Introduction
In joint stock companies, the primary obligation of the shareholder is to fulfill the capital obligation. In addition, capital commitment, which is the primary obligation of the shareholder, is the only obligation of the shareholder and is mandatory. It should be noted that the shareholders' capital commitment obligation will continue to exist as long as the legal personality of the company continues.
In the event that the shareholder defaults in the payment of the capital commitment, which is the primary and sole obligation of the shareholder in joint stock companies, one of the sanctions specified in the Turkish Commercial Code is squeeze-out. With this regulation, which is aimed for the protection of the capital, it will be possible to collect the unpaid shares against the defaulting shareholder. As a basic principle, the sanction of squeeze-out may only be imposed on unpaid shares and only in the event of non-payment of the capital debt.
Capital Commitment Due
Pursuant to Article 344 of the Turkish Commercial Code, at least twenty-five percent of the nominal value of the shares subscribed in cash should be paid before the registration and the remaining capital debt should be paid within twenty-four months following the registration of the company. For the payment of the remaining capital debt, the board of directors shall make a request to the shareholders within twenty-four months.
Article 481 of the Turkish Commercial Code regulates this request. Accordingly, the nominal value of the shares shall be requested from the shareholders by the board of directors through an announcement, unless there is another provision in the articles of association. Pursuant to the regulation, the announcement should clearly state the rate or amount of the capital debt to be paid, the date of payment and where the payment will be made.
Default of Capital Commitment
Pursuant to Article 482 of the Turkish Commercial Code, in the event that the shareholder fails to fulfill the capital commitment on the payment date specified in the articles of association or in the announcement made by the board of directors, the shareholder is obliged to pay default interest without a notice, and it is clearly stated that the company's rights to compensation are reserved.
As a result of default, the board of directors is authorized to (i) deprive the defaulting shareholder of his/her rights arising from the partial payments made, and (ii) sell and replace the share in question and cancel any share certificates issued to him/her.
Squeeze-out Procedure
As stated above, in the event that the shareholder fails to make payment within the period specified in the announcement made by the board of directors for the fulfillment of the capital commitment, in other words, in the event of default, the board of directors has the right to squeeze-out the shareholder. It is important to note here that there is a procedure that the board of directors should comply with in order to apply for squeeze-out.
Pursuant to Article 483 of the Turkish Commercial Code, the procedure for squeeze-out is determined. Accordingly, first of all, the board of directors should make a call to the defaulting shareholder to fulfill its obligation. This call should be made through an announcement in the Trade Registry Gazette and as stipulated by the articles of association, and through a message to be published on the company's website. In addition, it is stated that this invitation and warning should be made to the registered shareholders by registered letter with return receipt requested and by a message on the company's website instead of an announcement.
The notice should include the following points:
- the defaulting shareholder to pay the amount subject to default within one month,
- otherwise, they will be deprived of their rights regarding the relevant shares and
- penalty to be requested.
In order to issue a resolution of squeeze-out, the board of directors should follow this procedure and if the payment is not made by the shareholder within one month, it should adopt a resolution in accordance with the provisions of Article 390 of the Turkish Commercial Code. In addition, it should be noted that the relevant shareholder should be notified in order for the resolution of squeeze-out to take effect.
Accordingly, the following issues should be completed in order for the squeeze-out procedure to complete:
- A capital commitment should be made by the shareholder,
- The board of directors should make an announcement for the payment of the capital commitment, or any other matter required by the articles of association should be fulfilled,
- The shareholder should default by not making payment within the time limit given in the notice,
- The board of directors should issue a new notice to the relevant shareholder in accordance with the law and state that if payment is not made within one month, the shareholder will be squeeze-out,
- If the relevant shareholder fails to fulfill its commitment within one month, the board of directors should adopt a resolution of squeeze-out,
- The board of directors should notify the shareholder of the resolution of squeeze-out.
Consequences of Squeeze-Out
In order to complete the squeeze-out procedure, it is not sufficient to adopt a squeeze-out resolution; the resolution should be notified to the shareholder. Until the notification of the resolution to the shareholder, the shareholder shall continue to exercise all of its rights.
As a result of the squeeze-out, the shareholder will cease to be a shareholder in the relevant shares, in other words, only on the shares on which the shareholder is in default. It is not possible to squeeze-out to be a shareholder for fully paid shares.
It should be noted that the shares subject to squeeze-out continue to exist in the company. The rights regarding the shares that remain unclaimed as a result of the squeeze-out will temporarily pass to the joint stock company itself. These shares subject to squeeze-out should be sold by the board of directors to third parties as soon as possible and the capital commitment should be replaced. The board of directors shall take care of protecting the interests of the company during the sale of the shares. However, the board of directors may be obliged to sell the relevant shares below their nominal value. In such a case, pursuant to Article 483/3 of the Turkish Commercial Code, the defaulting shareholder will continue to be liable to the company for the amount remaining open from the new shareholder's payments.
Since the squeeze out is based on a board of directors' resolution, the board of directors will be liable if the resolution is not in compliance with the law or the articles of association. In such a case, the board of directors may be required to indemnify the shareholder for damages. In addition, the invalidity of the squeeze-out transaction, in other words, its non-existence, nullity or cancellation, are quite common situations in practice. In cases of non-existence (the absence of a constituent element of the transaction, e.g. the absence of a quorum of the board of directors, a resolution taken by another body, etc.) and nullity (situations that are contrary to the mandatory provisions of the law, morality, public order, personal rights, or that are impossible, e.g. contrary to the principle of equal treatment, contrary to the principle of capital protection, etc.), the squeeze-out transaction is invalid from the beginning, and in cases of cancellation (board resolutions cannot be cancelled except for the exceptions specified by the law. However, there are opinions that the board of directors may decide to annul not the board of directors' resolution, but the squeeze-out transaction), it should be stated that the squeeze-out transaction is valid until the court decision cancels the squeeze-out transaction.
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.
