Ekin Topatan

Attorney

26.09.2023

Rights Of Minority Shareholders İn Joint Stock Companies

INTRODUCTION
 
            There is a concept regulated in the Turkish Commercial Code No. 6102 that gives management rights to shareholders other than the company's partners and is defined as a “minority right”. Its aim is to prevent conflicts of interest in joint stock companies with minority rights granted to shareholders, decode disputes and maintain the balance between majority and minority shareholders. 
 
THE CONCEPT OF MINORITY
 
            Contrary to the expression used in the doctrine and in practice, the TCC has preferred the expression “scarcity” for this concept. [1]
 
A number of rights have been granted to shareholders representing a certain part of the capital in the Commercial Code. As a rule, the minority right is exercised by shareholders who make up 10% of the capital in companies closed to the public and 20% of the capital in public joint stock companies. 
 
We can define minority rights as management rights that result spontaneously, and are used by unilateral declaration of will of the right holders and without seeking the approval of the addressee bodies. 
 
Shareholders who have less than one-tenth of the share capital remain within the concept of a shareholder who cannot form a minority. These shareholders can only exercise their minority rights by merging. Although it is difficult to use minority rights by merging in joint stock companies with multiple shareholders, it is observed that junior partners mostly act together in companies with few shareholders or family companies.[2] According to the TCC, those who cannot form a minority are protected only by individual rights.
 
The Majority Principle and the Function of Minority Rights
 
In joint stock companies, the ”majority principle" is essential. According to Article 434 of the Turkish Commercial Code, shareholders exercise their voting rights at the general assembly in proportion to the total nominal value of their shares. In this case, it is not wrong to say that the shareholders who hold the majority votes constitute the will of the company.
 
In this context, some regulations have been stipulated in the law in order to prevent the abuse of the majority principle. As an example, in some cases we can cite the search for unanimity instead of an absolute majority of votes or the provision of aggravating conditions for the quorum of meetings. Minority rights aim to prevent violation of the provisions and principles of law. In this context, they serve as a protective right. Along with minority rights -in addition to protecting the aforementioned minority from abusing the will of the majority and the rights of the majority- the minority aims to be more effective in the company, maintain balance in the company, accomodate the majority and minority rights, apportion powers in the company and protect future shareholders.[3]
 
Shareholder Rights in Joint Stock Companies in General
 
According to the Turkish Commercial Code No. 6102, shareholders in joint stock companies have the right to participate in the general assembly (art. 425), the right to vote (art. 434), the right of examination and getting information (art. 437), the right to request appointing a special auditor (art. 438), the right of priority (art. 461), the right to share profits (art. 509), the right to request interest for the preparatory period (art. 510), the right to request the distribution of the remaining balance as a result of liquidation (art. 543), the right to acquire free shares in the capital increase from internal sources and to benefit from the company facilities. However, some additional rights are also provided for to shareholders with a certain ratio specified as “scarcity” in the TCC.
 
The Rights of Minority Shareholders Stipulated in the TCC
 
            By establishing minority rights, the balance between the majority and minority shareholders is achieved in preventing and deciphering conflicts of interest in the partnership. It should also be noted that the exercise of minority rights is also important in terms of limiting majority power. It is especially important to provide the liberty to apply to the court in terms of exercising minority rights. For this reason, the possibility of applying to the court in cases where the minority is helpless in the face of the majority decision is also provided by art.439 and following articles of the TCC.
 
The rights of minority shareholders regulated by the law can be classified in accordance with our explanations above as; the right to dismiss the auditor and request the appointment of a new auditor (TCC art. 399/4-b), the right to represent certain groups on the board of directors (TCC art. 360), the right to call the general assembly to a meeting and to add an item to the agenda (TCC art. 411), the right to request postponement of the general assembly meeting (TCC art. 420), the right to request appointing a special auditor (TCC art. 438), the right to request the printing of registered share certificates (TCC art. 486), the right to file a lawsuit for the termination of the company for justified reasons (TCC art. 531) and the right to prevent the release of the members of the board of directors and auditors (TCC art. 559).
Minority rights are classified using different criteria in the doctrine. The most common in these classifications is the positive and negative distinction between minority rights.
 
