Lawsuit for “Dissolution of Joint Stock Corporation by Just Cause” introduced with Article 531 of the Turkish Commercial Code No. 6102 [“TCC”] is a minority right that allows the court to intervene in the partnership for the purpose of protecting the minority shareholders in case of malfunction of the majority principle in joint stock corporations.1 A similar lawsuit is regulated in Article 636/3 of the TCC for limited liability partnerships. In this lawsuit, the court has discretion to rule on a different acceptable solution instead of dissolution if it deems more suitable considering the case. In the article, squeeze-out of the respective minority shareholders in exchange for real value of their shares has been suggested as an example of alternative solutions. Accordingly, this provision aims to protect the minority shareholders against the majority, while preventing the minority from using this right as an instrument to force their requests. At this point, the concept of “just cause” and the court's power of discretion regarding alternative solutions become critical.
2. The Concept of Just Cause and Situations That May Constitute Just Cause
Just cause is a discretionary concept––its content is not precisely determined and may arise in different appearances depending to the specifics of each case.2 The respective Article 531 of the TCC does not provide any definition and leaves it to the discretion of the judge. From this point of view, it would not be wrong to say that a situation that may constitute a just cause for an incident may not be of this nature in another. Cases that may constitute just cause in joint stock corporations can be examined under two main subjects: where the majority abuses its power, and where the operation of the company collapses regardless of the abuse of power by the majority.
I. Abuse of Power by the Majority and Examples of Such Abuse
The general principle in corporate law is the majority rule. Yet, in the event that the majority abuses its power, this may constitute a just cause for dissolution of the joint stock corporation. There are three essential conditions for a situation to constitute just cause based on the abuse of the power of the majority, for this, three conditions must be in place: existence of decisions or acts constituting abuse of the majority, continuity of the abuse, and actual existence of the abuse.3
Most of the cases that constitute an abuse occur through the violation of the property rights or other voting-related rights of the shareholders. Just cause for dissolution may arise in cases where shareholders' property rights such as dividend rights, liquidation rights, right of first refusal and/or preemptive rights are violated, and the other aforementioned conditions are met. As the ultimate purpose of joint stock corporations is to make profit, most of the disputes are related to dividend rights. If a joint stock corporation does not distribute dividend or distributes dividend with a low payout ratio and all the other options for the minority shareholders to receive profit are blocked, this situation may constitute a just cause for dissolution. However, for this situation to constitute a just cause, the majority must use its power for a purpose that is unfamiliar with the company. Forcing the minority to sell their shares, punishing the minority, and granting benefits to individuals who are outside of the company are the most common cases in practice.
The Court of Cassation does not consider the violation of property rights itself sufficient to constitute a just cause for dissolution but has attached importance to the violation of multiple rights together, such as violation of the right to request information, failure of the general assembly to meet regularly, increase in the wages of the members of the board of directors while the dividend decreases or existence of another personal or partnership dispute between the parties.
II. Other Situations That May Constitute Just Cause
Apart from the majority's abuse of power, just cause may arise due to the collapse of company operations, as well. In cases like capital loss, mismanagement, or impossibility of the company to fulfill its purpose may constitute just cause for dissolution if these situations are continuous and unimprovable, and being in the partnership becomes unbearable by the plaintiff shareholder. Besides, it should be also considered that personal reasons and relations between shareholders might be notably effective in the company operations, especially in closed joint stock corporations including family businesses where the number of stakeholders is low. If these reasons cause continuous disruption of the company operations, there is no doubt that they would constitute a just cause.
3. Secondary Nature of the Lawsuit
Dissolution of a joint stock corporation would not only affect the shareholders but also the creditors of the company, its employees, third parties doing business with the company, and even the country's economy.4 For this reason, the lawsuit for dissolution of the joint stock corporation by just cause is considered to have a secondary nature. This has two meanings: First, if it is possible for minority to eliminate the just cause by filing an annulment action, liability action or similar legal means, it is required to apply to these remedies before filing a dissolution lawsuit by just cause. Accordingly, the action for dissolution by just cause is not considered as a minority shareholding right that can be used on its own. On the contrary, if the acts that constitute just cause concern another shareholding right, then the Court of Cassation examines whether the minority shareholder has exercised his or her other rights of litigation, as the dissolution lawsuit by just cause is subject to the "ultima ratio” [last resort] principle. Accordingly, in a case brought before the 11th Chamber of the Court of Cassation, the court rejected the case because of the plaintiff's failure to file a lawsuit for annulment against the general assembly decisions in the first place and found the action contrary to the principle of good faith.5 Second if it is possible to eliminate the adverse situation that constitutes just cause through an alternative solution other than dissolution of the corporation, the court should not rule for dissolution. As a matter of fact, the court of first instances' decisions on the dissolution are mostly reversed by the Court of Cassation if it was possible to decide on an alternative solution rather than dissolution.6
4. Characteristics of the Lawsuit Regarding Procedural Law
Right to file a lawsuit for dissolution of a joint stock corporation is granted to the owners of the shares representing one-tenth of the company's capital, and one-twentieth in publicly-held corporations. The specified rate can be fulfilled by a single shareholder alone, or can be achieved by more than one shareholder. For example, a shareholder who holds one-twentieth of the capital in a closed corporation cannot file this lawsuit alone, can do it together with another shareholder so long as the latter holds at least one-twentieth of the capital.
