A Practical Approach To Legal Protection Of Equity Inverstment Under Turkish Law( Türk Hukukunda Hisse Yatırımlarının Kanuni Koruma Yöntemlerine Pratik Bir Bakış Açısı - Hissedarın Korunma Yöntemleri )
Serkan İÇTEM
Table of Contents
Preface III
Abbreviations XIII
Introduction 1
Chapter 1 Importance of Information Gathering Effort 7
A. Director Right to Access Corporate Information 7
1. General 7
2. Statutory Director Right to Information and Inspection 10
2.1 During a Formal Board Meeting 10
2.2 Outside a Board Meeting 11
2.3 By way of a Court Order 15
2.4 Conclusion and Tips 16
B. Shareholder Right to Access Corporate Information 17
1. General 17
2. Statutory Shareholder Right to Receive Information
and Inspection 17
2.1 Before a Shareholders Meeting 17
2.2 During a Shareholders Meeting 18
2.3 After a Shareholders Meeting 21
2.4 Denial Based on Corporate Secrecy and Benefit 22
2.5 By way of a Court Order 24
2.6 Conclusion and Tips 24
Chapter 2 Shareholders Meeting Phase 27
A. Benefits of a Formal Shareholders Meeting 27
1. Information Gathering 27
2. Right to Defer Discussions on Financial Statements 27
3. Special Audit Request 30
4. Moving to Replace Directors 39
4.1 An Exclusive Shareholder Right 39
4.2 Implied Agenda Item for Removal of Directors 41
4.3 Removal Based on Just Cause 42
4.4 Removal Based on Contractual Condition 42
5. Release of Directors from Liability 43
5.1 Explicit and Implicit Release Decision; Exception 43
5.2 Consequence of a Release Decision 46
5.3 A Specific Form of Release; Incorporation and
Capital Increase 48
5.4 Leaping Over an Existing Release Decision 48
6. Decision to Initiate Liability Law Suit Against Directors 50
7. Right to Approve Material Asset Sales 51
B. How to Convene a Formal Shareholders Meeting 53
1. Board of Directors 54
2. Minority Shareholder 55
3. Any Shareholder 57
4. Custodian 58
5. Shareholders Meeting 58
C. Appointment of a Custodian to the Company 59
1. General 59
2. Part of a Minority Right 59
3. Lack of Administrative Corporate Bodies 60
3.1 General Rule under Turkish Civil Code 60
3.2 In the Case of Management Deadlock 63
3.3 As a Form of Injunctive Relief 65
3.4 Under Threat of Forced Liquidation 66
4. Analysis 68
Chapter 3 Statutory Director Duties and Obligations 73
A. Statutory Obligations 73
1. Perform Managerial Duties in Person 74
2. Duty of Care and Loyalty 75
2.1 Duty of Care 75
2.2 Duty of Loyalty 81
(i) A Special Case; Combination of Shareholder
and Director Roles 82
3. Equal Treatment 83
4. Prohibition on Transacting with the Company 85
5. Prohibition on Incurrence of Indebtedness 87
6. Non Competition 88
7. Respecting Corporate Secrecy 94
7.1 Insider Trading Rules 94
7.2 Corporate Secrecy 96
8. Insolvency Related Obligations 100
8.1 First Tier; Excessive Loss of More than 1/2
of the Capital 101
8.2 Second Tier; Excessive Loss of More than 2/3
of the Capital 101
8.3 Third Tier; Insolvency 103
8.4 Last Resort Before Bankruptcy 105
(i) Subordination 106
(ii) Capital Injection 107
(iii) Merger 108
(iv) Bankruptcy Deferral 109
(a) Judicially Required Features of a
Restructuring Plan 111
8.5 Criminal Liability of Directors 114
8.6 Two Special Cases of Claw Back of Payments 115
(i) Shareholders and Directors Obligation
to Return Paid Dividends 115
(ii) Creditors Right to Claim Back Excessive
Director Remuneration 116
Chapter 4 Legal Action Phase 119
A. Liability Law Suits 119
1. Director/Management Liability 119
1.1 Element of Breach of Duty 120
1.2 Element of Loss; Direct Loss vs. Indirect Loss 120
(i) Claiming Direct Loss 120
(ii) Shareholders Right to Claim Indirect Loss 124
(iii) Creditors Right to Claim Indirect Loss 125
(iv) Litigation Costs 126
1.3 Element of Causation 127
1.4 Relief from Potential Liability 127
(i) Delegation 127
(a) Procedure for a Due Delegation 128
(b) Non Transferrable Director Duties 129
(c) Effect of a Due Delegation 131
(ii) Release 137
(iii) Negligence and Burden of Proof 137
1.5 Statue of Limitations 140
1.6 Interim Measures 142
1.7 Joint Liability of Directors 142
2. Director Liability In Case of Group Company Structures 144
2.1 Liability of Controlled Subsidiary’s Directors 144
2.2 Liability of Controlling Shareholder’s Directors 147
3. Shareholder Liability 148
3.1 Based on Breach of a Shareholders Agreement 148
3.2 In the Absence of a Written Shareholders Agreement;
Does a General Shareholder Duty of Loyalty Exist? 150
3.3 Duty of Loyalty Between Partners in an Equity
Joint Venture 155
3.4 Interim Analysis 160
(i) Evidentiary Issues 165
3.5 Statute of Limitations 167
4. Controlling Shareholders Liability in a Company
Group Structure 173
4.1 General; Definition of a Group Structure 173
4.2 Introduction to Two Different Causes of Action 175
4.3 Element of Control 176
4.4 Use of Control in an Unlawful Manner 180
4.5 Element of Inflicting a Loss upon the
Controlled Company 182
4.6 Counter Balancing/Equalization by the Controlling
Shareholder 186
4.7 Cause of Action Available to Shareholder/Creditor
of the Controlled Subsidiary 190
(i) Due to Abusive Actions 190
(ii) Due to Material Transactions
(Structural Corporate Decisions) 193
4.8 Defendants Shield Against Liability Claim 196
4.9 Statute of Limitations 198
5. Law Suit Arising From False Representations
and Documents 199
6. Other Sources of Statutory Liability 201
6.1 Inaccurate Declarations Regarding Payment
Status of the Capital 201
6.2 Accepting Subscription Undertaking from Parties
with Known Payment Incapability 202
6.3 Fraud in Valuation of Asset Contributions 202
