Ercüment Erdem Prof. Dr. H. Ercüment Erdem

Withdrawal And Expulsion From Limited Liability Companies (“LLC”) İncorporated By Two Shareholders

July 2014

Turkish Commercial Code No. 6102 (“TCC”) brought many innovations and formed many new entities. One of the innovations is the sole shareholding joint-stock and limited liability company. Pursuant to the Article 504 of the abrogated Turkish Commercial Code No. 6762 (“Former TCC”) a limited liability company cannot be formed by less than two, and more than fifty shareholders. The minimum limit of the number of the shareholders has been abandoned and incorporation of a sole shareholder limited liability company has become possible.

Expulsion from Limited Liability Companies Incorporated by Two Shareholders According to Former TCC

The limit of the number of shareholders in the Former TCC caused problems. For example, in limited liability companies incorporated by two shareholders, in case of a discrepancy, as the Former TCC didn’t allow for a single-shareholder limited liability company the only remedy applicable was the dissolution of the company for just cause by the court. Thus, because of these conflicts among the shareholders, companies that had good dynamics and efficient commercial potential were faced with dissolution and were eliminated from business life. As sole-shareholding limited liability companies were not permitted, the Court of Cassation didn’t allow the expulsion of a shareholder with just cause. The established opinion of the Court of Cassation was based on the ground that the withdrawal or expulsion of a shareholder from a limited liability company incorporated by two shareholders was not possible, even in the presence of a just cause, since the company can’t proceed with a sole shareholder after withdrawal or expulsion. Therefore the only remedy was to request dissolution of the company. Further to the Court of Cassation, as there is no article about the maintenance of sole shareholding limited companies in the Former TCC, Article 504/II indicates: “If the number of shareholders is down to one or one of the compulsory organs of the company can’t be formed, unless these deficiencies can’t be removed within an appropriate time, upon the request of an associate or a creditor of the company, the Court decides the dissolution of the company. Upon the request of a party, the Court takes necessary cautionary judgments.” This Article was only applicable when the number of shareholders was down to one because of an obligatory reason such as the death of a shareholder within the regular term of the company or transfer of all shares to one shareholder. The Court of Cassation adopted the view that according to the Former TCC Article 551/II, the right of expulsion of a shareholder exists only for limited liability companies with more than two shareholders.

Within the frame of the established opinion of the Court of Cassation, which was based on the According to the Former TCC, courts used to decide for the dissolution of companies by just cause instead of the expulsion of a shareholder in case of discrepancies between the shareholders; this caused the interruption of commercial life and prevented the development of the companies.

Expulsion from Limited Liability Companies incorporated by Two Shareholders According to the TCC

Pursuant to TCC No. 6102 the number of shareholders of limited liability companies is regulated as one to fifty; thus, in case of a conflict between the shareholders, instead of the dissolution of the company by just cause, the opportunity of expulsion was enabled. Therefore, it is now lawful to maintain a limited liability companies incorporated by two shareholders in the event of expulsion of one of said shareholders. Through this system, the Court of Cassation changed its view of dissolution by just cause, to expulsion of the opponent shareholder.

Law of Enforcement Article 3

Pursuant to Article 3 of the Law on Enforcement and Application of the Turkish Commercial Code (“Law of Enforcement”), concerning the legal transactions regulated by law irrespective of the parties’ consent that occurred before the entry into force of the TCC, the provisions of the TCC will be applicable. As per Article 3“The provisions of the TCC shall apply to legal relationships regulated by law irrespective of the parties’ consent, even if they were established before the entry into force of the TCC.” In connection with the limited liability companies, sole shareholding limited liability companies (TCC Articles 573-574), audit and special audit (TCC Article 635), grounds for and consequences of dissolution (TCC Article 636), participation in the withdrawal (TCC Article 639) and cash payment for withdrawal (TCC Article 641-642) are examples of these legal transactions. As per this provision, the decision of the 11th Civil Chamber of the Court of Cassation, dated 13.06.2013 and numbered 2011/14131 and 2013/12400, created case law by stating the following: “as Article 3 of the Law on Enforcement and Application of the Turkish Commercial Code which is established after this case has initiated, provides an opportunity to apply the provisions of the TCC No. 6102, which allows the single-member LLC, it is needed to be decided according to the petition of claim which requests the dismissal of the shareholder”. This decision opened the gate for the application of such new provisions.

Application of the TCC to the Limited Liability Companies incorporated in accordance with Former TCC

Pursuant the provisions of the TCC, there are two options concerning the expulsion of a shareholder. The first option is the existence of a provision in the articles of association that stipulates the reasons for the expulsion of a shareholder from the company (contractual right of dismissal). In this case, the shareholders may decide for the expulsion of a shareholder when the circumstances provided in the articles of association occur. Pursuant to Article 640 TCC, the shareholder may initiate an annulation case against this decision within 3 months after the notification by the notary to him/her. The reasons for expulsion provided in the articles of association should not necessarily be one of the just causes indicated in Article 640/3 TCC. Reasons for contractual right of dismissal are determined by the shareholders, in accordance with the freedom of contract principle.