Lawsuit for dissolution of joint stock corporation by just cause is filed against the legal entity of the company. It is not possible to file this lawsuit against the majority who are alleged to cause to just cause or the board of directors. The lawsuit must be directed to the legal entity of the company, otherwise the courts reject the case because of “the lack of capacity to be sued”.
II. Time to File the Lawsuit
There is no provision stipulating a certain time limitation to file this lawsuit. Although there are counter arguments in the doctrine7, given that there are other legal remedies that may be required before filing this case due to its secondary nature, it would not be appropriate to impose time limitation.8 It is in favor of the plaintiff to wait for the just cause to become stronger before filing the lawsuit. Nevertheless, the court will have the last say to determine that whether filing the case after a very long time will be contrary to the principle of good faith.
III. Competent Court
Competent court is the commercial court of first instance where the headquarters of the company is located. Accordingly, this authorization rule will constitute a definite authority of the respective court, meaning that if the lawsuit is initiated before another court, that court must reject the case, and that the parties are not allowed to authorize another court through agreement.
5. Decisions That Can Be Ruled by the Court
Depending on the case at the hand, if there are serious just causes that will require dissolution, the court may decide on the dissolution of the company or an alternative solution. Due to the secondary nature of dissolution, the court is obliged to implement an alternative solution if possible even in the presence of a just cause. As a matter of fact, the Court of Cassation mostly reverses the decisions ruling dissolution directly without seeking alternative solutions.9 Dissolution should be considered as a last resort, and it should be taken into account that all shareholders will be affected by dissolution of the company.
In terms of alternative solutions, as applied in the majority of judicial decisions, the purchase of minority shares by the company may be ruled. However, this solution may not be suitable for all types of companies and can also be abused. Also, the company must have financial power to buy the respective shares. In many decisions of the Court of Cassation, the company had to be dissolved since the company did not have financial resources to buy the minority shares.10
It is also suggested in the doctrine that the court may also act as the general assembly and rule on dividend distribution, appointment of a minority representative to the board of directors, dismissal of the members of the board of directors or amendment of articles of association.
It is also possible for the court to substitute the board of directors and rule on an alternative solution, if the just cause has been arisen due to a decision of the board of directors. Accordingly, the court may cancel or change that decision. The court may also act as the board of directors and implement a decision to eliminate the just cause.
Apart from these, the court may rule on structural changes that will eliminate the just cause. Especially in joint stock corporations where the stakeholders are also legal entities, the court's application of alternative solutions such as merger, division or change of type might be more appropriate.
In a lawsuit for dissolution of joint stock corporation by just cause, the court is entitled to decide on an alternative solution suitable for the situation even if the plaintiff's request is dissolution. Alternative solutions are not limited to those set out in the TCC and should be evaluated on a case-by-case basis. Although various solutions as an alternative to the dissolution are discussed in the doctrine, the judicial decisions indicate that the courts tend to rule on purchase of the minority shares by the company. It is clear that developing the practices in this area and deciding on alternative solutions in line with the requirements of the concrete case would be in accordance with the purpose of Article 531 of the TCC and would result in more equitable consequences for the parties.
1. Ayşe Şahin, Anonim Ortaklığın Haklı Sebeple Feshi, Vedat Kitapçılık, 2013, 7.
2. Rona Serozan, Medeni Hukuk, Vedat Kitapçılık, 2013, I 4 N 15.
3. Özlem İlbasmış Hızlısoy, Anonim Şirketin Haklı Sebeple Feshi, Adalet Yayınları, 2016, 92.
4. İlbasmış Hızlısoy, 253.
5. Yargıtay 11. HD. 2015/14221 E., 2017/3922 K., 20.06.2017 T.
6. E.g. Yargıtay 11. HD. 2018/1177 E., 2019/3046 K., 16.04.2019 T.; Yargıtay 11. HD. 2015/9088 E., 2016/2352 K., 03.03.2016 T.
7. Erdoğan Moroğlu, Öneriler, 313, 314
8. İlbasmış Hızlısoy, 220, 221
9. Yargıtay 11. HD., 2014/3669 E., 2014/10238 K., 02.06.2014 T.
10. E.g. Yargıtay 11. HD., 2015/6751 E., 2015/13424 K., 14.12.2015 T.; Yargıtay 11. HD. 2015/6768 E., 2015/10302 K., 12.10.2015 T.; Yargıtay 11. HD., 2014/17428 E. 2015/8840 K., 06.07.2015 T.
Originally published 31 May, 2021
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