Resignation, Exclusion From Limited Liability Companies And Current Practice

1. INTRODUCTION

Although limited liability companies are regulated as capital companies under the Turkish Commercial Code No. 6102 (“TCC”), they constitute a corporate structure in which the personal relations between shareholders and the element of mutual trust carry considerable importance. Particularly in limited liability companies with a small number of shareholders, the deterioration of mutual trust or the continuation of the shareholding relationship becoming intolerable for one of the parties may significantly hinder the conduct of the company’s activities.

Although the continuity of the company and the shareholding relationship is the general principle, no shareholder should be compelled to remain in the company regardless of the circumstances. Likewise, allowing a shareholder whose conduct or personal circumstances adversely affect the company’s operations to retain shareholder status indefinitely may conflict with the interests of the company and the other shareholders. For this reason, the legislator has introduced the mechanisms of withdrawal and expulsion, which allow the legal relationship between the relevant shareholder and the company to be terminated without dissolving the company as a whole.

The withdrawal of a shareholder from a limited liability company is regulated under Article 638 of the TCC. Pursuant to this provision, the articles of association may grant shareholders a right of withdrawal and may make the exercise of such right subject to certain conditions. In addition, each shareholder may bring an action requesting the court to permit their withdrawal from the company where just cause exists. During the proceedings, the court may, upon request, suspend some or all of the claimant’s rights and obligations arising from the shareholding relationship or order any other necessary interim measures.

The expulsion of a shareholder is regulated under Article 640 of the TCC. Accordingly, the articles of association may set out the grounds upon which a shareholder may be expelled by a general assembly resolution. A shareholder who has been expelled may bring an action for annulment of the resolution within three months following notification of the resolution through a notary public. Furthermore, upon the company’s request, a shareholder may be expelled by a court decision where just cause exists.

Withdrawal and expulsion do not merely result in the termination of shareholder status. These mechanisms raise several legal issues, including whether the grounds relied upon constitute just cause, who is entitled to bring the relevant action, the competent court and territorial jurisdiction, interim legal protection during the proceedings, the calculation and payment of the withdrawal compensation, and the protection of the company’s financial structure. Accordingly, withdrawal and expulsion proceedings in limited liability companies must be considered together with the relevant provisions of the TCC, academic opinions and current judicial practice.

2. WITHDRAWAL OF A SHAREHOLDER FROM THE COMPANY

Withdrawal refers to a limited liability company shareholder’s voluntary declaration of their intention to leave the company. Through such declaration, the shareholder terminates their relationship with the company and loses their shareholder status. Apart from exercising the right of withdrawal, the transfer of the company share to a third party may also produce the same result. However, share transfers may be prohibited in limited liability companies, or the general assembly may refuse to approve a transfer. Therefore, where a share transfer cannot be completed, the shareholder may resort to exercising the right of withdrawal.

The right of withdrawal is regulated under Article 638 of the TCC. Pursuant to this provision, a shareholder may terminate their shareholder status either by exercising a contractual right of withdrawal set out in the articles of association or by obtaining a court decision on the basis of just cause. In other words, withdrawal may arise through the exercise of a contractual right or by virtue of a court decision.

1. Contractual Right of Withdrawal

The articles of association may regulate the shareholders’ right to withdraw from the company. The right of withdrawal may be included in the articles of association at the time of incorporation or introduced at a later stage by amending the articles of association.

The right of withdrawal may be exercised without being subject to any condition. Alternatively, provided that mandatory legal provisions and morality are not violated, the exercise of the right may be made conditional upon the occurrence of certain events.

In order to exercise the right of withdrawal set out in the articles of association, it is sufficient for the withdrawing shareholder to notify the company of their intention to withdraw. The TCC does not prescribe any mandatory form requirement for exercising this right. However, the articles of association may require the notification to be made in writing.

