Arbitration of Corporate Law Disputes: The Swiss Example, Lessons to be Learnt and Suggestions

December 2021 Prof. Dr. H. Ercüment Erdem

"This article has been prepared based on the statement I gave at the "Arbitration in the Resolution of Corporate Law Disputes" webinar held by ITOTAM, the Ministry of Commerce General Directorate of Domestic Trade, the Istanbul Chamber of Commerce Trade Registry and the Istanbul Bar Association Arbitration Center on 16 October 2021. You can find the recorded video of the webinar here."

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Introduction

Arbitration in corporate law contains controversial elements in many respects, especially the issue of arbitrability. Even in legal systems where these disputes are considered to be arbitrable, uncertainties remain on whether an arbitration clause can be included in the articles of association and for whom it will be binding. Switzerland, on the other hand, has made a very important amendment in the Swiss Code of Obligations with regard to adding an arbitration clause to the articles of association in order to put an end to these uncertainties. Legal regulations based on the Swiss model should be adopted in order to eliminate similar uncertainties in Turkish law.

Debates in Swiss Doctrine

The issue of whether an arbitration clause can be included in the articles of association under Swiss law was discussed from a variety of different perspectives prior to the adoption of the amendment to the Code.

First of all, the legal nature of the arbitration clause to be included in the articles of association may be interpreted differently in accordance with the opinions claiming that the articles of association have the nature of a multilateral agreement and those who argue that the articles of association become objective legal norms upon registration with the trade registry.

Secondly, although the arbitration clause is binding on the founders from the moment they sign the articles of association, it was unclear whether new shareholders are bound by the arbitration clause in case of a change in shareholding.[1]

Thirdly, different views were put forward about the majority to be sought in the general assembly for the arbitration clause to be added to the articles of association. As a rule, unless otherwise stated in the law or the articles of association, unanimous consent is not required for a general assembly resolution regarding the amendment of the articles of association. However, it may not be fair to require an ordinary majority in the general assembly for the amendment of the articles of association regarding the addition of an arbitration clause. For this reason, it was argued that it would be more appropriate to seek a qualified majority or unanimity for the amendments to the articles of association.

Finally, there was also controversy surrounding the issue of whether the arbitration clause included in the articles of association imposes an obligation other than the subscribed capital on the shareholders and that this may constitute a violation of the sole obligation principle.[2] However, under Swiss Law, it is generally accepted that the arbitration clause to be included in the articles of association does not affect the fundamental rights and obligations of the shareholders and does not violate the sole obligation principle.[3]

New Regulations Under Swiss Law

The process for the revision of Swiss corporate law had been ongoing since 2007.[4] After remaining open to discussion until 2015, the draft Swiss Code of Obligations was adopted by the Swiss Federal Assembly in June 2020, but has not yet entered into force. In accordance with these amendments, the Swiss Civil Procedure Code and the Federal Act on Private International Law have also been revised. The Swiss Federal Act on Private International Law was adopted by the Swiss Federal Assembly on 19 June 2020 and entered into force on 1 January 2021.

A new paragraph stating that the relevant provision can also be applied by analogy to unilateral legal transactions or to arbitration clauses in the articles of association, has been added to art. 178 of the Federal Act on Private International Law which states that the arbitration agreement can be concluded in any form that can be proven in writing or text. The same amendment was made in art. 358 of the Civil Procedure Code. The discussions regarding on whom the arbitration clause is binding and whether the arbitration clause imposes obligations on shareholders, could not be ended with the amendments made in the Federal Act on Private International Law and the Civil Procedure Code. These discussions were ended with the amendment of the Swiss Code of Obligations.

The free translation of article 697N, added to the Swiss Code of Obligations but expected to enter into force at the end of 2022 or in 2023, is as follows:

“Article 697N
(1)  The articles of association may provide that all corporate law disputes shall be decided by an arbitral tribunal seated in Switzerland. Unless the articles of association provide otherwise, corporate bodies, members of corporate bodies and shareholders are bound by such a clause.
(2)  Arbitration proceedings are subject to Part 3 of the Civil Procedure Code; the provisions of Chapter 12 of the Federal Law dated 18 December 1987 on Private International Law do not apply.
(3)  The articles of association may regulate the procedure, in particular through referral to arbitration rules. They ensure that persons who may be directly affected by the legal effects of the arbitration award are informed about the initiation and conclusion of the proceedings and may participate in the constitution of the arbitral tribunal and in the proceedings as interveners.”

In addition, the amendment made to art. 704 of the Swiss Code of Obligations requires a general assembly resolution taken with at least two-thirds of the votes cast and the majority of the nominal values ​​of the votes cast in order to add an arbitration clause to the articles of association.

According to Swiss legal scholars, this new regulation provides a non-contractual basis for the arbitration clause. The non-contractual, corporate character of the articles of association, in which the arbitration clause will be included, is set forth by the provision.[5]

Pursuant to this provision, the arbitral tribunal shall be seated in Switzerland and the provisions of the Swiss Civil Procedure Code shall be applied to the arbitration proceedings initiated based on the arbitration clause in the articles of association.

