Corporate and Commercial Law

The articles of association are the company’s constitution

Where the articles of association are silent, the Turkish Commercial Code supplies its own answer — and that answer is rarely the one the shareholders would have chosen. Making share transfers subject to company approval, pre-emption and priority rights, what happens to a deceased shareholder’s heirs, meeting and voting thresholds: each of these is a short paragraph at incorporation and a qualified-majority problem afterwards.

The most common pattern in practice is a company held fifty-fifty by two shareholders with no deadlock mechanism at all. Once they disagree, the general assembly cannot convene, the board cannot resolve, and the company stops functioning. An arbitration clause, a call option or a casting-vote arrangement in the articles removes that risk before it arises.

General assembly and board resolutions

The validity of a general assembly resolution depends as much on the notice, the agenda and the quorum as on its content. A resolution adopted at a meeting convened without proper notice can be annulled however sensible its substance.

An action to annul a resolution that breaches the law, the articles or the rule of good faith must be brought within three months of the meeting. The period is preclusive: once it passes, a defective resolution becomes final. Resolutions that remove a shareholder’s inalienable rights or violate the principle of equal treatment are null, and their nullity may be raised at any time.

• Review of notice, agenda and quorum
• Drafting resolutions before the meeting
• Bringing or defending annulment actions
• Establishing grounds of nullity

Shareholder disputes: withdrawal, expulsion and dissolution

In a limited company, a shareholder may exercise a right of withdrawal where the articles provide for it, and may ask the court to permit withdrawal where just cause exists. The company may equally ask the court to expel a shareholder for just cause.

In a joint stock company, shareholders representing at least one tenth of the capital may seek dissolution for just cause. Instead of dissolution, the court may order that the claimants be paid the real value of their shares as at the date closest to the decision and removed from the company, or may adopt another solution appropriate to the situation. In practice dissolution is exceptional; courts generally prefer a remedy that keeps the company alive.

Minority rights and the special auditor

A shareholder concerned that the accounts are not transparent starts with a special audit. Any shareholder may ask the general assembly to clarify specific events through a special audit, provided it is necessary for the exercise of shareholder rights and the right to information or inspection has already been exercised.

If the general assembly refuses, shareholders representing at least one tenth of the capital — one twentieth in a publicly held company — may apply to the court within three months for the appointment of a special auditor. The minority’s other tools include postponing deliberation of the financial statements and requiring the general assembly to be convened.

Director liability and the internal directive

Board members are liable for loss caused by a culpable breach of their duties under the law or the articles. That liability is personal and reaches their own assets.

The most concrete way to manage the risk is an internal directive on delegation of management. Where the articles so permit, management may be delegated in whole or in part to one or more directors or to third parties by way of an internal directive. Where it has been, the delegating members are not liable for the acts of those to whom management was delegated to the extent they show reasonable care in selecting them. The internal directive is, in practical terms, the document that shifts the burden of proof.