An Exceptional Remedy Protecting Minority Shareholders against Persistent and Serious Abuse by the Majority: the “Exit Share Price”

The “exit share price” is the claim representing the true economic value of a shareholder’s stake in the company in return for the termination of that person’s shareholder status. Under the Turkish Commercial Code, the term used for limited liability companies is mainly “withdrawal consideration” (ayrılma akçesi); in joint-stock companies, within the just-cause dissolution action, practice also uses the expressions “exit share price” (çıkma payı) or “share price” (pay bedeli).

In joint-stock companies there is an exceptional remedy protecting minority shareholders against persistent and serious abuse by the majority: the action for dissolution of the company for just cause. The exit share price is one of the outcomes that may be reached in that dissolution action. For that reason, the process of the dissolution action is outlined below.

TCC Art. 531 is an exceptional remedy protecting minority shareholders in joint-stock companies against persistent and serious abuse by the majority. Under the provision, shareholders holding a specified capital percentage may, where just cause exists, seek dissolution of the company from the commercial court of first instance at the company’s registered office. Instead of dissolution, the court may also order payment of the true value of the shares or another appropriate solution.

1. The claimant must hold the required shareholding percentage

The action may be brought by shareholders representing:

• at least 10% of the capital in non-public joint-stock companies,
• at least 5% of the capital in public joint-stock companies.

That percentage may belong to a single shareholder or may be reached by several shareholders acting together. The criterion is not voting power but, in essence, the percentage of capital represented by the shares. The required percentage must exist on the date the action is filed. Loss of shareholder status or of the required percentage during the proceedings may create problems as regards the claimant’s standing and legal interest.

Accordingly, a shareholder in a closely held joint-stock company with less than 10% cannot rely on TCC Art. 531 alone. That shareholder may, however, complete the threshold by acting together with other minority shareholders.

2. “Just cause” must exist

The Code does not list just causes one by one. Whether just cause exists is determined by the court by assessing together the structure of the company, the relations among the shareholders, the duration and gravity of the events, and their effect on the minority. Official court decisions likewise accept that TCC Art. 531 contains no definitive definition or closed list of just cause.

For an event to constitute just cause, it is generally expected to have the following features:

• conduct that is serious or continuing, not one-off and trivial,
• serious harm to the economic and membership interests of the company or of the minority shareholders,
• use of majority control in a manner contrary to the principle of good faith,
• continuation of the shareholder relationship becoming objectively intolerable or meaningless for the shareholder.

Just cause need not take the form of the company’s insolvency or over-indebtedness. Systematic exclusion of the minority by the majority may constitute just cause even in a profitable company.

3. Principal situations that may constitute just cause

Depending on the circumstances of the case, one or more of the following situations may together constitute just cause:

• persistent obstruction of the minority’s rights to information and inspection,
• irregular holding of general meetings or exclusion of the minority from meetings,
• failure to distribute dividends for many years without a reasonable ground although the company is profitable,
• transfer of unjust benefits to majority shareholders or related persons,
• transfer of company assets at undervalue to the controlling shareholder or related companies,
• persistent breach of the equal-treatment principle in favour of the majority and against the minority,
• use of management and supervision mechanisms entirely for the personal interests of the majority,
• persistent losses, idle status of the company, or practical impossibility of pursuing the company’s object,
• instrumentalisation of capital increases to dilute the minority’s stake or eliminate its influence in the company,
• failure to disclose company accounts, preparation of false financial statements, or diversion of company resources outside the company.

In judicial practice, persistent losses, long-term non-distribution of dividends, the company remaining idle, and serious disruption of company operations through breakdown of trust within the partnership are among the facts considered in assessing just cause. None of these, however, automatically leads to dissolution on its own.

4. Dissolution as a last resort

Dissolution of the company is a severe outcome that ends the company’s legal personality. For that reason, in the application of TCC Art. 531, dissolution is accepted as an “ultima ratio”, that is, a last resort.

The court assesses the following question:

Can the problem raised be resolved without dissolving the company, by a more proportionate method such as annulment of a general-meeting resolution, enforcement of the right to information, appointment of a special auditor, an action for liability against board members, interim measures, or the shareholder’s exit from the company upon payment of the true share value?

If the problem can be remedied effectively by a milder legal instrument, that path is preferred to dissolution. Official court decisions also state clearly that the just-cause dissolution action is last-resort in nature.

That principle does not, however, mean that the claimant must first have brought and concluded every other action before filing under TCC Art. 531. What is examined is whether other remedies would be effective and sufficient in the concrete case. Where the minority has for years obtained no result, the majority’s conduct is systematic, or it is clear that other remedies will not cure the problem, a direct application under TCC Art. 531 may be possible.

5. The action must be brought against the correct defendant

The action is brought essentially against the joint-stock company as a legal person. Majority shareholders, board members, or controlling shareholders are not, as a rule, the principal defendants in a TCC Art. 531 action.

Nevertheless, where separate claims arising from their unlawful acts exist—such as:

• annulment of a general-meeting resolution,
• liability of board members,
• compensation for company loss,
• remedy of the shareholder’s direct loss

—the relevant persons may also be named as defendants. The legal bases of those claims differ from TCC Art. 531.

6. The claimant’s request for dissolution

The principal action provided for in TCC Art. 531 is the action for dissolution of the company for just cause. In the petition the claimant may seek dissolution of the company and may also request that, instead of dissolution, the court order:

• the claimant’s exit from the company upon payment of the true value of the shares,
• development of an appropriate corporate solution.

The court is not wholly bound by the solution proposed by the claimant. Where it finds just cause, it may determine a more proportionate solution instead of dissolution.

7. The court may reach four basic outcomes

1. Dismissal of the action: If the shareholding percentage or just-cause conditions are not met, the action is dismissed.
2. Dissolution of the company: If the problem cannot otherwise be resolved, dissolution and liquidation of the company are ordered.
3. Payment of the share price: The true value of the claimants’ shares as of the date closest to the judgment date is paid, and the claimants are removed from the company.
4. Another appropriate solution: The court may determine another solution required by the concrete case. For example, performance of a particular transaction, distribution of dividends, reorganisation of company management, or establishment of a corporate mechanism protecting the minority may come into question.

The Code provides that the true share value is to be determined as of the date closest to the judgment date.