Ceyda Ceylan Uygun

Senior Attorney

16.01.2024

Disguised Dismissal in Joint Stock Companies

 
DISGUISED DISMISSAL IN JOINT STOCK COMPANIES

Every Joint Stock Company must have a board of directors, its core decision-making body. As outlined in Article 374 of the Turkish Commercial Code (TCC No. 6102), the board, along with the delegated management team, can make decisions on any business or transaction related to the company's operations, unless explicitly reserved for the general assembly by law or the company's articles of association. This gives the board broad authority to steer the company's continuous activity, while respecting legal and internal limitations.

The order of dismissal adopted in the general assembly terminates the liability of the members of the board of directors, managers and auditors against the company. Once the order of dismissal is approved at the general assembly, the rights of the shareholders who voted positively for the discharge decision to file a liability lawsuit against the members of the board of directors expire. For the shareholders who did not vote in favor, a liability lawsuit may be filed within six months from the date of the general assembly resolution; the right to file a lawsuit expires upon the expiration of six months.

The obligation of the board of directors to exercise due diligence and care in all its affairs and to act in accordance with the principles of integrity and in the best interests of the company also stems from the TCC. The liability of the members of the board of directors is eliminated only upon proof of fault, lapse of time or dismissal.

Pursuant to Article 408/II-b of the TCC, the inalienable duties and powers of the general assembly are listed as the election of the members of the board of directors, determination of their remuneration, attendance fees, terms, bonuses and premiums, and, in addition to these, resolution on their discharge and dismissal of the members of the board of directors. In short, within the scope of this provision, the authorized body to decide on the dismissal of the members of the board of directors is the general assembly.

Pursuant to paragraph 1 of Article 409 of the TCC, it is possible for the general assembly to adopt resolutions at an ordinary or extraordinary meeting. The order of dismissal may also be taken at an ordinary or extraordinary general assembly meeting; there is no difference between the two meetings of the general assembly. 

The order of dismissal taken by placing an item on the agenda of the general assembly meeting regarding the release decision is an open dismissal. If an open dismissal is obtained for all activities and transactions of all members of the board of directors in the relevant accounting period, this is a general open dismissal. At the same time, it is also possible to obtain a dismissal by limiting it in terms of person, subject or time. This situation is characterized as a special open order of dismissal. In this article, the concept of “Disguised Dismissal”, which terminates the liability of the members of the board of directors, is analyzed.

1)    THE CONCEPT OF DISGUISED DISMISSAL

In our legislation, a disguised dismissal is referred to as a presumption of dismissal. Disguised dismissal is in cases where the general assembly will be deemed to have adopted a resolution of dismissal in accordance with the law, even if there is no item on the agenda of the general assembly regarding dismissal.

As a matter of fact, paragraph 1 of Article 424 of the TCC on the subject is as follows "The decision of the general assembly regarding the approval of the balance sheet shall result in the dismissal of the members of the board of directors, managers and auditors, unless otherwise specified in the decision. However, if some issues are not stated in the balance sheet at all or as required, or if the balance sheet contains some issues that will prevent the real situation of the company from being seen, and if this has been acted consciously, the approval shall not have the effect of dismissal.".

The main purpose of the disguised dismissal regulation for Joint Stock Companies is to eliminate the possibility of board members, managers and auditors facing liability lawsuits for long periods of time and to ensure continuity in administrative activities in  Joint Stock Companies. 

The fact that disguised dismissal is regulated under Article 424 of the TCC, as mentioned above, ensures that the balance sheet and other financial statements are examined more meticulously at the general assembly meeting at the end of each period. This examination is also important in terms of establishing the responsibility of the managers in corporate law and ensuring the control of whether the administrative activities are carried out in accordance with the principle of capital protection, especially in capital companies.

The disguised dismissal decision realized with the approval of the balance sheet is a general dismissal , unless the decision contains a statement to the contrary and no limitation is made. Since the release decision taken in this manner is in the nature of a general release decision, as a rule, it is accepted that it covers all members of the board of directors, managers and auditors in terms of transactions and activities related to the relevant accounting period covered by the balance sheet in accordance with the law.

Although there is a significant connection between the approval of the balance sheet and the release of liability, both are independent issues. Therefore, the general assembly may either approve the balance sheet but not resolve on release of liability, or it may resolve on release of liability but not approve the balance sheet. However, in order to decide on both issues separately, either the agenda of the general assembly must include a separate item for release from liability in addition to the item for approval of the balance sheet, or it must be stated in the resolution that the decision to approve the balance sheet will not result in release from liability. 