6.4 Unauthorized Public Offering 203
B. Minority’s Right to Exit 203
1. Law Suit Requesting Company Dissolution 203
1.1 Just Reasons 204
(i) General Principles 204
(ii) Types and Forms of Just Reasons 208
(iii) Last Resort Relief 214
1.2 Court’s Discretion to Order an Alternative Solution 220
1.3 Interim Measures 224
C. Squeezing Out Minority 224
1. Law Suit For Forced Exit of Minority 224
1.1 Conditions 225
D. Invalidation of Board/Shareholder Decisions 228
1. Law Suit For Declaring Board Decisions as Unlawful 229
1.1 Grounds for Declaration of Unlawfulness
of a Board Decision 231
(i) Decisions Breaching the Principle of
Equal Treatment 231
(ii) Decisions Violating the Principle Structure of
a Joint Stock Company or Those Against the
Principle of Protection of Capital 232
(iii) Decisions Violating, Restricting or Burdening
Use of Absolute Shareholder Rights 233
(iv) Decisions that Relate to or Delegate Non
Transferrable Rights of Other Statutory
Corporate Bodies 234
2. Law Suit For Cancellation or Declaration of
Unlawfulness of a Shareholder Decision 235
2.1 Grounds for Cancellation of a Shareholder Decision 236
(i) Decisions Violating the Rule of Law or Articles
of Association 236
(ii) Decisions Breaching the Principle of Acting
Bona Fide 236
2.2 Grounds for Declaration of Unlawfulness of
a Shareholders Decision 237
(i) Decisions Abolishing or Restricting Shareholder
Rights of Participation to a Shareholders Meeting,
Minimum Vote, Right of Legal Action and
Statutory Inalienable Rights 238
(ii) Decisions Restricting the Right of a Shareholder
to Obtain Information, Inspection and Audit
Beyond the Legally Permissible Scope 238
(iii) Decisions Violating the Principle Structure of a
Joint Stock Company or Those Against the
Principle of Protection of Capital 238
Chapter 5 Conclusion and Suggestions 239
A. Having Right and Proper Legal Documentation
and Structure 239
B. Setting up a Professional Corporate Governance System 244
C. Setting up an Outside Compliance Check System 247
D. Setting up a “Whistle Blowing” System 248
BIBLIOGRAPHY 249
Introduction
Our experience shows us that some foreign equity investors tend to lean too much on local partners or directors assuming primary responsibility from management and administration of a local investment company. The reasons for such reliance are rather unimportant. All investments in the form of equity partnerships start as a promise of a success story or a high degree expectation of a positive financial return. Not all hit such target. Partners in a business venture always have some degree of mutual trust before engaging in business and inevitably one part will assume control of the business. In case of foreign investors partnering with a local counterparty, it is possible that local management and administration of the company is left in the hands of local shareholders and directors. We do not mean to criticize this approach without exception as in many cases such allocation of responsibility comes natural. Foreign investors are often induced to invest in Turkish market by their local partners where the former relies on an implied added value of their local partner’s contacts, knowledge of the local market and management skills. When that is the case, who is in a better position to manage the local company than the local shareholder? It is very rare to see foreign and local equity investors’ partnership in the form of a local company to be governed by an entirely independent professional advisers or managers. A more typical and common practice is where the foreign investor represents the financial resource and overall know how for the local business and the local partner represents local management. Add to this, the often understandable desire of the local shareholder, especially if in minority position, to be able to derive dependable and periodical income from the investment in the form of salary income or alike as opposed to depending on a contingent annual dividend return. Local shareholders often feel surrounded and fear to be overwhelmed by their foreign partners’ financial ability and resources. These intimidations are often in the form being possibly diluted by unexpected major capital increases invoked by a foreign partner, decisions preventing dividend distributions or diversion of corporate funds to capital expenditure or business growth all may be in good faith nevertheless will deprive the local minority shareholder from any periodical business return. As a way to prevent this fear, partners often agree to appoint local shareholder as a compensated director thus merging a shareholder and a director position in the capacity of one. Whatever the reason may be we often observe local shareholders also assuming director or managerial positions in the Turkish investment company in addition to their shareholder role. This structure in many cases works to mutual benefit where local shareholders, be it also directors or not, work hand in hand with their foreign partners. To ensure this end, foreign shareholders also actively contribute to the local company’s management or if not actively involved, set certain corporate mechanisms so as to watch over the shoulders of the local management and react when needed. However, not all investments are structured in such ideal, professional manner. Local management when left unchecked or acting overly ambitious may sail the ship his own way ignoring the overall partnership interests.
