Cancellation of the General Assembly Resolutions in Turkish Law

The general assembly resolution (“GAR”) is a legal act that may affect partners, creditors, directors, and employees. Therefore, their compliance with the law bears utmost importance for joint stock companies. GAR requires a decision that has been taken in accordance with the relevant legislation and articles of association (“AoA”) in order to become applicable. Otherwise, its absolute nullity or invalidity may be claimed by all stakeholders. Besides, even when a GAR fulfils the required criteria to avoid such circumstances, it may be subject to cancellation under article 445 of the Turkish Code of Commerce numbered 6102 (“TCC”). This article aims to summarize bullet points regarding cancellation of GAR under Turkish law.

What are the Reasons for Cancellation?

As per article 445 of the TCC, reasons for cancellation of GAR are determined as (i) illegality, (ii) violation of the AoA, and especially (iii) violation of the principles of good faith.

i. Illegality

While illegality is determined as a reason for cancellation under article 445 of the TCC, there is not any distinction between mandatory and interpretive provisions. As a result, there are several approaches to the subject regarding in which cases GAR may be cancelled.

Accordingly, it is argued that any violation of legal provisions except for the violations that result in non-existence or nullity may be considered as a reason for cancellation. In other words, GAR may be subject to cancellation in cases where the violation does not fall under article 447 of the TCC or article 27 of  the Turkish Code of Obligations numbered 6098 (“TCO”). 

Another approach suggests that violation of the absolute mandatory provisions aiming to protect third parties and claims of the association shall be subject to non-existence or nullity, whereas proportional mandatory provisions that aim to protect the shareholders shall be subject to cancellation. With this respect, proportional mandatory provisions regarding the formation of GAR instead of constitutional provisions regarding GAR shall be subject to cancellation. 

ii. Violation of the AoA

Any violation of the AoA is subject to the cancellation. However, in case the violated provision of the AoA is a repetition of the mandatory provisions of the law or the essential principles of a joint stock company as determined under article 447 of the TCC, such violation shall be subject to nullity.

However, a provision of the AoA that has been registered and published which is against the mandatory provisions of the law shall not be subject to cancellation as it would be invalid in the first place.

iii. Violation of the Principles of Good Faith

As per article 445 of the TCC, “especially” GARs that violate good faith are subject to cancellation. Accordingly, principles of good faith within the context of GAR are a reflection of the principles of good faith determined under article 2 of the Turkish Civil Code numbered 4721. With this respect, principles of good faith consists of transparency, exercising rights cautiously, not prioritizing the benefit of majority, respecting the shareholders’ right to inspection, information, and examination. 

Accordingly, in case there are alternatives for a right to be exercised in order to achieve a certain result, the alternative that would cause the least damage to third parties should be preferred. However, if any conflict of interest is present between the owner of the right and third parties, the owner of the right’s interests would prevail. In other words, if the alternative methods do not provide the equivalent benefits, then the owner of the right would not be expected to opt for such alternatives in terms of principles of good faith. 

In addition, for cancellation of GAR, causa proxima between the violation and the GAR subject to the cancellation lawsuit should be present.

Who may apply for such a remedy?

Pursuant to article 446 of the TCC, cancellation may be demanded by shareholders, board of directors (“BoD”), or members of the BoD. In addition, the Capital Markets Board of Turkey may also apply to court for cancellation of GAR under certain circumstances.

The lawsuit shall be filed against the company in all cases. The company shall be represented by the BoD unless the lawsuit has been filed by the BoD in the first place.

As per article 445 of the TCC, the lawsuit demanding cancellation of GAR shall be filed within 3 (three) months as of the date of GAR before the commercial court located at the headquarters of the company. Pursuant to article 448 of the TCC, the hearings would not begin until the 3 (three) months starting from the date of the GAR is expired in order to be able for joinder of actions if there are multiple claims.

i. Shareholders

As mentioned above, the first group that may apply for cancellation is shareholders who voted against the resolution by attending the general assembly meeting personally or through an attorney and have written their opposition to the minutes of the meeting. The legislation sets these criteria as cumulative and lack of one of them shall abolish the right to benefit from such legal remedy. Therefore, fulfilment of the criteria must be evaluated carefully.

