In joint stock companies, which is one of the most preferred partnership types due to the limited liability of shareholders, due to various concerns such as family and personal concerns and the relevant shareholders’ unsatisfied expectations relating to the company’s performance, shareholders may sometimes wish to terminate the partnership with other shareholders. In such cases, it is critical which actions can be taken by the controlling shareholders against the minority who cause difficulties and complexities in the decision-making process of the relevant company.
We experience that there are many lawsuits filed against the company when the shareholders, who would not like to continue the partnership relationship, cannot terminate their partnership relations peacefully by agreeing with other shareholders. In addition to the liability lawsuits filed against the executives nominated by the controlling shareholders, due to the economic conjuncture, the shareholders would like to explore terminating a partnership and squeezing out the minority more nowadays.
Although the essence is the continuity of the company, disputes between the shareholders may also result in the termination (winding up) of a company in some cases. As a matter of fact, termination of a partnership or squeezing out the minority is possible in joint stock companies only by filing an action for the termination of the company.
Termination File for Just Cause and Squeezing Out / Exit
A shareholder who is unable to transfer their shares voluntarily and whose partnership has become unbearable for them has a right to litigate and demand “the termination of the company due to just cause” before the commercial court where the registered headquarters of the company is located. As this right is envisaged as a minority right in the Turkish Commercial Code (“TCC”), the lawsuit can be filed by the shareholders who represent at least 10% of the total capital in non-public joint stock companies. This right is exercised by shareholders who are not in a dominant position in companies. On the other hand, the controlling shareholders prefer to squeeze out the minority from the company by giving a squeeze out compensation or to benefit from the special regulations regarding group companies.
Even though the primary request of the action should be the termination of the company in such cases, the continuity of the company is also crucial. In this context, the termination of the company is considered as the last resort and in practice, during the lawsuit, the plaintiffs also request to exit the company along with the request for the termination of the company as a secondary remedy. Indeed, the court may decide on the termination of the company or it may decide in favor of the exit of the plaintiff upon the payment of the real value of their shares on the date nearest to the date of the decision. However, the court may also decide on another appropriate and acceptable solutions which may provide a relief for the future of the company instead of the termination of the company or squeezing out any shareholder.
Which Grounds may Constitute a Just Cause?
There is no definition of just cause under the TCC. In terms of termination of joint stock companies, just cause can be defined as any situation which may lead an impossibility or substantial difficulty/threat for the realisation of partnership’s purpose and which a shareholder should not be expected to continue the relavant partnership.
The Court of Cassation exemplify that if the company continuously incurs losses, there are significant disputes between the shareholders, the relevant shareholders’ right of information and examination is breached or limited, the company could not convey general assembly, the controlling shareholders prevents the company to achieve its targets, there are irregularities related to the company’s general assembly meetings, the company’s sources are used in bad faith, family and personal issues cause adverse effect on the operation of the company, no dividend payment is made for a long term or the company’s executives act in favor of their personal benefits and cause the company to be in debt, such cases can be considered as just cause for termination cases. However, such situations may not be accepted as a just cause in every legal action and the court will evaluate whether the alleged causes constitute just cause or not depending on the characteristics of each substantial case. This will be an analysis which should be made case by cases. In fact, there are also rulings where the Court of Cassation do not see any just cause when the shareholders’ right to participate in management and audit is prevented by the board and audit organs of a company in bad faith or shareholders’ right of information and examination is prevented. Furthermore, when the plaintiff also plays a role in decision-making processes relating to an issue claimed as a just cause by the relevant plaintiff or the plaintiff has fault in economic deterioration of the company, the Court of Cassation does not accept such cases as a just cause considering the bad faith of the plaintiff.
Timing of Termination Lawsuits
Under the TCC, no specific limitation of time is regulated for such actions. Nonetheless, refraining from filing an action for a long time despite the existence of just causes and filing the action later might be evaluated as the breach of good faith and may constitute an abuse of right in other words. Therefore, it is recommended that the actions should be filed within a short period of time after the occurrence of the just cause. Otherwise, the filed actions may be rejected.
Potential Consequences of Disputes
It is expected that in case of a just cause, instead of termination of the company which has an economic value, the judge is expected to consider alternative solutions which may ensure the Still, we experience that when it is not possible to realise company’s common purpose and the plaintiff does not have a contribution to the occurrence of the just cause subject to judicial review, the Court of Cassation may decide that the company be terminated due to the relevant just cause. On the other hand, in cases where the company can easily carry out its activities with its assets, it may be decided that the plaintiff exit the company instead of the termination of the company.
It should also be considered that the court may not decide to terminate the company or the partnership either. For instance, in the event that the court considers the exit option, the real values of the shares belonging to the shareholder to exit will have to be paid. It should be assessed that whether the company has the ability to make this payment and whether it can continue its activities after such payment. In such cases, although it is not common in practice, the court may decide on an alternative solution which will continue the partnership relationship. The amendment of the articles of association of the company, the dividend payment or spin-off of the company can also be alternative solutions which may be encountered in practice depending on the nature of the just cause.