Special Committee Of Preference Shareholders

October 2014 Selen Öztürk
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Introduction

Turkish Commercial Code No. 6102 (the “TCC”) provides a number of provisions for the protection of preference shareholders. In this regard, the general assembly’s right to amend the articles of association is restricted by the rights of the preference shareholders. In accordance with Art. 454 of the TCC entitled “Special Committee of Preference Shareholders,” resolutions of the general assembly pertaining to amending the articles of association, authorizing the board of directors with respect to increasing the share capital, and the decision of the board of directors with respect to increasing the share capital that may potentially violate the rights of the preference shareholders shall result the convening of preference shareholders to meeting, and their subsequent approval.

TCC Art. 454 regulates the circumstances where the approval of the special committee of preference shareholders is required, the convocation procedure, the decision-making method, and the lawsuit to be filed against the special committee of preference shareholders by the board of directors.

Circumstances that Require Approval of Special Committee of Preference Shareholders

TCC Art. 454/1 stipulates the circumstances where the approval of the special committee of preference shareholders is necessary. These circumstances are listed in the relevant article; therefore, the implementation of the resolutions other than those listed in the article do not require the approval of the special committee of preference shareholders.

The first circumstance rises when the amendment of the articles of association by the general assembly violates the rights of the preference shareholders. This circumstance may occur as removal or restriction of the privilege by the amendment of the articles of association. For instance, if the articles of association withdraw the voting preference of the preference shareholders by the amendment of the articles of association, in order for this amendment to be implemented, the special committee of preference shareholders must grant its approval of such amendment. The circumstances regarding violation are not limited to this situation, and other circumstances where the rights of the preference shareholders are violated are considered to be within this scope.

Another circumstance is the general assembly’s resolution concerning the authorization of the board of directors to increase the capital. In such a case, even though the board of directors has not yet adopted a resolution based upon the general assembly resolution, the possibility of adoption of a resolution is sufficient to convene the special committee of preference shareholders. If the authorization resolution of the general assembly enables the board of directors to issue preference shares, then it is probable that the rights of the preference shareholders may be violated[1].

The final circumstance that Art. 454/1 sets forth is the case where the board of directors’ resolution to increase the capital infringes upon the rights of the preference shareholders. This infringement may occur when the registered capital system is in question.

In such cases, if the rights of the preference shareholders are violated, the resolution cannot be implemented unless the approval of the special committee of preference shareholders is obtained. The special committee of preference shareholders is comprised only of the preference shareholders whose rights have been infringed. Preference shareholders whose preferences are not infringed cannot attend the committee meeting.

More importantly, in order for the special committee of preference shareholders to be convened, the law specifically requires that the rights of the preference shareholders have been violated. The fact that the resolution of the general assembly or the board of directors was unlawful shall not suffice for the convening of the special committee.

Convening the Special Committee of Preference Shareholders

TCC Art. 454/2 stipulates that the special committee of preference shareholders shall be convened by the board of directors. In accordance with the relevant article, the board of directors shall convene the special committee of preference shareholders no later than one month following the announcement of the general assembly resolution. This authority of the board of directors is unassignable. Unless the special committee of preference shareholders is convened by the board of directors within this period, each preference shareholder is entitled to apply to the commercial court of first instance to convene the meeting within fifteen days following the last day of the convening period set forth for the board of directors. Therefore, the law entitles the preference shareholders to convene the meeting. The aim of this provision is to enable the court to make an unbiased decision in order to balance the conflicts of interest.

Meeting of the Special Committee of Preference Shareholders

Pursuant to Art. 454/3 of the TCC, the special committee of preference shareholders convenes with the presence of 60% or more of the share capital representing the preference shares, and the decision by the majority of the shares represented at the meeting. In addition, if the preference shareholders cast affirmative votes at the general assembly for the resolution in question, there will be no convening of a special committee meeting.

Moreover, TCC Art. 454/3 sets forth certain steps to be performed where the special committee decides that a violation has occurred with respect to the rights of the preference shareholders. Accordingly, the decision is confirmed with justified minutes, and the meeting minutes are delivered to the board of directors within ten days following the date of the decision. Therefore, if the preference shareholders decide that their rights have been infringed, they must provide sufficient reasoning with respect to the infringement. Additionally, the list of a minimum number of signatures of the preference shareholders who cast negative votes regarding the general assembly resolution, and a notification address suitable for the lawsuit that may be filed shall be delivered to the board of directors. TCC Art. 454/3 stipulates that the special committee decision shall be deemed non-existent unless the aforesaid conditions are met. Thus, these conditions laid out by the TCC shall be respected when adopting a decision.

If the special committee does not convene despite the call to convene, the general assembly resolution shall be deemed as approved.

Annulment of the Special Committee of Preference Shareholders’ Decisions

The special committee of preference shareholders has the authority not to approve the general assembly resolution on the grounds that their rights have been infringed. In this case, if the board of directors finds the justification provided by the special committee to be unsatisfactory, it may file an action for annulment, and demand the registration of the general assembly resolution from the commercial court of first instance located at the headquarters of the company. The action shall be brought before the court within one month following the decision date of the special committee.

The annulment action shall be initiated against the preference shareholders who voted against the approval of the general assembly resolution. The purpose of this provision is to prevent unnecessary lawsuits to be filed against the preference shareholders who had cast affirmative votes.[2]

Conclusion

The provision rearding the special committee of preference shareholders provides for certain guarantees for the protection of the rights of the privileged shareholders. TCC Art. 454 regulates the special committee of preference shareholders and, since this includes detailed provisions regarding the committee and the action for annulment of the decisions of the committee, it must be considered as an important provision.

[1] Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, p. 98.

[2] Hasan Pulaşlı, Yeni Şirketler Hukuk Genel Esaslar, p. 754.

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