Pursuant to the TCC, the balance sheet must be audited by the auditor before the balance sheet negotiations can commence. Although the decision to approve the balance sheet, as a rule, has the effect of releasing the transactions included in the balance sheet, it is accepted in the doctrine that the term "balance sheet" should be interpreted broadly, that the income statement and the annual report of the board of directors are inseparable from the balance sheet, and that these should also be considered within the scope of the "balance sheet". Balance sheet, other financial statements, annual report, oral explanations, independent audit reports, special audit reports are the documents that will be the basis for release. 

Since the decision to release from the incorporation and capital increase transactions is regulated separately under Article 559 of the TCC, an implicit release decision cannot be taken regarding the incorporation and capital increase transactions through the approval of the balance sheet. An explicit dismissal may be taken on the relevant matter only upon fulfillment of all other conditions stipulated under Article 559 of the TCC.

 

 

2)    ELEMENTS OF A DISGUISED DISMISSAL DECISION

The conditions that must be present in order for a tacit release to be in question are explained in detail:

There is no item on the agenda for open dismissal: In order for the resolution to approve the balance sheet to give rise to the effect of dismissal, the agenda should not include an item on explicit release, or the resolution should not include a statement stating that the resolution to approve the balance sheet will not give rise to the effect of release. Pursuant to TCC 424, the approval of the balance sheet shall only result in the dismissal of the members of the board of directors, managers and auditors as a whole. If the members of the board of directors are dismissed due to the inclusion of an item on the agenda regarding their dismissal, the decision to approve the balance sheet shall not result in the dismissal of the other directors and auditors. If it is desired to decide on the dismissal of the directors and auditors, an item for the dismissal of the directors and auditors should be included among the agenda items of the general assembly and an open dismissal resolution should be adopted for the relevant persons. 

Approval of the balance sheet: The financial statement, which is the basis for financial reporting and auditing, is the annual balance sheet. Article 424 of the TCC stipulates that the approval of the balance sheet shall result in dismissal. In the event that there is a deficiency in the balance sheet, regardless of whether the deficiency was made consciously or unconsciously, it will lead to the invalidity of the dismissal in relation to all matters regulated in the balance sheet. In the event that certain matters are not stated in the balance sheet at all or as required, or if the balance sheet contains certain matters that prevent the real situation of the company from being seen, and if the approval is made consciously in this regard, the approval shall not have the effect of a dismissal (TCC Art. 424). In the event that the balance sheet is incomplete or incorrectly prepared, the disguised dismissal decision shall be void.

Absence of a contrary clarification in the decision regarding the approval of the balance sheet: In order for the approval of the balance sheet to have the effect of dismissal, there should be no contrary clarity in the resolution. Despite the approval of the balance sheet, the dismissal of some of the members of the board of directors, managers or auditors and the non-dismissal of some others results in the elimination of the liability of some of the persons in question and the continuation of the liability of others.

 

3)    THE QUORUMS REQUIRED FOR THE DISMISSAL DECISION

Since no aggravated quorum is stipulated in terms of the meeting and decision quorum for the dismissal decision, unless a special quorum is stipulated in the articles of association, the ordinary meeting and decision quorum must be met in order to make the dismissal decision.

Pursuant to Article 418 of the TCC, unless a higher quorum is stipulated by law or the articles of association, the general assembly may convene with shareholders or representatives representing at least one fourth of the share capital, and may adopt resolutions with the majority of the votes present at the meeting. Pursuant to the second sentence of Article 418/1 of the TCC, if the quorum is not met in the first meeting, no quorum is required for the second meeting to be held. Article 479/ 3 of the TCC clearly regulates that the voting privilege cannot be exercised in general assembly resolutions regarding release.

4)    VOTE DEPRIVATION

Article 436 of the TCC stipulates that "(1) A shareholder may not vote in the negotiations regarding a business or transaction of a personal nature or a lawsuit before any judicial institution or arbitrator between the shareholder, their spouse, their lower and higher relatives or the sole proprietorships in which they are shareholders or the capital companies under their control and the company. (2) The members of the board of directors of the company and the authorized signatories in charge of the management may not exercise their voting rights arising from their shares in the decisions regarding the dismissal of the members of the board of directors". Since the second paragraph of this regulation explicitly stipulates that the members of the board of directors cannot exercise their voting rights arising from their own shares in the resolutions regarding the release of the members of the board of directors, it is stated in the doctrine that this regulation will also have effect in terms of disguised dismissal. In terms of the dismissal of the auditors, since there is no provision regarding the deprivation of voting rights, it is believed that the shareholders of the board of directors may also vote.