THE RIGHT TO DEMAND THE DISSOLUTION OF PARTNERSHIPS WITH A VALID REASON AND ALTERNATIVES AS PER THE TURKISH COMMERCIAL CODE

The Turkish Commercial Code numbered 6102 (in Turkish “Türk Ticaret Kanunu”, hereinafter referred to as the “Code”) that came into force on 1 July 2012 regulates, as the former code no. 6762, both joint stock companies (in Turkish, called “anonim şirket”, hereinafter referred to as the “JSC”) and limited companies (in Turkish, called “limited şirket”) (“Company/s”) in the Turkish law system but conversely to the former code, the new code regulates incorporated partnerships, whether they are constituted under the form of a JSC or under the form of a limited company.

In this respect, for both kinds of companies, the Code also provides substantial changes regarding the dissolution of companies especially with the newly adopted possibility of dissolution with a valid reason, vested as a right for the minority shareholder but that gives to the court the right to find suitable and acceptable alternatives.

Below you may find some important aspects of these changes.

1. Definition of the right to demand the dissolution of joint stock companies with a valid reason:

Regarding JSC’s, as per article 531 (“Article”) of the Code, a shareholder possessing at least ten percent of the total capital has the right to litigate and demand the rightful termination of the company providing that the shareholder has a valid reason. For public companies, possessing a minimum of five percent of the total capital is enough to exercise this minority right with the same principle of having a valid reason. This condition is compulsory for companies whether they are public or not. It is, by any means, impossible to alter these percentages determined by the Code. It should be noted that these percentages of shares determined by the Code do not have to be held in a single hand. A group of minority shareholders constituting the required percentage of capital may also exercise together their minority right.

Regarding limited companies, this right for dissolution of the partnership is set forth in article 636/3 of the Turkish Commercial Code under roughly the same terms as for JSC’s, but with no minimum share capital requirement for the minority shareholders claiming in justice the dissolution of the company and the price of the shares shall reflect the real value of the shares without no more detail. As per article 636/5, the provisions related to JSC’s apply to the limited companies for the dissolution.

2. Exercise of the right:

The right can be exercised by filing a lawsuit demanding the rightful termination of the company. Court of competent jurisdiction is the commercial court of first instance situated in the judicial boundaries of registered headquarters of the company. As per the Article, the judge, at first, will alid reason exists in that specific case. Provided that this condition is met, the judge will either rule;

1. 1. The dissolution of the company, or
   2. The squeeze out of the plaintiffs from the company in exchange for a payment of a price for their shares, or
   3. An alternative solution convenient to that specific situation and acceptable for all concerned parties.

3. Definition of the valid reason:

Neither the Article nor the Code comprises an explicit definition of a valid reason on this subject. However, as the right to demand the dissolution of a Company with a valid reason is bestowed upon minority shareholders, a valid reason must be a reason which damages vital benefits of minority shareholders.

Doctrine and current legal practice is instructive for defining the valid reason. Turkish commercial law doctrine referring to Swiss Law’s case law proposes four groups of reasons which can be considered as valid in an action of rightful termination of a company:

1. 1. Majority rule causes the company to run in vast debts, to become insolvent or to go bankrupt.
   2. Majority rule systematically transfers funds, for instance via commercial contracts, to majority shareholders or other companies ruled by majority shareholders.
   3. Majority rule has not been paying dividends for at least three or four years even though financial situation of the company is stable.
   4. Majority rule systematically and continuously violates minority rights.

The Turkish High Court of Justice, in its decision dated 2 June 2014 and numbered 2014/10238 related to the case number 2014/3669 has ruled that:

1. 1. The fact that the company stays inactive for a long time, e.g. 8 years in the specific case, that there are various major disputes between shareholders and that continuation of the company has become unbearable constitutes a valid reason for applying article 531 of the Code and for the court to accept the case.
   2. However, the Turkish High Court of Justice has ruled that this valid reason, per se, is not enough for the commercial court of first instance to decide on the dissolution of the said company without looking for alternatives like the forced sales of the shares or other possible solutions.

4. Appropriate and acceptable alternative to dissolution of the company:

Requested to decide on the dissolution of the Company, the Court may decide (i) the dissolution of the company, or (ii) the squeeze out of the plaintiffs from the share capital of the company in exchange for a payment of capital, or (iii) any other alternative solution convenient to that specific situation and acceptable for the concerned parties. It is an exception to the principle according to which the court must stick itself to the plaintiff’s demand as set forth in article 26 of the Civil Procedure Code.

The court must seek the continuation of the company and find suitable and acceptable alternatives. The idea here is that the legislator does not only seek to protect the interests of the other (majority) shareholders but also to protect employment and the economy of the country or at least of a region. Therefore, competent courts are expected to dissolve the company as a last resort.

As per the Article, squeezing out the plaintiffs from the company in exchange for a payment of capital is the second option. Provided that the value of capital is determined by basing the value of the shares on the real value of the shares on the closest possible date to the date of the court decision for JSC’s and on the real value of the shares for the limited companies (the legislator may have omitted to use exactly the same content as for JSC’s), the court can rule the squeeze out of the plaintiffs instead of dissolving the company. As mentioned above, the second option is preferred over the first one to ensure the continuation of the company except in particular situations where the continuation of the company has become unbearable. There is no additional stipulation required for applying this option.

Finally, the court may also rule an alternative solution on condition that the solution is convenient to that specific case and acceptable to all concerned parties. According to Turkish commercial law doctrine referring to Swiss Case Law, the court must redress the balance between the interests of minority shareholders, majority shareholders and the very existence of the company itself. Any such alternative may be i) obliging the company and its majority shareholder(s) to distribute dividends, ii) admitting a representative of minority shareholders into the Board of Directors, iii) amending the articles of association to expurgate provisions in the Articles of Association considered as preventing the good and fair functioning of the company,

iv) deciding a spin off etc. In practice, however, it is still unclear how the judges will interpret this provision of the Article as the judges tend to rule, to this date, either the dissolution of the company or the squeeze out of the plaintiffs.

Our firm remains at your disposal for any further clarifications you may need.