ARTICLE
20 January 2025

Invalid Decisions Of The Board Of Directors Of A Joint Stock Company

E
Egemenoglu

Contributor

Egemenoglu is one of the largest full-service law firms in Turkey, advising market-leading clients since 1968. Egemenoğlu who is proud to hold many national and international clients from different sectors, is appreciated by both his clients and the Turkish legal market with his fast, practical, rigorous and solution-oriented work in a wide range of fields of expertise. Egemenoğlu has been considered worthy of various rankings by the world’s most leading and esteemed rating institutions and legal guides. We have been ranked as Recognized in “Project and Finance” and “Mergers and Acquisitions” areas by IFLR 1000. We also take place among the top- tier law firms of Turkey at the rankings of Legal 500, at which world’s best law firms are regarded, in “Employment Law” and “Real Estate / Construction” areas. Also our firm is regarded as significant by Chambers& Partners in “Employment Law” area as well.
Turkish Commercial Code No. 6102 is different from the former Turkish Commercial Code by specifically regulating the invalidity of the decisions of the board of directors.
Turkey Corporate/Commercial Law

I INTRODUCTION

Turkish Commercial Code No. 6102 is different from the former Turkish Commercial Code by specifically regulating the invalidity of the decisions of the board of directors. Apart from nullity, legal transactions that have constituent elements but contain serious illegalities in terms of their content and lack validity conditions are invalid. In this article, the circumstances under which the decisions of the board of directors will be invalid will be evaluated within the scope of Article 391 of the TCC.

II INVALID DECISIONS OF THE BOARD OF DIRECTORS

Pursuant to Article 391/1 of the TCC, the decisions of the board of directors that (i) are against to the principle of equal treatment, (ii) do not comply with the basic structure of the joint stock company or do not observe the principle of capital protection, (iii) violate the rights of the shareholders, especially the inalienable rights of the shareholders, or restrict or make it difficult to their exercise, and (iv) that involved the inalienable powers of other bodies and are related to the transfer of these powers are invalid.

The nullity reasons listed in Article 391 of the TCC are not restrictive. Hence, the first sentence of the Article emphasizes that the enumeration made with the word "in particular" is not restrictive. Thus, this issue is also stated in the preamble of the article as follows: "In the provision, the most common invalid decisions are presented with examples (by enumeration)."1 For this reason, transactions that are contrary to the mandatory provisions of the law, morality, public order, personal rights or whose subject matter is impossible (invalid) are absolutely invalid except for those listed in the article within the meaning of Article 27 of the Turkish Code of Obligations.2

a. Decisions against to The Principle of Equal Treatment

While the principle of equal treatment was an unwritten principle of the law of joint stock companies prior to the reform of the Commercial Code, it is stipulated as a legal rule in the new regulation (Art. 357 TCC).3 The principle of equal treatment shall be understood as the obligation to treat all shareholders under equal legal conditions in an equal manner. Violation of the principle of equality also constitutes a violation of the honesty rule as defined in Article 2 of the Turkish Civil Code4. For example, a decision stating that a shareholder who votes against an item on the agenda of the general assembly regarding the distribution of dividends will not benefit from the right to dividends5, the negative vote of some shareholders during the capital increase decision in the general assembly, or for any other reason, the board of directors does not give these persons the opportunity to exercise their pre-emptive rights in relation to the new shares to be issued, or while demanding the balance capital debt, demanding the entire balance debt from some shareholders, and demanding only 50% of the debt from the founding shareholders, is contrary to the principle of equal treatment and is invalid.

b. Decisions That Do Not Comply with The Basic Structure of The Joint Stock Company or Do Not Observe the Principle of Capital Protection

The decisions against to the basic structure of the joint stock company are explained in the preamble to Art. 391 TCC, based on the Swiss doctrine, as follows: " The decisions of the board of directors that are against the mandatory provisions of the general rules of law are invalid.

For example, a resolution of the board of directors imposing additional payment obligations for all shareholders in order to cover balance sheet deficits is contrary to the principle of limited liability of shareholders, which is a defining principle of the basic structure of the joint stock company (Art. 421/2-a of the TCC is reserved).7 To give another example, resolutions that are contrary to the single debt relationship applicable in joint stock companies in relation to the obligation of the shareholders, resolutions that impose additional obligations or personal liability on the shareholders other than their commitments, or the delegate or letter voting system instead of shareholders or their representatives in attending and voting at the general assemblies, or situations that impose veto rights for each shareholder, or the decision of the board of directors to distribute the balance sheet resolution are considered as examples that do not comply with the basic structure of the joint stock company or the distribution of duties between the organs of the company.8

In terms of the principle of capital protection, invalid board decisions may also include violations of the provisions that protecting the capital. For example, the board of directors' proposals that submitted to the general assembly regarding the issuance of new shares below the nominal value, or the granting of exit rights to the shareholders to be paid from the company's cash register, as well as the board of directors' resolutions regarding the dividend distribution to be decided by the board of directors instead of the general assembly are also invalid due to the violation of the principle of capital protection.

c. Decisions That Violate Shareholders' Rights, Especially Those That Are Inalienable, Or That Restrict or Restrain Their Exercise.

The reason for the invalidity of the board of directors' resolutions under Article 391/1/c of the TCC is not the granting of rights equal to the rights of the shareholder to the third party, but the violation or restriction of the exercise of the shareholder's inalienable rights. For example; subjecting the filing of an annulment action to the approval of the board of directors, abandoning the purpose of the joint stock company to generate and share profits, making the issuance of an entrance card to the general assembly or making obtaining and reviewing information pursuant to Article 437 of the TCC conditional upon the signing of a letter of undertaking required by the board of directors, prohibiting participation in the general assembly with a representative (Article 425), and requiring independent and corporate representatives (Article 428) to deposit collateral with the company.9

d. Decisions That Fall Within the Inalienable Powers of Other Bodies and Decisions Regarding the Delegation of These Powers

The provision of Article 391/1 subparagraph d of TCC is related to the basic structure of the joint stock company, and at the same time aims to protect the non-transferable powers of the organs, especially the order set forth in Articles 375, 397, 398 and 408 of the code. The provision applies to the transfer of inalienable powers individually as well as in whole.10 The code lists the inalienable powers and duties of each organ of the joint stock company. For example, according to Article 408 of the TCC, the amendment of the articles of association, the election of the members of the Board of Directors and auditors and determination of their remuneration, making decisions on their release, disposing of the annual profit, determination of dividends and proift shares, and taking decisions on the use of the reserve fund, including its inclusion in the profit, are among the inalienable powers of the general assembly.

III. CONCLUSION

Although Article 391 of the TCC lists by way of example which resolutions of the board of directors are invalid, resolutions of the board of directors that contain serious violations of law and lack validity conditions are invalid in accordance with the general provisions. Accordingly, the decisions of the board of directors that are contrary to the principle of equal treatment, that do not comply with the basic structure of the joint stock company or that do not observe the principle of capital protection, that violate the rights of the shareholders, especially the inalienable rights of the shareholders, or that restrict or make it difficult to exercise these rights, and that fall within the inalienable powers of other organs and regarding the transfer of these powers are invalid. A decision that is determined to be invalid by the court is null and void from the beginning and does not take effect at any stage.

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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