Lack of Mandatory Bodies in Joint Stock Companies

April 2019 Ecem Çetinyılmaz
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Introduction

Article 530 of Turkish Commercial Code No. 6102[1] (“TCC”) regulates the cases where, for a lengthy period of time, one of the company bodies that is mandatory by law does not exist, or where the general assembly fails to convene, and provides for the termination of the company unless such situation is brought in compliance with the law. Although said Article has been inspired by Article 435 of the former Turkish Commercial Code (“fTCC”), it introduces several changes. This Newsletter addresses the discussions as to which situations company bodies shall be deemed non-existent, what the notion of lengthy period of time means, who could be entitled to file the subject lawsuit, and what authorities could be exercised by the court in such cases.

Lack of Mandatory Bodies

When the lack of mandatory bodies of joint stock companies is in question, the first body that comes into mind is certainly the board of directors. One could accept that the management body is not existent if a new board of directors has not been elected, although the term of the former board has expired, if the board has become vacant through resignation of the members and it is not possible to fill the vacancy, or although existent, if the board of directors cannot duly hold a meeting, or cannot meet at all[2]. When the term of the board of directors expires, and until new members are elected, its duties continue, limited to the purpose of conducting the then-current works; however, this is applicable for a certain period of time: when the waiting period extends beyond reasonable levels, the body should be deemed to be non-existent[3].

Whether or not the auditor in companies that are subject to independent audit, or the committee for early detection of risks in the listed companies, are company bodies is an issue worth consideration. In the legal doctrine, it is stated that mandatory bodies are the board of directors and the general assembly[4]. On the other hand, bodies other than the foregoing are not within the scope of Article 530 as their formation is not mandatory by law, and their absence does not affect the corporate structure[5]. This is because auditing is a function in joint stock companies, failure to elect an auditor is not explicitly regulated as grounds for termination and, similarly, the committee for early detection of risks is not a mandatory body, the lack of, or non-convention of which would cause the termination of the company[6].

General Assembly’s Failure to Convene

General assembly’s failure to convene may be due to the failure of convocation of the meeting by the competent bodies, as well as due to the lack of quora required by law, or by the articles of association in a duly convoked meeting. What is important in consequence is such body’s failure to convene as an assembly.

Notion of Lengthy Period of Time

In order for the court to rule for the termination of a company as regulated under Article 530 of the TCC, cases where one of the mandatory bodies does not exist, or where the general assembly fails to convene, must be of a continuing nature. The aim to include the condition of lengthy period of time, which was not included under the fTCC, is to prevent those who have the right of action from immediately resorting to the court upon the first unsuccessful attempt to elect the board of directors[7]. According to Tekinalp, the expression “for a lengthy period of time” is an admissibility condition for the case, and is especially important when the lawsuit is immediately filed by the creditors or the Ministry of Trade: Filing of a lawsuit by the foregoing cannot be accepted when the shareholders are working to solve the problem[8].

Neither the wording, nor the preamble of the Article, includes guidance as to what the expression “for a lengthy period of time” refers to. According to the preamble, the discretionary power is left to the judge as to the interpretation of the lengthy period of time in order to prevent abuse of rights, and to enable acting freely according to the conditions of the case at hand; this is because the lawmaker thought that if a definite period of time was stipulated under the law, the right holders who are acting in bad faith would be involved in unjust practices by taking into consideration both such period and the court process[9]. Tekinalp is of the view that the lengthy period of time could be 10-12 months for shareholders, and a longer period of time for creditors and the Ministry of Trade[10].

Parties to the Case, Competent Court

Shareholders and creditors of the company, as well the Ministry of Trade, are entitled to file the lawsuit foreseen under the Article. The preamble of the Article states that the Ministry of Trade’s entitlement to file a lawsuit for termination might be considered as a state interference with joint stock companies, yet the Ministry has exercised such power during the reign of the fTCC exceptionally, and with a great diligence and, therefore, the lawmaker deemed beneficial to keep such authority[11]. It is stated by the legal scholars that for a creditor to file such lawsuit, it should have a legitimate interest[12].

