Rights of Minority Shareholders in Joint Stock Companies and Actions for Dissolution for Just Cause

Although minority rights in joint stock companies provide shareholders with certain protections against the majority, not every dispute within the company will justify the dissolution of the company. Therefore, it is important to correctly determine from the outset which right has been infringed in the specific case and which legal remedy should be pursued. This distinction is particularly important in order to avoid loss of rights due to short application periods such as 3 months and 10 days.

The Turkish Commercial Code No. 6102 (“TCC”) uses the term “minority”. Shareholders representing at least 10% of the capital in non-public joint stock companies and at least 5% in publicly held companies may benefit from statutory minority rights. However, these thresholds do not mean that a shareholder holding a lower percentage is left without protection. Certain rights, such as the rights to obtain information and conduct an examination, to submit a request for a special audit to the general assembly, and, subject to certain conditions, to initiate legal proceedings, are granted to every shareholder.

The first matter to be determined is the nature of the right alleged to have been infringed. In this context, the legal remedy to be pursued will vary depending on whether the claim is based on an individual shareholder right or a statutory minority right, whether it is directed against a specific general assembly resolution, or whether it concerns a structural problem that renders the continuation of the shareholding relationship intolerable.

Distinction Between Principal Minority Rights and Individual Shareholder Rights

Pursuant to Article 357 of the TCC, shareholders shall be treated equally under equal circumstances. This principle does not require absolute identical treatment; rather, it guarantees that shareholders in the same position will not be treated differently without just cause. The rights to attend the general assembly, vote, participate in dividends within the statutory conditions, and bring actions protecting shareholder status also form part of the sphere of individual rights.

In this context, the rights may be divided into three categories:

• Right of Representation Subject to the Articles of Association: Representation on the board of directors under Article 360 of the TCC does not arise automatically merely by reaching the 10% or 5% threshold. Such rights must be granted under the articles of association to certain share groups, shareholders forming a group by virtue of their characteristics, or the minority.
• Rights Granted to Every Shareholder: The right to obtain information and conduct an examination under Article 437 of the TCC, the right to request a special audit from the general assembly pursuant to Article 438 of the TCC where the necessary prerequisites are met, the right to bring an action for annulment subject to the conditions under Article 446 of the TCC, and the right to request compensation for losses incurred by the company pursuant to Article 555 of the TCC.
• Statutory Minority Rights: The right to calling the General Assembly to a Meeting or request the addition of an item to the agenda, request the postponement of discussions on the financial statements, apply to the court under certain conditions where a request for a special audit is rejected, request the issuance of registered share certificates, and bring an action for dissolution for just cause. When establishing the shareholding structure, voting, management, information flow, and exit mechanisms should be designed from the outset rather than relying solely on statutory minimum protections.

Principal Minority Rights and Conditions of Exercise

The General Assembly to a Meeting and Requesting the Addition of an Item to the Agenda

Pursuant to Article 411 of the TCC, the statutory minority may request the board of directors to call the general assembly to a meeting by stating the reasons necessitating the meeting and the agenda in writing. If the general assembly is already to convene, the matter requested to be resolved may be added to the agenda. The request to call the general assembly and to add an item to the agenda shall be made through a notary public. The request concerning the agenda must reach the board of directors before payment of the publication fee for the announcement of the call in the Turkish Trade Registry Gazette. The articles of association may also grant this right to call the general assembly to shareholders holding a lower percentage of shares.

If the board of directors rejects the request or fails to respond affirmatively within seven business days, the same shareholders may apply to the commercial court of first instance at the company’s registered office. If deemed necessary, the court shall appoint a trustee to determine the agenda and make the call; its decision shall be final. If the request is accepted, the general assembly must be called to convene within 45 days.

Postponement of Discussions on the Financial Statements

Resolving on the financial statements and related matters without sufficient explanation may create a serious gap in oversight. Pursuant to Article 420 of the TCC, the statutory minority may request that discussions on the financial statements and matters related thereto be postponed for one month. No separate general assembly resolution is required for such postponement; upon request, the chair of the meeting shall postpone the discussion.

A request for a second postponement is subject to a stricter condition. The matters objected to and recorded in the minutes at the first meeting must not have been answered in accordance with the principle of honest accountability; otherwise, a second postponement may not be requested. Therefore, it is important that objections be recorded in the minutes by specifying the relevant financial statement items and the transactions for which explanations are requested, rather than being expressed in general terms.

Right to Obtain Information, Conduct an Examination, and Request a Special Audit

The right to obtain information and conduct an examination under Article 437 of the TCC is not dependent on the percentage of shares held. Every shareholder may request information at the general assembly from the board of directors concerning the affairs of the company and from the auditor concerning the conduct and results of the audit. Information may only be refused on the grounds that disclosure would reveal a company secret or jeopardize a company interest requiring protection; the grounds for refusal must be capable of being reviewed in the specific case.