The arbitration clause included in the articles of association shall be registered and announced like other provisions of the articles of association. However, the arbitration clause is not listed among the provisions benefiting from the positive (informative) function of the registry in the Swiss Code of Obligations. The importance of registering the arbitration clause is that it provides notice to new shareholders that they are subject to the arbitration clause.

If the provision is examined in terms of its application ratione materiae, the arbitrability of corporate disputes, as stated before, is controversial. However, according to the Preamble of the Swiss Code of Obligations Amendment (“Preamble”), disputes regarding annulment and nullity of the general assembly resolutions, termination with just cause, unpaid capital debt, direct or indirect liability of the members of the board of directors and managers, may be submitted to arbitration.[6]

In terms of application ratione personae, the arbitration clause is binding on corporate bodies, members of bodies and shareholders. However, it is possible to narrow the scope of the arbitration clause in the articles of association in terms of both the application ratione materiae and ratione personae. According to the Preamble, disputes between shareholders cannot be resolved based on the arbitration clause in the articles of association.[7] These disputes should be resolved in accordance with the arbitration clause to be included in the shareholders agreement.

Suggestions for Turkish Law

With an amendment similar to the regulation made under Swiss law, disputes arising from Turkish corporate law may be resolved based on the arbitration clause in the articles of association. Although Turkish legal scholars and Courts of Appeal seem to take a more conservative approach compared to their Swiss counterparts regarding the arbitrability of the disputes related to the dissolution of the company and the general assembly resolutions, an amendment should be made in Turkish law as well.[8]

In my opinion, paragraph 4 can be added to art. 339 of the Turkish Commercial Code (“TCC”):

“(4) The articles of association may stipulate that corporate law disputes will be resolved by an arbitral tribunal seated in Turkey. Unless the articles of association provide otherwise, the company, its bodies, members of the bodies and shareholders are bound by the arbitration clause. Arbitration is subject to the provisions of the eleventh Part of Civil Procedure Law numbered 6100 and dated 12.01.2011. International Arbitration Law numbered 4686 and dated 21.06.2001 is not applicable. The articles of association may regulate the arbitration procedure by referring to a specific arbitration rule. The arbitration clause to be included in the articles of association also requires that persons who may be directly affected by the legal consequences of the arbitral award are informed about the initiation and conclusion of the proceedings, and that they can participate in the constitution of the arbitral tribunal and in the proceedings as interveners.”

Considering that the company’s seat of corporation is in Turkey and that Turkish law should be applied, domestic arbitration which is governed by the Civil Procedure Law should be regulated in the TCC as it is in Switzerland. In addition, it would be useful to specify in the TCC that the arbitration rules may be determined by referring to arbitration rules of institutional arbitration centers.

In addition to the new paragraph to be added to TCC art. 339, a new paragraph should be added to TCC art. 421/3 requiring an affirmative vote of shareholders owning shares constituting at least seventy-five percent of the capital for the amendment of the articles of association. Furthermore, adding a new paragraph to TCC art. 354/1 can ensure that the arbitration clause benefits from the positive (informative) function of registration.

Regarding limited companies, the arbitration clause can be listed among the binding provisions of the articles of association in TCC art. 577/1. The qualified majority required for the important decisions listed in TCC art. 621/1 can also be utilized for adding arbitration clause to the articles of association. Finally, by adding a new paragraph to TCC art. 587/1, the arbitration clause can benefit from the positive (informative) function of registration for these companies as well.

Conclusion

It can be observed that the trade registries in Turkey have started to register the arbitration clauses included in the articles of association. However, since there is no regulation on this issue, there are different views and uncertainties. The details of the arbitration clause to be included in the articles of association should be regulated in the TCC in order to encourage the resolution of corporate law disputes through arbitration.

Source

[1] Bersheda, Tetiana: “Les clauses d'arbitrage statutaires en droit Suisse”, ASA Bulletin, Volume 27 Issue 4, 2009, p. 707-708.

[2] Bersheda, p. 699.

[3] Bersheda, p. 705. See also Veziroğlu, Cem: “Arbitration of Corporate Law Disputes in Joint Stock Companies under Turkish Law: A Comparative Analysis”, Global Relations Forum Young Academics Program Policy Paper Series No. 9, March 2019.

[4] Erdem, H. Ercüment: İsviçre Şirketler Hukukuna İlişkin Kanun Taslağı ve Taslağın Türk Hukukuna Etkisi, Banka ve Ticaret Hukuku Enstitüsü 60. Yıl Armağanı, Ankara 2015, p. 142

[5] Allemann, Richard G.: “Setting the Ground for Corporate Arbitration in Switzerland: Swiss Parliament Approves New Rules for Arbitration of Corporate Law Disputes”, Kluwer Arbitration Blog, August 17, 2020.

[6] Message concernant la modification du code des obligations (Droit de la société anonyme), FF, 2017, p. 495.

[7] Message concernant la modification du code des obligations (Droit de la société anonyme), FF, 2017, p. 495.

[8] For discussions and suggestions on this subject, see Erdem, H. Ercüment: “Şirketler Hukuku Uyuşmazlıklarının Tahkime Elverişliliği”, Tahkim Anlaşması, Ed. Kocasakal Özdemir, Hatice/Balkar, Süheyla, İstanbul 2020, p. 1-24.


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