As the right of withdrawal is a formative right, the declaration of withdrawal produces its legal effects once it reaches the company. Nevertheless, where the contractual right of withdrawal is subject to certain conditions, a dispute may arise as to whether those conditions have been fulfilled. In such case, either party may refer the dispute to the competent court, which will determine whether the relevant conditions have occurred.

2. Withdrawal by Court Decision

Pursuant to Article 638/2 of TCC, each shareholder may bring an action requesting permission to withdraw from the company where just cause exists. This statutory right is mandatory and may not be abolished or made more difficult through the articles of association.

Where circumstances constituting just cause arise for a shareholder, that shareholder may apply to the court for a decision permitting withdrawal from the company. The existence of just cause does not necessarily require fault. However, the circumstances relied upon should not have arisen predominantly as a result of the conduct of the shareholder requesting withdrawal.

3. Participation in Withdrawal

Article 639 of the TCC regulates “participation in withdrawal.” Under this provision, where one shareholder withdraws from the company, the other shareholders may also participate in the withdrawal if the conditions for withdrawal are satisfied in respect of them. In such case, all withdrawing shareholders must be treated equally in proportion to their capital shares.

A shareholder may exercise the right to participate in withdrawal where the contractual conditions for withdrawal have been fulfilled in respect of that shareholder or where just cause exists.

For participation in withdrawal to be possible, the manager must notify the other shareholders without delay that a shareholder has exercised a contractual right of withdrawal or has initiated withdrawal proceedings on the basis of just cause. A shareholder wishing to participate must declare their intention to do so or join the previously initiated proceedings within one month following receipt of the notification.

The one-month period is a statutory time limit. Once this period has expired, the shareholder may no longer participate in the pending withdrawal. However, provided that the relevant conditions are satisfied, the shareholder may independently exercise their own right of withdrawal.

3. EXCLUSION OF A SHAREHOLDER FROM THE COMPANY

Article 640 of the TCC provides that a shareholder may be expelled from the company by a general assembly resolution where the conditions specified in the articles of association have occurred. The third paragraph of the same article also regulates the expulsion of a shareholder by court decision on the basis of just cause. Accordingly, a shareholder may be expelled either by a general assembly resolution upon the occurrence of a ground specified in the articles of association or by a court decision where just cause exists.

1. Exclusion Based on the Articles of Association

Pursuant to Article 640/1 of the TCC, the articles of association may specify the grounds upon which a shareholder may be expelled from the company by a general assembly resolution. Such grounds may be included in the articles of association at the incorporation stage or introduced at a later stage through an amendment. The articles of association may therefore provide that shareholders may be expelled by a general assembly resolution upon the occurrence of specifically identified circumstances.

This mechanism allows matters considered essential for the company to be expressly emphasised in the articles of association while also ensuring legal certainty for the shareholders. Where one of the grounds set out in the articles of association has occurred, a general assembly resolution must be adopted in order to expel the relevant shareholder. The resolution must also be notified to the shareholder through a notary public. The expelled shareholder may bring an action for annulment within three months following notification of the resolution. This three-month period is a statutory time limit. Accordingly, once the period has expired, an annulment action may no longer be brought and the expulsion resolution becomes final.

2. Exclusion by Court Decision

In addition to the grounds specified in the articles of association, a shareholder may be expelled by a court decision where just cause exists, pursuant to Article 640/3 of the TCC. Where just cause has arisen, the company may initiate legal proceedings seeking the expulsion of the shareholder responsible for the relevant circumstances. The interest protected by this provision is the company itself. A shareholder whose conduct gives rise to circumstances that endanger the continuity or proper functioning of the company may therefore be expelled through court proceedings initiated following a general assembly resolution.

The action must be brought by the company against the shareholder whose expulsion is sought before the commercial court of first instance at the place where the company’s registered office is located. For a shareholder to be expelled by a court decision, the claimant company must allege and prove the existence of just cause. The expulsion produces its legal consequences once the court decision becomes final.