If the request has been expressly rejected, the shareholder may apply to the commercial court of first instance at the company’s registered office within 10 days following the rejection. Where the request is left unanswered, deferred, or information is not effectively provided, the Law permits an application after a “reasonable period”. The right to obtain information and conduct an examination may not be abolished or restricted by the articles of association or by a resolution of a corporate body.

With respect to a special audit, the two stages under Articles 438 and 439 of the TCC must be considered separately. Every shareholder may request the general assembly to clarify certain matters through a special audit, provided that this is necessary for the exercise of shareholder rights and that the shareholder has previously exercised the right to obtain information or conduct an examination. If the request is accepted by the general assembly, the company or any shareholder may request the court to appoint a special auditor within 30 days. If the general assembly rejects the request, Article 439 of the TCC applies. In this case, shareholders meeting the 10% or 5% threshold, or shareholders whose shares have an aggregate nominal value of at least 1 million Turkish liras, may request the court to appoint a special auditor within three months from the date of rejection. The application must convincingly demonstrate that the company or the shareholders have suffered loss as a result of conduct contrary to the law or the articles of association.

Issuance of Registered Share Certificates and Representation on the Board of Directors

Pursuant to Article 486/3 of the TCC, if requested by the minority following the incorporation of the company, registered share certificates shall be printed and distributed to all holders of registered shares. This right has practical value in documenting shareholder status and ensuring that share transactions are carried out securely. However, this right does not apply to shares traded on the stock exchange due to the existence of the dematerialized share system.

The right to representation on the board of directors under Article 360 of the TCC requires a provision in the articles of association. The designated group or minority may be granted the right to nominate candidates, or it may be stipulated that members shall be elected from such group. Unless there is just cause, the nominated candidate must be elected. In publicly held joint stock companies, this representation right may not exceed one-half of the total number of board members; provisions concerning independent members are reserved. Pursuant to this provision, shares to which a right of representation on the board of directors is attached are deemed privileged shares.

Distinction Between Actions for Annulment, Nullity, Liability, and Dissolution for Just Cause

If a general assembly resolution is contrary to the law, the articles of association, or the principle of good faith, an action for annulment may be brought under Article 445 of the TCC. The action must be filed with the commercial court of first instance at the company’s registered office within three months from the date of the resolution. As a rule, a shareholder attending the meeting must vote against the resolution and have its dissent recorded in the minutes. Separate conditions under Article 446 of the TCC must be examined with respect to irregularities concerning the call or participation.

Nullity under Article 447 of the TCC concerns serious defects, such as resolutions that abolish a shareholder’s indispensable rights, restrict the right to obtain information and conduct an examination beyond the extent permitted by law, or impair the fundamental structure of the joint stock company. The three-month period applicable to an action for annulment cannot be circumvented by characterizing every illegality as “nullity”.

If members of the board of directors or other liable persons have caused loss to the company, compensation for the company’s loss may be sought pursuant to Article 555 of the TCC. Although every shareholder may bring such an action, the shareholder shall request that the awarded compensation be paid to the company. This remedy is aimed at compensating a specific loss, whereas Article 531 of the TCC seeks a structural solution to a serious and continuing problem in the shareholding relationship.

How Is Dissolution for Just Cause Assessed Under Article 531 of the TCC?

Since Article 531 of the TCC does not enumerate just causes individually, the assessment is made according to the circumstances of the specific case, taking into account the company’s shareholding structure, the course of the relationship between the parties, and the seriousness of the alleged infringements. In practice, the following circumstances in particular may constitute grounds for a claim based on just cause:

• Reduction of the company’s assets through non-transparent transactions;
• Continuous and unjustified obstruction of the right to obtain information and conduct an examination;
• Use by the majority of the company’s resources for its own benefit or for the benefit of related persons;
• Repeated irregularities in the conduct of general assemblies or rendering minority rights ineffective;
• Prolonged non-distribution of profits without economic justification and systematic exclusion of the minority;
• Particularly in closely held or family companies, deterioration of the relationship of trust to an extent that seriously impedes the company’s operations;

The existence of any one of these circumstances does not, by itself, require the dissolution of the company. The court shall assess together the seriousness and continuity of the alleged conduct, its effects on the company and the shareholders, the conduct of the claimant, and whether the dispute can be resolved through less severe legal remedies. Therefore, as a rule, an isolated voting dispute or a single general assembly resolution that may be remedied through an action for annulment may not be considered sufficient. On the other hand, the continuing nature of different infringements and the fact that, when assessed together, they render the continuation of the shareholding relationship intolerable for the minority may strengthen the assessment of just cause.

