractual or just cause) may constitute tort or crime under Turkish law as well. In this case, separate compensation may be claimed.
Amount of cash payment may be determined in the AoA. If not, actual value of leaving shareholder's share should be paid. Actual value isn't defined under TCC and preamble states definition of actual value is left to the courts and scholars. It is stated in doctrine that actual value is amount that a person willing to buy shares should pay. This includes all factors such as properties of company, customer group, profit amount distributed.
Cash payment becomes due if (i) company is disposing of utilized equity, or (ii) leaving partner's principal capital shares are transferrable, or (iii) principal capital is decreased in accordance with the related provisions.
Shareholders in LLC are vested with right to withdraw. This right may be envisaged in AoA and even if not, just cause may be legal ground to withdraw. Participation in withdrawal is granted by TCC for the first time in order to provide equality among shareholders in requesting cash payment and for procedural economy. Dismissal, however, is a right of LLC granted to save continuity of harmony in the company. Like withdrawal, it may be envisaged in the AoA or just cause may constitute legal ground.
1. Tarhan, Mehmet Umur: Limited Şirkette Çıkma ve Çıkarılma, Türk Ticaret Kanunu Sempozyumu, İstanbul 2018, p.180.
2. Baştuğ, İrfan: Limited Şirkette Ortağın Çıkma ve Çıkarılması, İzmir 1966, s. 16; Üçışık, Güzin: Limited Şirkette Ortağın Ortaklıktan Çıkarılması, Prof. Dr. Fahiman Tekil'in Anısına Armağan, İstanbul 2003, p. 41.
3. Tekinalp, Ünal: Sermaye Ortaklıklarının Yeni Hukuku, İstanbul 2013, p. 490.
4. Sup. C. 11. CC., Doc. 2001/3297, Dec. 2001/5291, D. 11.6.2001, (Kazancı İçtihat Bilgi Bankası, Access Date: 15.03.2019).
5. Sup. C. 11. CC., Doc. 2016/2571, Dec. 2017/5023, D. 4.10.2017, (Kazancı İçtihat Bilgi Bankası, Access Date: 18.03.2019).
6. İstanbul Regional Civil Court, 12. CC., Doc. 2018/1563, Dec. 2018/1117, D. 01.10.2018, (Kazancı İçtihat Bilgi Bankası, Access Date: 15.03.2019).
7. Sup. C. 11. CC., Doc. 2014/8798, Dec. 2014/14978, D. 1.10.2018, (Kazancı İçtihat Bilgi Bankası, Access Date: 16.03.2019).
8. Şahin, Ayşe: "Yeni Türk Ticaret Kanunu'nun Limited Ortaklıkta Ortağın Çıkması ve Çıkarılmasına İlişkin Hükümlerinin Değerlendirilmesi", Ersin Çamoğlu'na Armağan, İstanbul 2013, p. 191.
9. Taşdelen, Nihat: Limited Ortaklıklarda Çıkma Çıkarılma ve Fesih, Ankara 2012, p. 223.
10. Sup. C. 11. CC., Doc. 2015/14202, Dec. 2017/2710, D. 8.5.2017, (Kazancı İçtihat Bilgi Bankası, Access Date: 12.03.2019).
11. Sup. C. 11. CC., Doc. 2017/1950, Dec. 2018/7602, D. 4.12.2018, (Kazancı İçtihat Bilgi Bankası, Access Date: 12.03.2019).
12. Sup. C. 11. CC. Doc. 2003/492, Dec. 2003/5870, D. 3.6.2003, (Kazancı İçtihat Bilgi Bankası, Access Date: 12.03.2019).
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.