Lawsuit for Dissolution of Companies for Just Cause

Introduction

The dissolution of a company is a specific type of dissolution, which results in the cancellation of the legal personality which was gained by registration at incorporation. The specific proceeding which leads to the dissolution, and thus, the termination of a company upon the constitutive decision of the court, is regulated separate but almost identical provisions for joint stock companies and limited liability companies under the Turkish Commercial Code numbered 6102 (“TCC”).

The subject of this article is the lawsuit for dissolution of companies for just cause, which is applicable for both joint stock companies and limited liability companies. First of all, the legal framework will be explained alongside with scholars’ contributions on the issue. Finally, a rather recent decision of the 11^th Civil Chamber of the Court of Cassation, dated February 2022, will be examined.

Legislation Regarding Dissolution Proceedings against a Company

During the transition from repealed Turkish Commercial Code No. 6762 (“rTCC”) to the TCC, the lawsuit for dissolution of the company for just cause was introduced under Article 531 of the TCC for joint stock companies, and under Article 636/3 of the TCC for limited liability companies. The common feature of both articles is to strengthen the position of the minority shareholder, who would be the plaintiff of the dissolution lawsuit, against the majority shareholders. As a right granted to the minority in joint stock companies, it is one of the provisions of the TCC to protect the rights of minority shareholders.^[1] In limited liability companies, each partner has the right to file a lawsuit for dissolution for just cause.

It is commonly known that a minority in joint stock companies is a shareholder or a group of shareholders constituting at least ten percent of the capital in private companies. In public companies, this threshold is set as five percent, but for the sake of simplicity, this article will focus on private companies. Article 531 of the TCC defines the plaintiff as “owners of shares representing at least one tenth of the capital.” Both due to the usage of the plural, and from the explanation in the Recital of the relevant article which states that “More than one shareholder can exercise the right in question together,” it is understood that it is not necessary for a single shareholder to meet the ten percent threshold in order to have the title of plaintiff, and that multiple shareholders can join together and file a lawsuit. Finally, the scholars consider that the threshold shall not be increased with the articles of association, however it is controversial among scholars whether it is possible to set the threshold below ten percent in the articles of association.^[2]

The dissolution lawsuit for just cause is not one of the innovations created by the TCC for limited liability companies, as it also existed under Article 549(1)(4) of the rTCC. In the period covered by the repealed law, the right of action in limited liability companies was granted to every partner, without their being a specific condition such as having a minority share. During the transition to the TCC, every partner’s right to claim dissolution in a limited liability company was preserved. This has been interpreted by some scholars as bringing limited liability companies closer to personal partnerships in terms of dissolution with just cause.^[3]

Another important point to be emphasized regarding the parties of the case is the identity of the defendant. Although the relevant articles were introduced to protect minority shareholders against the majority in both joint stock companies and limited liability companies,^[4] the defendant is not the majority shareholders but the company. This is due to the fact that even though the court has wide discretion in terms of solutions, the ultimate demand of the plaintiff is the dissolution of the company,^[5] and the such relief should be addressed to the company.

Finally, arguably the most important feature of the lawsuit for dissolution for just cause under the TCC is the wide discretion granted to the judge for both the determination of just cause and the remedy. According to commentators on this Article, possible reasons for a finding of just cause include (i) constant violation of shareholder rights, especially minority rights, (ii) the failure to call the general assembly repeatedly and in violation of the TCC, and (iii) the company’s continuous loss of money.^[6] In addition, personal tensions or intra-family conflicts may also constitute just cause in joint stock companies which are family businesses, and for limited companies in general. However, whether or not violations of the shareholders’ agreement can constitute just cause is controversial. Professor Ayoğlu claims that they can, and argues that a reason which would cause inconvenience to the continuation of the partnership and which is stipulated under a contract among all of the shareholders, should not be less corporative than family tension.^[7] In addition, Professor Altay states that in joint ventures established as joint-stock companies where the equity subscription is equal, a situation that will cause a permanent deadlock could be considered just cause for dissolution.^[8]

In each case, if the court accepts the existence of just cause, Articles 531 and 636 of the TCC provide for a unique remedy. Accordingly, the court may order a squeeze-out of the claimant shareholder from the partnership or “another remedy appropriate to the situation.” Undoubtedly, the dissolution of the company is the last resort (ultima ratio) that the court may decide.^[9]

Professor Kendigelen has written a critical review of Article 531 of the TCC. As per the explicit wording of Article 531, if the judge decides to squeeze-out a claimant shareholder from a company, the “real value at the closest date to the decision date” will be the share price. Kendigelen draws attention to the fact that this language was added to the article by the Justice Commission at the Parliament, and may not be suitable to meet the article’s ratio legis. Underlining that the reason for the addition was only to ensure that the shareholder also benefits from the increase in the value of the shares over time, he states that if the provision is applied in absolute terms, the shareholder would be adversely affected by the decrease in the share value.^[10]

A Novel Decision by the Court of Cassation

In a decision dated 15.02.2022 and numbered E. 2020/8247, K. 2022/1130 (“Decision”), the 11^th Civil Chamber of the Court of Cassation (“Chamber”) evaluated a claim for the dissolution of two limited companies for just cause.^[11] In this case, two shareholders each held 50% of two limited liability companies. The claim of the plaintiff regarding the existence of just cause was that the other shareholder (i) had completely abandoned dealing with the companies, (ii) had given his administrative powers in the companies to his son, (iii) the son of the other shareholder had made sales in a way that would cause a loss to one of the companies and a corresponding amount had been transferred out from the company, and (iv) that the other shareholder and his son had commercial relations with rivals of the defendant companies. As a result, the plaintiff claimed that the continuation of the company was intolerable and demanded a decision to dissolve the companies.

The counterclaims of the other shareholder focused on two points: (i) it was possible to squeeze-out the plaintiff from the partnership and (ii) the claims were not made in good faith. In the lower court decision, the plaintiff’s claim was accepted and the dissolution of the company was ordered on the grounds that the company (i) had not been active for ten years, (ii) the company had no opportunity to realize its purpose, (iii) there was no possibility for the shareholders to come together and (iv) there was no attempt to make the company active again.

In its Decision, the Chamber underlined that dissolution is the last resort (ultima ratio) under Article 363/3 of the TCC and revoked the decision to dissolve the company without resorting to any other remedy. The Chamber found that both the plaintiff and the claimant requested squeeze-out of the plaintiff among their claims for relief. Therefore, the Chamber reversed the lower instance decision since it did not decide to squeeze-out the plaintiff, but rather decided to the dissolution the company.

Conclusion

The right to claim dissolution for just cause is granted to every partner in limited liability companies, whereas it is a newly introduced minority right for joint stock companies. Although the alleged just cause generally arises from the actions of the majority shareholders, the company is the defendant in a dissolution proceeding. Arguably, the most important feature of a suit for dissolution for just cause is the judge’s wide discretionary power, both in determining just cause and in choosing an appropriate remedy. In its Decision dated 15.02.2022, the 11^th Civil Chamber of the Court of Cassation found the decision for dissolution contrary to the principle of ultima ratio and revoked the decision by stating that squeezing-out the plaintiff from the partnership should have been regarded as a solution.