Dissolution Is a Remedy of Last Resort and the Court May Order an Alternative Remedy

An action under Article 531 of the TCC may be brought by shareholders representing at least 10% of the shares in a non-public company and at least 5% of the shares in a publicly held company. An action shall be brought against the company whose dissolution is sought and shall be heard by the commercial court of first instance at the company’s registered office. Pursuant to Article 1521 of the TCC, the simplified procedure shall apply to such action arising from the shareholding relationship.

Even if the claimant has requested the dissolution of the company, the court is not bound by such request. Pursuant to Article 531 of the TCC, instead of dissolution, the court may order the payment to the claimant shareholders of the actual value of their shares as of the date closest to the date of the judgment and their removal from the company, or may order another appropriate and acceptable solution that ensures the continuation of the company. Therefore, Article 531 of the TCC does not grant a shareholder a unilateral and unconditional right of exit; the solution is determined by the court following the establishment of just causes. In determining the actual value of the share, neither its nominal value nor its book value alone shall be taken as the basis. The company’s assets, liabilities, income-generating capacity, privileges attached to the shares, and developments close to the valuation date may also be taken into consideration in the expert examination. Since dissolution constitutes the most severe intervention, whether an exit or another solution would be sufficient to remedy the infringement shall also be considered.

Article 531 of the TCC does not prescribe a specific statutory limitation period for bringing an action for dissolution. This does not mean that the claimant may wait indefinitely. A lengthy delay may adversely affect the assessment under the principle of good faith, the court’s view as to the seriousness of the circumstances, the preservation of evidence, and the credibility of the need for interim protection.

Matters to Be Considered Before Initiating Proceedings

1. Verify the shareholding and the threshold. The articles of association, trade registry records, share ledger, share certificates, and, where applicable, dematerialized records should be reviewed together. If more than one shareholder jointly meets the threshold, the intention to make the application and the preservation of the shares throughout the proceedings should be planned from the outset.
2. Arrange the events in chronological order. General assembly calls, minutes, dissenting opinions, board of directors’ resolutions, notarial notices, and correspondence should be matched within a single chronology. In this manner, an allegation of a continuing infringement can be distinguished from isolated events.
3. Determine the correct remedy and time limit for each circumstance. The three-month period for annulment, the 10-day period following an express rejection of an information request, the 30-day period for an accepted special audit request, and the three-month period for a rejected special audit request should each be separately recorded in the calendar. A claim under Article 531 of the TCC should not be used as a substitute for an action for annulment whose time limit has expired.
4. Document internal company applications. Information requests should contain specific questions; requests for a call and addition of items to the agenda should comply with the notarial procedure under Article 411 of the TCC; and objections to the financial statements should be expressly recorded in the meeting minutes. Although Article 531 of the TCC does not expressly make the exhaustion of other remedies a procedural prerequisite, records demonstrating why less severe remedies have proved insufficient help establish that dissolution is a remedy of last resort.
5. Preserve financial evidence. Financial statements, annual reports and audit reports, related-party agreements, bank transactions, valuation reports and records concerning company assets should be preserved in accordance with the law. The production through the court of records that cannot be accessed and an expert examination may be requested.
6. Assess urgent risks separately. If there is a risk of transfer of assets, loss of records, or implementation of an irreversible general assembly resolution, the options of interim injunction and preservation of evidence should be examined without delay. The protection sought should be proportionate to the specific risk.
7. Prepare solution and valuation scenarios. The economic consequences of dissolution, exit at actual value, and other options that would keep the company in operation should be modelled before initiating proceedings. This enables the claimant to present to the court not only past infringements but also a workable solution.

Matters to Be Considered in Practice

Failure to have dissent recorded in the minutes of the general assembly, making information requests only verbally, confusing the different time limits applicable to actions and applications, and obtaining company data through unlawful means may weaken the evidentiary strength of the case. Likewise, treating every dispute directly as a ground for dissolution is inconsistent with the last-resort nature of Article 531 of the TCC. A claim for dissolution for just cause should be substantiated by demonstrating together the recurring infringements, the timely exercise of shareholder rights and the reasons why less severe legal remedies have proved insufficient.

Strategic Protection with Esenyel Partners in Shareholding Disputes

Failure to exercise minority rights in a timely manner may result in short litigation periods being missed, while an uncontrolled request for dissolution may unnecessarily harm the company’s value and the commercial relationship. Particularly in cases involving a risk of asset transfers or loss of information, delay may narrow the scope of effective protection.

Esenyel Partners provides legal support to shareholders and companies in reviewing the articles of association and shareholding structure, managing general assembly and information processes, special audits, annulment and liability actions, and developing a strategy under Article 531 of the TCC.

You may contact Esenyel Partners to protect your minority rights, map out the evidence and applicable time limits in an existing dispute, or develop a proportionate solution that ensures the continuation of the company.

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