The second option is that the right to request from the court the expulsion of a shareholder in case a just cause exists. Requests for expulsion of a shareholder from a company is one of the non-delegable authorities of the general assembly pursuant to Article 616/1/c TCC. In this case, if the company believes that there is a just cause that prevents a shareholder from remaining as such, the company shall apply to the Court and the judge will decide whether the cause is just or not. The judge will decide for expulsion if he agrees with the just cause.

Even if, pursuant to Article 3 of the Law on Application, the provisions of the TCC shall apply to the limited liability companies incorporated by two shareholders that were established during the Former TCC, the application of the first option is not directly possible. If the contractual right of expulsion was not recognized by the articles of association of a limited liability company established during the Former TCC, this right of contractual dismissal can only be used after the revision of the articles of association of the company providing such right. However, the application of the second option is possible. If the company proves the just cause, it may request the expulsion of the shareholder from the company. Even if the company was incorporated during the Former TCC, instead of the dissolution of the company in accordance with the previous decision of the Court of Cassation, due to Law of Enforcement and provisions of the TCC, the court might decide for the expulsion of the shareholder or for the application of other circumstances convenient to the case.

Withdrawal

In case the relationship among the shareholders becomes unbearable, the right of contractual withdrawal provided by the articles of association (TCC Article 638/1) and the permission of withdrawal for just cause by the Court (TCC Article 638/2) are other solutions, besides the dismissal or liquidation of the company. In accordance with the above mentioned explanations, even if the articles of association of a company incorporated according to the Former TCC does not provide for the right of contractual withdrawal, such right could be provided by amending the articles of association. The quorum set forth in the TCC shall be respected when the amendment is made, a right of withdrawal can be provided and instead of seeking just cause and applying to the court, when a stipulated reason for withdrawal occurs, the shareholder may use his/her right of withdrawal, and the company could continue with a single shareholder. If this remedy is not preferred, the shareholder who alleges the presence of a just cause may apply to the court and request his/her withdrawal. In this case the court shall examine whether there is a just cause and especially whether the claimant is at fault or not. According to the established view of the Court of Cassation, the party at fault cannot claim withdrawal for just cause.

Dissolution

Every shareholder may request dissolution of the company in case a just cause exists pursuant to Article 636 TCC, which regulates grounds of dissolution of limited liability companies. Nevertheless, the dissolution is the last remedy. Instead of dissolution, the court may decide, at its sole discretion, on the dismissal of the shareholder claiming the dissolution upon the payment of real value of the shares or on other solutions that are acceptable and convenient to the situation. The distribution of dividends, division of the company and providing shares of a newly established company and attribution of the opponent shareholder as director can be shown as alternative, acceptable solutions.

Just cause

Just causes that are the conditions to apply to the court are not restrictively cited in the TCC. Abuse of majority power, non-functioning organs, breach of trust among shareholders, providing unfair advantages to the shareholders, breach of financial rights, breach of the right to information and to inspect, important conflict between the shareholders, misdirection of the company and causing a loss to the shareholders may be accepted as the reasons that render the shareholders relationship unbearable. As a matter of fact, the Court of Cassation indicates that the just causes stated in the TCC that trigger dissolution of the companies are not restrictive.

The parties of the dissolution request

In case of a court application for just cause, another problem appears; against whom the lawsuit will be initiated? The Court of Cassation’s decisions on this matter are contradictious. In some of its decisions, it seeks that all the shareholders are respondent, and in recent decisions it accepts only the company as respondent, since otherwise when the dissolution of the company is decided, the decision would effect a third party who is not involved in the case. The Court of Cassation has conflicting decisions concerning the other party when companies incorporated by two shareholders are involved; is some decisions it is the shareholders and in other it is the company.

Conclusion

TCC allows for the expulsion of a shareholder or to implement other solutions that are convenient to the situation instead of the dissolution of a limited liability company with two shareholders. According to Article 3 of the Law of Enforcement, these provisions are also applicable to limited liability companies that have been incorporated and to the lawsuits that were initiated during the Former TCC. The continuity of companies is important not only for the self-dynamism of the company, but also for the commercial life. During the Former TCC, the dissolution of a company was the only remedy offered to limited liability companies where there existed discrepancies among its shareholders. This remedy was deficient and did not serve the purpose. The TCC changed this system and filled the gaps. The Court of Cassation followed this approach in its new decisions and contributes to the establishment of new regulations brought by the TCC.