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December 21, 2023

Termination For Just Cause Lawsuits In Joint Stock Companies 

INTRODUCTION

Termination of a joint stock company for just cause is a right granted by the legislator to minority shareholders in joint stock companies. Although the concept of just cause termination was incorporated in the Swiss Code of Obligations, there was no provision in the repealed Turkish Commercial Law No. 6762. Termination of a joint stock company for just cause is incorporated into our legislation for the first time in Article 531 headed “Termination for Just Cause” under the “Termination and Liquidation” part of the Turkish Commercial Code No. 6102 (“TCC”), which went into force in 2012. In this article, the termination of joint stock companies for just cause (“Termination Lawsuit”) will be explained and the concept of just cause subject to the termination request will be discussed in the light of the doctrine and the opinions of the Supreme Court.

TERMINATION LAWSUIT IN GENERAL 

One of the most powerful rights provided to minority shareholders in joint stock companies by the lawmaker with the TCC that entered into force in 2012 is the lawsuit for termination of the joint stock company for just cause. According to Article 531 of the TCC, “In the presence of just cause, the shareholders representing at least one-tenth of the share capital in non-public companies and one-twentieth of the share capital in publicly held companies may request the commercial court of first instance in the place where the company’s head office is located to decide on the termination of the company. Instead of terminating the company, the court may decide to give the plaintiff shareholders the fair market value of their shares as of the date closest to the date of the ruling, expulsion of the plaintiff shareholders from the company, or decide on another appropriate remedy.” According to this provision, shareholders representing at least ten percent of the capital in a non-public joint stock company may file a termination case against the legal entity by applying to the commercial court of the first instance where the company’s headquarters is based.

The law does not specify a time limit for shareholders to file a Termination Lawsuit against a joint stock company, and shareholders who hold the shares at the rates specified in the law until the Termination Lawsuit is concluded will be able to file this case against the company from the moment the just cause arises.

THE CONCEPT OF JUST CAUSE AS A GROUND FOR TERMINATION

The law does not specify what is required for the existence of just causes or events, which is one of the special types of termination, and the ruling of which events the court may decide to terminate the company is shaped within the framework of the Supreme Court’s jurisprudence and doctrinal opinions. According to the generally accepted opinion in the doctrine, the grounds for termination, referred to as a just cause, must be objective and independent from the shareholder’s personality. Therefore, the cause for the termination request must be such that the continuation of the company cannot be expected from the shareholder who filed the case under the bona fide, and it must be such that it may damage other shareholders. In the presence of certain criteria, the company’s termination may be decided as a “last resort” without harming the equilibrium of interests by taking other shareholders’ rights into account. The sole exception to this general acceptance is family businesses, and it is well known that the Supreme Court takes the family and certain personal reasons of the shareholders into account in the appraisal.

The doctrine cites the following examples of just cause: financial difficulties caused by mismanagement of the company, which causes damage to the rights of shareholders, intentionally emptying company sources, non-distribution of dividends for an extended period without a valid reason, systematic restriction of the rights of minority shareholders, continuously failing to invite the general assembly to a meeting or preventing it from taking decisions, carrying out activities that are incompatible with the company’s purpose, preventing the company organs from fulfilling their duties and disposing of a portion of the company’s assets that will prevent or significantly limit the company’s purpose and activity, as well as personal reasons arising from the violation of the shareholders’ agreements. 

The Court of Cassation emphasises in its established case-law that the following scenarios will constitute a just cause for termination:

  • Mismanagement of the joint stock company,
  • Irregularities in the general assembly meetings such as not holding the general assembly meetings, suspicious completion of the signatures despite the lack of attendance to the meeting, failure to call the general assembly for an extraordinary meeting on this issue by insistently not applying the relevant articles of the TCC even though the company is actually bankrupt and in a state of insolvency,
  • The company’s departure from the purpose of partnership in favour of individual interests, as well as members of the company’s board of directors not carrying out actions consistent with the achievement of the company’s purpose,
  • Failure to inform shareholders about the company’s financial status despite the notice, failure to allow examination of the company’s income and expenses, failure to inform shareholders about the company’s management, assets, and profit and loss status, limitation of shareholders’ right to obtain and review information by preventing their right to audit and information
  • Long-term failure to provide dividends to shareholders, denial of shareholders’ right to dividends, inability to distribute dividends to shareholders despite the company’s high profitability, and
  • The lack of trust between the shareholders, the shareholder’s default in the payment of the balance debt, the existence of major disputes between the shareholders and their judicial proceedings, the emergence of distrust and disagreement between the shareholders to an extent that cannot be eliminated by reflecting the complete deterioration of the plaintiff’s relations with his siblings, who are the company’s other shareholders, on the functioning of the company.

However, it is not possible to conclude that the presence of just one of these reasons necessitates the termination of the company. Therefore, a decision should be made by evaluating the special provisions regulated under the TCC, the circumstances of the case, and the current situation individually. In other words, where special rules apply, these provisions must be applied first, and it is not possible to apply for just cause termination.

TERMINATION DECISION AND OTHER REMEDIES

As stated previously, minority shareholders may apply to the commercial court of the first instance of the place where the company is based for the termination of the partnership against the company in the presence of justified grounds. In order to file a Termination Lawsuit, it is not necessary to have applied for an interim measure to prevent the situation that constitutes a just cause for the termination of the company. In fact, a previously filed case against this matter, a court ruling, or an unfiled case does not guarantee that the termination would be approved or refused. Although it is not necessary for a lawsuit to have already been filed or an interim measure to have been taken by the shareholders in order to file a Termination Lawsuit, it is considered that a lawsuit filed and prevailed by the minority shareholders against the situation subject to the termination request may also positively affect the Termination Lawsuit.

In a lawsuit filed under the provisions on termination for just cause, the court may decide to accept the termination or to pursue other remedies, as these reasons do not necessitate termination under Article 531 of the TCC. Because the continuity and sustainability of the activities of the joint stock company, which is one of the capital companies, is critical, other alternative remedies that will keep the company alive should be considered instead of the company’s economic value being terminated. Hence, even if the minority requests the termination, the judge ex officio may decide on other remedies following the principle of last resort.

In other words, the judge may order the exercise of an appropriate remedy to protect the rights of the minority and to eliminate the just cause. The expulsion of the plaintiff minority shareholder from the shareholding, the decision to distribute dividends, the invalidity or amendment of the content of a resolution of the board of directors or the general assembly, the invalidity of a provision of the articles of association that has been determined to be null and void, the appointment of a shareholder as a member of the board of directors, or the decision to distribute dividends are examples of such remedies.

IN CONCLUSION 

The power to request the termination of a joint stock company for just cause is an incredibly essential and critical privilege granted by the lawmaker to minority shareholders. Because the law does not specify the circumstances that may constitute just causes for termination, each case will be reviewed individually by the relevant court. In fact, the court may decide to terminate the company as well as other appropriate remedies. It is recommended that the lawsuit expected to be filed on the matter be prepared and examined by lawyers specialising in corporate law.

Best Regards,

Kılınç Law & Consulting

Att. Gülenay ÇAPKINOĞLU

Att. Çağla YARGIÇ

Legal Int. Ecem ÖZBEK



Authors

Gülenay Kavcar

Gülenay Kavcar

Çağla Yargıç

Çağla Yargıç

Lawyer