Negative Minority Rights
 
Negative minority rights are cases in which a minority prevents a decision from being taken by voting negatively, despite reaching a sufficient number of votes in the general assembly. It should be noted here that this result will be achieved with the negative vote of the minority shareholders, not with the abstention vote.
 
  1. The Right to Prevent the Compromise and Release of the Members of the Board of Directors and Auditors (TCC art. 559)
 
According to art. 559 of the TCC, the responsibilities of the members of the board of directors and auditors arising from the establishment of the company and the increase in capital can only be removed by compromise and release four years after the date of registration of the company. However, after this period has elapsed, the negative vote of the minority shareholders for compromise and release at the general assembly constitutes an obstacle to release. This is a mandatory provision stipulated in the law, and although the share ratio required by the articles of association cannot be increased in order to grant this right to minority shareholders, it can be reduced. In the event that those responsible are released despite the opposing votes, the cancellation of the decision of the general assembly may be requested.
 
  1. The Existence of Aggravated Majority States 
 
According to art. 423 of the TCC, decisions of the general assembly bind everyone, whether they attend the meeting or not. For this reason, it is stipulated in the law that a certain amount of participation should take place in order for meetings to be held and decisions to be taken.
 
In some cases, the law has linked the existence of aggravated quorum numbers to the decision-making. According to a regulation in art. 421 of the TCC, aggravated quorum numbers are sought while making the following decisions:
 
-       Amendments to the general articles of association,
-       Increasing the commitments of shareholders or moving the partnership center abroad by placing secondary obligations,
-       Completely changing the subject of operation, creating privileged shares, limiting the transfer of registered shares and reducing the capital,
-       Merger, division, making changes in articles of association related to increasing the capital to be received by joint stock companies whose shares are traded on security exchanges and raising the registered capital ceiling. 
 
As stated, the law provides for aggravated meetings and decision quorum numbers in order to take decisions on certain issues at general assembly meetings. Yet, if they are aggravated by the articles of association in simple quorum numbers, minority shareholders have the right to prevent the formation of quorum numbers. Therefore being able to make certain decisions.[4]
 
Positive Minority Rights
 
In some cases, the TCC has prevailed over the will of the minority. If the minority exercises these rights, the request will bind the company and the bodies, and if the minority's request is not taken into account, the responsibility of managers and auditors will come up in this case. 
 
  1. The Right to be Represented on the Board of Directors (TCC art. 360)
 
According to art. 360 of the TCC, it has been arranged that certain share groups should be represented on the board of directors by the characteristics and qualifications of the shareholders and the minority who make up a certain group, provided that they are regulated in the articles of association. In the articles of association, the arrangements for the minority's right to be represented on the board of directors may be arranged initially, or they may be arranged later by amending the articles of association. 
 
In this context, the representation of certain groups on the board of directors is subject to two conditions: the use of the right of representation on the board of directors by stipulating the articles of association; and the concrete determination of the group that will benefit from the right of representation. [5]
 
  1. The Right to Call the General Assembly to a Meeting and to Have an Item Added to the Agenda (TCC art. 411)
 
According to art. 411 of the TCC, minority shareholders may request to call the general assembly to a meeting by specifying the necessary reasons and agenda in writing, or to put on the agenda the issues they want to be resolved if the general assembly is already to be convened, and the articles of association stipulate that the right to call may be granted to shareholders with a smaller number of shares.
However, the minority shareholders' request to put an item on the agenda must be submitted to the Board of Directors before the payment of the fee related to the publication of the call announcement in the Turkish Trade Registry Gazette. (art. 411/2) The call and the request to put an item on the agenda are subject to the official form and are made through a notary.
 
If the request is approved by the board of directors, the general assembly will convene within forty-five days at the latest, while the same shareholders will be able to apply to the commercial court where the company headquarters is located if the request is rejected or does not respond positively within seven business days. If the court deems the meeting necessary, it will appoint a trustee to arrange the agenda and make the call in accordance with the provisions of the Law. (art. 412)
 
  1. The Request for Postponement of the Negotiation of the Financial Statements and the Right to Request Postponement of the General Assembly Meeting (art. 420)
 
The Chairman of the General Assembly, which will convene on the negotiation of financial statements and related issues, postpones the meeting to one month later at the request of the minority. Just as the justification does not need to be stated in the request, the president has the obligation to implement this request.
 
