INTRODUCTION
The preservation of the shareholder structure in limited companies and the maintenance of a balance of interests among shareholders become even more critical, particularly in structures where the number of shareholders is limited. In this context, whilst the expulsion of a shareholder from the company may be possible through a general meeting resolution or a court order, the application of the enhanced quorums stipulated in Article 621/1 of the Turkish Commercial Code No. 6102 (“TCC”) for “important decisions” gives rise to significant controversy. This is because these quorums effectively prevent the expulsion mechanism from being implemented in practice and may lead to the company becoming paralysed in situations where the shareholder relationship has become unsustainable.
How is Expulsion Regulated in Limited Companies?
Expulsion may be carried out in two ways: based on the grounds specified in the company’s articles of association or on just cause.
- Pursuant to Article 640(1) of the TCC, if the grounds provided for in the company’s articles of association exist, expulsion may be effected by a resolution of the general meeting;
- pursuant to Article 640/3 of the TCC, if there is just cause, the shareholder may be expelled by a court decision at the company’s request.
In both cases, a resolution of the general meeting must be obtained for the decision to expel a shareholder to be valid. This is because, under the case law of the Court of Cassation, the resolution of the general meeting is accepted as a condition for bringing an action for expulsion by court order.
What are the Quorum and Voting Requirements for the General Meeting Resolution on Shareholder Expulsion?
The general meeting resolution regarding the expulsion process is classified as a “major decision” under Article 621/1-h of the TCC. Therefore, for a resolution to expel a shareholder to be adopted:
- At least two-thirds of the represented votes and,
- the absolute majority of the share capital with voting rights,
must be met.
In accordance with the prevailing view in legal doctrine, it is accepted that in the general meeting resolution required for the expulsion of a shareholder for just cause, the shareholder to be expelled is not deprived of their voting rights and may vote on the resolution concerning their own expulsion.
It should also be noted that Article 616 of the TCC lists the application to the court for the expulsion of a shareholder and the expulsion of a shareholder on grounds specified in the company’s articles of association among the general meeting’s non-delegable powers. Therefore, a general meeting resolution must be adopted for a shareholder to be expelled from the company.
Are the Provisions Governing Shareholder Expulsion Applicable to Two-Shareholder Limited Liability Companies?
The provisions of the TCC do not contain any specific regulations applicable to two-shareholder limited liability companies, unlike ordinary limited liability company structures. In this context, for decisions regarding the expulsion of a shareholder, the dual quorum stipulated in Article 621/1-h of the TCC namely, “at least two-thirds of the represented votes” and “an absolute majority of the share capital with voting rights” must be met. This quorum is not merely a decision-making threshold but also constitutes a meeting quorum, and in this respect, it effectively requires the participation of both shareholders.
As a natural consequence of this structure, since the shareholder targeted for expulsion has not been deprived of their voting rights, they are able to block a decision taken against them; in other words, this creates a de facto veto effect over the decision-making process. Particularly in companies with two shareholders holding equal shares, it is clear that the shareholder sought to be expelled will vote against the resolution. In such a situation, it is not possible to meet the quorums prescribed by law, and the mechanism for expulsion becomes ineffective in practice.
Indeed, the Court of Cassation has also stated in a ruling that, given the company has two shareholders and the shareholders hold equal shares, it is in practice impossible to adopt such a decision.
In the same vein, in its decision numbered E. 2019/3224, K. 2020/2963, the 11th Civil Chamber of the Court of Cassation stated that it is stipulated that general meeting resolutions regarding an application to the court for the expulsion of a company shareholder may only be adopted if both a two-thirds majority of the votes represented and an absolute majority of the share capital with voting rights are present; however, given that the majority required by law cannot be achieved in a general meeting convened with the participation of only one of the two shareholders in a two-shareholder limited company, the said resolution is deemed null and void .
Constitutional Court Decision and Rationale
Bakırköy 1st Civil Commercial Court;
- Article 616/1-h of the TCC, which classifies the expulsion of a shareholder as one of the general meeting’s non-delegable duties, and,
- Article 621-h of the TCC, which classifies the decision to expel a shareholder as a significant general meeting decision and establishes a special quorum,
It sought the annulment of the aforementioned provisions on the grounds that they rendered the expulsion of a shareholder impossible in two-shareholder companies and that the failure to introduce regulations for two-shareholder limited companies—despite such regulations existing for general shareholderships—was contrary to the principle of equality.