3. General Assembly Quorums for Expulsion Resolutions

In order to expel a shareholder on the basis of a ground specified in the articles of association or to initiate court proceedings for expulsion on the basis of just cause, the general assembly must adopt a resolution in accordance with Article 621/1(h) of the TCC. Accordingly, both at least two-thirds of the votes represented at the meeting and the absolute majority of the entire share capital carrying voting rights must be present concurrently.

4. CURRENT PRACTICE

In current judicial practice, the circumstances relied upon as just cause for the withdrawal or exclusion of a shareholder are assessed in light of the particular facts of each case. Not every disagreement between shareholders or every act undermining mutual trust is regarded as sufficient on its own. The courts examine whether the dispute has objectively rendered the continuation of the shareholding relationship intolerable. Persistent and serious disputes between shareholders, deadlock in the company’s management, systematic obstruction of a shareholder’s information and inspection rights, use of company resources for personal benefit, unjustified non-distribution of profits and the company becoming unable to achieve its corporate purpose may be taken into consideration when assessing the existence of just cause. However, where the circumstances relied upon have predominantly arisen from the conduct of the shareholder seeking withdrawal, the claim must also be examined in accordance with the principle of good faith.

In court proceedings for exclusion, it is particularly important that the action be brought by the company as a legal entity and that a valid general assembly resolution satisfying the quorum requirements under Article 621 of the TCC be adopted before the proceedings are initiated. In the practice of the Court of Cassation, a general assembly resolution authorising the initiation of exclusion proceedings on the basis of just cause is treated as a procedural prerequisite. Therefore, actions initiated solely by a manager or by other shareholders, without a duly adopted general assembly resolution on behalf of the company, may face procedural objections. The court will examine the extent to which the conduct of the shareholder whose expulsion is sought has affected the company’s operations and the relationship of trust between the shareholders. The burden of proving the existence of just cause rests with the claimant company.

One of the most frequently disputed matters in practice concerns the determination of the withdrawal compensation. Under Article 641 of the TCC, a shareholder who withdraws or is expelled is entitled to claim compensation corresponding to the actual value of their capital share. In determining the actual value, reliance solely on the book values appearing in the company’s commercial records is generally insufficient. The company’s assets, movable and immovable property, operational capacity, income, liabilities, brand value and customer portfolio should also be assessed by qualified experts. As a general rule, the withdrawal compensation is calculated as of the date closest to the termination of shareholder status, which is usually the date of the court decision, rather than the filing or amendment date of the action. Nevertheless, determination of the compensation does not necessarily mean that it becomes immediately and fully payable. Pursuant to Article 642 of the TCC, the maturity of the payment must also be assessed by taking into account matters such as the company’s freely disposable equity and the transferability of the relevant capital shares.

5. CONCLUSION

Withdrawal and exclusion constitute important legal mechanisms that provide an alternative to the dissolution of a limited liability company where the continuation of the shareholding relationship has become untenable. While the right of withdrawal protects a shareholder who can no longer reasonably be expected to remain in the company, exclusion enables the removal of a shareholder whose conduct endangers the company’s operations or continuity. However, the exercise of these mechanisms depends on the existence of the conditions set out in the articles of association or of just cause, as well as compliance with the procedural requirements prescribed by law.

In practice, particular attention must be paid to ensuring that the action is brought by the proper party, that the necessary general assembly resolution is duly adopted, that the circumstances constituting just cause are supported by concrete evidence and that the withdrawal compensation is calculated on the basis of the actual value of the relevant share. The courts must protect the financial rights of the withdrawing or expelled shareholder while also safeguarding the company’s capital structure and operational continuity. Therefore, disputes concerning withdrawal and exclusion from limited liability companies should be resolved not only by reference to the termination of shareholder status, but also by considering the company’s economic structure, the balance of interests between the shareholders and the continuity of the commercial enterprise.

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.