For example, the Supreme Court’s decision numbered 2014/9194E.- 2014/16569K. by the 11th Civil Department emphasized that the minority is not obliged to provide a justification for the request to postpone the negotiation of financial statements:
“The defendant's request for the discussion of the financial statements and, accordingly, the cancellation of the general assembly meeting is an abuse of rights according to Law No. 6102, art. 420. The decision-making authority in this matter belongs to the president of the court, arguing that the request was rejected by the president of the court and requested the dismissal of the case. By the court, according to the scope of the claim, defense and file; according to Law No. 6102, art. 420, the negotiation of financial statements and related issues should be postponed at the request of shareholders who own 1/10 of the capital and 1/20 of the capital in publicly traded companies, without the need for the general assembly to make a decision.”
 
With the recognition of this right to the minority, it was aimed to prevent the majority shareholders from making decisions only within themselves, and to prevent the preparation of financial statements contrary to the truth and accounting principles.[6]
 
  1. The Right to Request the Appointment of a Special Auditor (TCC art. 438)
 
The principle of adherence to the agenda is essential for joint stock company general assembly meetings. However, some cases constitute an exception to the principle of adherence to the agenda. One of these exceptions is the right of shareholders to request a special audit regulated in art. 438 of the TCC. 
 
Art. 438 of the TCC includes the following; “Each shareholder may request from the general assembly that certain events be clarified by a special audit, even if they are not on the agenda, if it is necessary for the exercise of the share ownership rights and if the right to receive information or review has been used before. If the general assembly approves the request, the company or each shareholder may request the appointment of a special auditor from the commercial court of first instance at the location of the company's headquarters within thirty days.”.
 
            According to art. 438 of the TCC, the exercise of this right has two stages. In the first stage, in accordance with the provisions in art. 438 of the TCC, if it is necessary for a shareholder to exercise their share ownership rights and if the right to receive information has been used before, they must have requested that certain events be clarified by a special audit from the general assembly. If this request is rejected by the general assembly, according to art. 439 of the TCC, shareholders constituting at least one tenth of the capital and one twentieth of the capital in public joint stock companies, or shareholders whose nominal value of their shares is at least one million TL, have the right to request the appointment of a special auditor from the court within three months. It should be noted that it does not matter if the shareholder who has used the right to receive information or review and the shareholder who wants a special audit are the same person or persons, but the issue should be the same. [7]
 
            The Court decides to appoint a special auditor if the claimants convincingly demonstrate that the founders or corporate bodies have caused losses to the company or shareholders by violating the law or the articles of association. This decision of the court is final. 
 
  1. The Right to Request the Printing of Registered Share Certificates (TCC art. 486)
 
According to art. 484 of the TCC, share certificates in joint stock companies are bearer or registered. Share certificates written to the bearer are every valuable document that is understood from the text or form of the deed that the person who is the holder will be considered the rightful owner. A registered deed, on the other hand, is a negotiable instrument written in the name of a certain person, but not containing his registration to his order, and cannot be counted as one of the promissory notes written to the order by law.
 
According to art. 486/4 of the TCC, if a minority requests, the registered share certificate will be suppressed and distributed to all registered shareholders. Accordingly, this request of the minority will concern all registered shareholders. Because the board of directors will request the printing of written share certificates for the shares owned by all shareholders, not just the minority.
 
  1. The Right to Request the Termination of the Company for a Just Cause (TCC art. 531)
 
Another right granted to minority shareholders under the TCC is the opportunity to request the termination of the company for a justified reason. According to the relevant regulation, shareholders representing one tenth of the capital and one twentieth of the capital in public joint stock companies in the presence of justified reasons will be able to ask the commercial court of first instance at the location of the company's headquarters to decide on the termination of the company. In the continuation of the judgment, instead of termination, the court may decide that the plaintiff shareholders be paid the actual values of their shares on the nearest date to the decision date and that the plaintiff shareholders be removed from the company or another solution that is appropriate and acceptable to the situation.
 