In its examination, the Constitutional Court determined that, in limited companies with two shareholders holding equal shares, it is in practice impossible to adopt a general meeting resolution to remove one shareholder from the company, even where there are valid grounds; conversely, a shareholder can only resort to an indirect route by requesting the dissolution of the company, yet this route does not guarantee a direct removal. In this context, it was concluded that the practical impossibility of utilising the option to apply to the court via the general meeting demonstrated the absence of an effective recourse mechanism, and that this situation constituted a violation of the Constitution.
Consequently, it was decided to annul Article 616/1-h of the TCC, which stipulates that a claim for shareholder expulsion is among the non-delegable duties of the general meeting, and Article 621/1-h of the TCC, which classifies resolutions on shareholder expulsion as significant general meeting resolutions subject to a special quorum requirement, with respect to two-shareholder limited liability companies.
What Does the Dissenting Opinion Argue?
The dissenting opinion focuses on two main points. Firstly, it is argued that, within the framework of the principle of the prudent trader and freedom of contract, a person choosing to become a shareholder in a limited liability company must be aware that the possibilities for shareholder expulsion are limited. It is further stated that the legislator has deliberately restricted the expulsion mechanism in this structure—where shareholders are liable only up to the capital they have committed, rather than with their personal assets, unlike in ordinary partnerships and limited partnerships. In this context, it is emphasised that, since the separation payment to be made to the expelled shareholder is to be paid directly from the company’s assets rather than from the shareholders’ personal assets, such payment may reduce the company’s capital and create risks for creditors; accordingly, restricting this mechanism serves the purpose of protecting the company’s capital structure.
Secondly, it is noted that the legal system is not entirely defenceless against deadlock situations that may arise in two-shareholder companies; provisions that can be included in the articles of association, shareholder agreements, and actions for withdrawal or dissolution on just cause offer alternative solutions. Furthermore, it is noted that differing interpretations of whether a shareholder whose removal is sought may vote in the relevant resolution could significantly alleviate the deadlock problem. Pointing out that there is no uniform model in comparative law, and noting the differing approaches in Swiss, German and French law, as well as the lack of harmonisation in this area within European Union law, it is argued that the relevant provisions do not constitute a breach of the Constitution.
Conclusion
The Constitutional Court’s decision constitutes a significant turning point in that it addresses the deadlock arising from voting quorums in two-member limited companies at a constitutional level and confirms that the expulsion mechanism has effectively become non-functional.
With this decision, the Constitutional Court has annulled, solely in respect of two-shareholder limited liability companies, the provisions of Article 616/1-h of the TCC, which stipulates that applying to the court for the expulsion of a shareholder is among the non-delegable duties and powers of the general meeting, and Article 621/1-h of the TCC, which classifies resolutions regarding shareholder expulsion as significant general meeting resolutions subject to a special quorum requirement. Thus, the aim is to overcome the practical veto and deadlock issues arising in companies with two shareholders holding equal shares.
However, it is important to consider how the decision will be implemented in practice and, in particular, how the judicial approach to cases brought without a general meeting resolution will develop. For this reason, when establishing a limited company or revising existing articles of association, it is important to include provisions designed to prevent potential disputes between shareholders and to regulate exit mechanisms (such as buy-out rights and withdrawal arrangements).
QUESTION & ANSWER
Is it possible to expel a shareholder from a two-shareholder limited company?
Yes. However, the quorum stipulated in Article 621/1-h of the TCC had, in practice, rendered it impossible to secure the necessary general meeting resolution in two-shareholder structures with equal shares, due to the departing shareholder’s de facto veto power. With the Constitutional Court’s annulment decision, this provision has been repealed for two-shareholder limited companies; thus, the structural obstacle to the mechanism has been removed.
Can legal proceedings be initiated without a general meeting resolution?
Under Article 616/1-h of the TCC, applying to the court for the expulsion of a shareholder was considered one of the general meeting’s non-delegable powers, and the Court of Cassation had accepted this as a prerequisite for bringing a claim. Consequently, claims filed without a general meeting resolution were dismissed on the grounds of the absence of a prerequisite. With the Constitutional Court’s annulment decision, this requirement has been removed for limited companies with two shareholders. However, judicial precedents will be decisive in determining how the practice will take shape.
Which provisions of the Turkish Commercial Code have been annulled?
TCC Art. 616/1-h (the general meeting’s non-delegable authority to refer matters to court)
TCC Art. 621/1-h (special quorum requirement for expulsion)
Does this decision apply to all limited companies?
No. The decision applies only to limited companies with two shareholders. In companies with three or more shareholders, the existing quorum rules remain in force.