The party who claims for cancellation of GAR should act consistently. For instance, if the shareholder voted in favor of the GAR, his/her application for cancellation would not yield any result; even when there is an opponent that has been included within the minutes of meeting, in compliance with the relevant law. 

If the shareholder complied with necessary conditions by attending the general assembly meeting and voting against the resolution, then the existence of written opponent should be questioned. First of all, the opponent must be an obvious one. Accordingly, making a statement or a motion against the GAR during the general assembly meeting may not be considered sufficient in terms of making an opposition. The shareholder must also provide the opponent when all discussions regarding agenda topic has been completed and the decision is taken. It is recommended, since a general opponent to all resolutions may be regarded as an abuse of right and could cause non-fulfilment of the set criteria, to write an opponent about each objected topic once the process of consideration is finished.

However, as stipulated under article 445 of the TCC, there are certain exceptions to the general principle, which set voting against the resolution by attending the general meeting and writing an opposition to the minutes of meeting as a prior condition to become entitled to file a lawsuit. First of all, (i) if the general assembly meeting was not duly made or the agenda was not announced as required by law, a shareholder may apply to the court for cancellation of GAR even if he/she did not vote against the resolution or did not attend the meeting at all. The same opportunity rises also when (ii) parties who were not authorized to attend the general assembly meeting or their representatives attended the general assembly meeting and voted or (iii) a shareholder was not allowed to attend the general assembly meeting and vote unjustly. In such a case, the shareholder is only required to prove one of these unlawfulness had influence on adopting GAR.

ii. Board of Directors

The BoD may also file a lawsuit in order to cancel a GAR. The BoD may use such right by a decision of the BoD. The BoD’s right to demand cancellation may also be regarded as a duty due to its care and commitment obligation if GAR violates the law or the AoA or is contrary to the company’s interest. In case of the BoD’s legal action with the aim of cancellation of the GAR, the company shall be represented by a trustee instead of the BoD.

iii. Members of the BoD

A member of the BoD may file a lawsuit for the cancellation of GAR when GAR lay a burden on him/her. The BoD member may apply to such legal act individually even when opening a case regarding cancellation of GAR has been discussed during a board meeting and rejected by the BoD.

iiii. Capital Market Boards of Turkey

According to article 23 of the Capital Market Law numbered 6362, Capital Markets Board of Turkey (“Board”) is authorized to determine (i) significant transactions that involve publicly-held corporations such as being a party to merger or division transactions, decisions regarding change of type or termination, transfer of assets, change of area of activity significantly, creating or amending privileges, or being delisted and (ii) the procedures and principles that should be followed in order to perform such transactions.

In case of violation of the above-mentioned procedures and principles, the Board may impose administrative fines and may file lawsuit for cancellation of such transactions in accordance with the relevant provisions of the TCC.

What are the Results of a Verdict Regarding Cancellation?

Pursuant to article 450 of the TCC, the verdict regarding nullity or cancellation of GAR, after finalization, becomes binding for all shareholders, organs of the company and the members of organs. The BoD is obliged to immediately register and publish such a verdict and publish it on the company’s website (if any).

With a cancellation verdict of the court, the GAR subject to the verdict would be retroactively cancelled and deemed ineffective as of the date of the GAR. Bonafide third persons’ rights that arise from the cancelled GAR would not be affected. In order for a third party to be deemed malicious, (i) a cancellation verdict should be existent and (ii) the third party should be aware of such verdict. 

As per article 451 of the TCC, the malicious plaintiff filing for the nullity or cancellation of a GAR would be jointly and severally responsible for the losses of the company, in case their malicious intention is proven.

 

References

Poroy, R., Tekinalp, Ü., & Çamoğlu, E. (2019). Ortaklıklar Hukuku I. İstanbul: Vedat Kitapçılık.

Bahtiyar, M. (2015). Ortaklıklar Hukuku. İstanbul: Beta Yayıncılık.

 

Co- Authors: Kaan Erdoğan – Simge Kılıç