In the relevant article, examples of justified reasons that will form the basis for this request are not given. In this context, on which situations constitute justifiable reasons, these few decisions of the Supreme Court’s 11th Civil Department can guide us:
 
"...Since justifiable reasons are not defined by law, they will be evaluated by the courts according to the characteristics of each concrete event. Situations that constantly and seriously violate the shareholder's right, situations where it is not possible to realize the common goal of the company, should be considered as a justified reason.’ ( 2017/3460 E. , 2019/2407 K.)
 
"...The defendant company, in which the plaintiff is a partner, is a family company. Problems between company partners, especially the Dec Deconfliction between partners and the insult caused by the non-litigation partner should be recognized as a justifiable reason for such companies. In this context, the grouping between the partners that occurred after the mutual insult incident between the plaintiff and the out-of-suit partner named … which was referred to the criminal court, constitutes a justified reason for termination as a whole.” ( 2019/2942 E. , 2021/1647 K.)
 
“...A company that has not been engaged in any activity since the day it was founded and has not held board meetings may be terminated.” (2016/8891 E., 2017/6960 K.)
 
“...Decrees that the company directors have not fulfilled their duties and obligations in accordance with the law, there is no possibility of reconciliation between the company partners, there are many lawsuits between the parties, the plaintiff is treated differently from other shareholders, the company facilities are allocated to partners other than the plaintiff, general assembly meetings are not held, the plaintiff's right to information is blocked, all these issues constitute a just reason for the termination of the company, on the other hand, the company attorney Decrees the termination of the company in response to the statement that the company's financial situation does not allow the plaintiff to purchase shares in the company.” (2015/6768 E., 2015/10302 K.)
 
“...Considering that the defendant company does not have the financial strength to pay the price of the plaintiff's shares, it is appropriate to decide on the termination of the company because the plaintiff cannot buy the shares.” (2014/17428 E., 2015/8840 K.)
 
"...It is in place to decide on the termination of the company, which has suffered losses as it has no sales, which owes taxes, which has no general assembly meetings, whose missing assets are actually divided among its partners, because it does not agree to pay the plaintiff's share.” (2016/5493 E., 2017/7447 K.)
 
 
CONCLUSION
 
According to the terminology in the Turkish Commercial Code No. 6102, the term "scarcity”, according to the usage in the doctrine, the positive and negative rights envisaged for the shareholders who are a "minority" or, more precisely, who are "representing one tenth of the capital and one twentieth of the capital in public joint stock companies" constitute minority rights in joint stock companies. These rights aim to protect the minority against the will of the majority in joint stock companies conducted according to the majority principle. By limiting the authority of the majority, it ensures that the company's interests are taken into account. 

[1] Esra KAYA; "Minority Rights in Joint Stock Companies”, Journal of Istanbul Bar Association, March 2019.; Considering the widespread use of the TCC in practice and doctrine instead of the expression of minority, it might have been more appropriate to prefer the phrase “minority”. It should also be noted here that the first equivalent of the word “scarcity” in TLA is “state of being few” and the second equivalent is “minority”.
[2] Reha POROY, Ünal TEKINALP, Ersin ÇAMOĞLU; “Law of Partnerships I"., Istanbul, 2014, p.579.
[3] Ismail Kayar, “Minority Rights in Joint Stock Companies”, Istanbul, Marmara University, 1989.

[4] Esra KAYA; "Minority Rights in Joint Stock Companies”, Istanbul Bar Association Journal, March 2019, p.144.
[5] ULUSOY/FALCIOĞLU, "Minority Representation on the Board of Directors”, s.143.
[6] Hakan GÜÇLÜ, The Regulations Contained in the Turkish Commercial Code and Capital Market Legislation on Minority Rights and the Practices of Developed Countries.”

[7] Esra KAYA; "Minority Rights in Joint Stock Companies”, Istanbul Bar Association Journal, March 2019, p.153