The lawsuit shall be filed against the company’s legal personality.

The commercial court of first instance located in the place wherein the company headquarters is situated is the competent court.

Authorities of the Court

Before ruling for the termination of the company, the court must first listen to the board of directors, and allow the company to bring its situation into compliance with the law through the granting of a convenient period of time. Whereas the provision for granting a convenient period of time is taken from the fTCC; the condition to listen to the board of directors is introduced by the TCC. This condition finds its area of application where the lawsuit for termination has been initiated due to the general assembly’s failure to convene, or the board of directors’ failure to duly hold a meeting, or to meet at all. It is beyond doubt that such condition cannot be fulfilled in cases where the board of directors does not exist.

The court is entitled to take the necessary measures upon the request of one of the parties. Neither the wording, nor the preamble of the Article, specifies such measures, and broad discretionary power is provided to the judge.

Whether or not a judgment could be made pursuant to Article 531 of the TCC in a case that is filed and based on the provisions of Article 530 of the TCC has been a subject of discussion amongst legal scholars. In a case for termination based on Article 531 of the TCC, the court is ex officio entitled to squeeze out the claimant shareholder, or to rule for suitable and acceptable alternative solutions, instead of termination of the company. The view in favour of application of Article 531 of the TCC in a lawsuit that is filed within the scope of Article 530 is based on the ultima ratio character of termination, and argues that this solution is both compatible with the iura novit curia principle, and is supported by the special nature of the lack of mandatory bodies included within the scope of the notion of just cause[13]. According to this view, there is, and there should be, no difference for the claimant between leaving the company through taking the real value of its shares and termination of the company[14]. As a counter-view, one might argue that the discretionary power of the judge is not open-ended, and an exceptional provision included in one Article cannot be extended to apply to another Article by way of analogy.

Conclusion

Article 530 of the TCC provides for a joint stock company’s shareholders and creditors, as well as the Ministry of Trade, to file a lawsuit for the termination of the company where, for a lengthy period of time, one of the company bodies that is mandatory by law does not exist, or where the general assembly fails to convene. The commercial court of first instance located in the place wherein the company headquarters is situated shall listen to the board of directors of the company, and determine a convenient period of time for the company to bring its situation to be in compliance with the law, and if the situation is not remedied within such period, shall rule for the termination of the company. It is mandatory for the acceptance of the case that the situations foreseen under the Article have continued for a lengthy period of time, and the judge should act freely in determination of such period according to the conditions of the case at hand. Whether or not a judgment could be made pursuant to Article 531 of the TCC in a case that is filed based on the provisions of Article 530 of the TCC shall be determined by judicial decisions.

[1] TCC (Official Gazette, 14.02.2011, No. 27846) entered into force on 01.07.2012.

[2] Preamble of Article 530 of the TCC.

[3] Pulaşlı, Hasan: 6102 Sayılı Türk Ticaret Kanuna Göre Şirketler Hukuku Şerhi, C. II, Ankara 2011, p. 1786.

[4] Pulaşlı, s. 1785; Karahan/Bozgeyik: Şirketler Hukuku, 1th ed., Konya 2012, p. 648.

[5] Tekinalp/Poroy/Çamoğlu): Ortaklıklar Hukuku II, Updated 13th ed., İstanbul 2017, p. 337.

[6] Karahan/Bozgeyik, p. 648.

[7] Tekinalp/Poroy/Çamoğlu, p. 338.

[8] Tekinalp/Poroy/Çamoğlu, p. 338.

[9] Preamble of Article 530 of the TCC.

[10] Tekinalp/Poroy/Çamoğlu, p. 338.

[11] Preamble of Article 530 of the TCC.

[12] Tekinalp/Poroy/Çamoğlu, p. 338.

[13] Ayoğlu, Tolga“Anonim Ortaklıkların Haklı Nedenle Feshi”, Galatasaray Üniversitesi Hukuk Fakültesi Dergisi, No. 2013/2 (Prof. Dr. Oğuz İmregün’e Saygı Sempozyumu), p. 230.

[14] Ayoğlu, p. 230-231.

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