This may in certain unfortunate circumstances lead to serious disappointments where local management/partners sometimes negligently and sometimes with motives exceeding mere negligence or incapacity, act in disastrously detrimental fashion to the business and financial well being of the local company. It is not uncommon to observe cases where local directors under different motives exercise their managerial rights in such a fashion triggering or eventually causing substantial corporate liability or loss. As mentioned before, this may in certain aspects arise due to negligence or relative inexperience of local directors during the conduct of company business. In other instances local directors’ fraud, desire for personal benefit or over ambitious business decisions may be involved. We have seen many different forms of such mishappenings; cases where local management does not hesitate to make questionable payments or offer favors to local officials to tip the balance in a procurement tender to favor the company, use of corporate assets by directors for personal benefit or cases where non corporate interests were followed by directors to the detriment of the company.
Whatever the motive or reason may be, the ultimate result usually signifies irrevocable harm to the investor either indirectly by damaging the local business and local company assets or even sometimes directly the investor. Questions remain as to what an equity investor is entitled to do in order to regain control of its equity investment and protect whatever that is left? What corporate legal remedies are there under Turkish law for this purpose? If too late from a corporate governance/change of management perspective, which causes of action are there that may be used to demand compensation from responsible parties? Similarly, are there any statutory exit options when the partners are at a deadlock for one reason or the other?
This study aims to shed light on these topics, if not aiming to provide definite answers or a full action list which may only be tailored by a local counsel after scrutiny of the factual elements of each case. That being the case, we aim to answer some immediate questions arising in these times of crisis where all is felt to be sliding out of hand. It seems to us that the natural target audience of this study is foreign equity investors in Turkish companies. For this purpose we opted to prepare this study in English and with a pragmatic view considering available legal steps and actions. We are also aware that not all readers may have a legal background so we tried to adopt a rather non legal tone with an emphasis on how things evolve in practice. The approach is not to provide a general explanation of (minority) shareholder rights or law suits available to them but a more specific one which assumes an equity investor who for one reason or the other was kept in the dark with respect to company business and suspects that the company was, to say the least, “run badly”. That being the case we happen to put ourselves in many instances in the shoes of such investor and attempted to see the issue through his eyes and provide some insight, a road map as to what needs to or may be done. We also hope that this study will be useful to our foreign colleagues as well when facing a challange of advising their clients on issues governed by a foreign legal regime.
A few words about methodology. The study’s main interest area and focus is joint stock companies as opposed to limited liability companies. This is no coincidence as the vast majority of foreign equity investments are structured in the form of a joint stock company which more or less corresponds to a “corporation” or an “aktiengesellschaft” of its foreign equivalents. In some limited instances we also referred to limited liability companies’ law and practice as well but when we did so, this is specifically mentioned. Therefore, unless otherwise indicated our explanations shall be read as for a joint stock company. Throughout the following pages when we refer to “investor” we mean an equity investor who is a shareholder in a Turkish company (irrespective of the relevant shareholding percentage) and not merely a debt investor. We use the terms “partners” to also refer to shareholders representing different interest groups in a Turkish company and not as a technical term of partnership in a non-corporate structure unless otherwise specifically indicated such as referring to partners of an ordinary partnership. The term partner is also used when referring to equity holders in a limited liability company as within the understanding of Turkish commercial law equity owners in a limited liability company are not referred to as shareholders; simply because a limited liability company is not said to have “shares” but “partnership interest”. Many of the statutory rights we refer in this study can be exercised by any shareholder irrespective of its shareholding percentage. If and when a certain right or cause of action can be used merely by a minority shareholder, we specifically indicate such condition. The term “director” is used in its technical sense to refer to a member of the board of directors and not merely a manager or other employee of the company. We used the term “director” and “member of the board of directors” in the same manner. The term "manager" however, is used in a broader sense to include directors as well as senior managers.
Also important to note that the TCC is taken as the milestone in this study and in general we refrained from a comparative analysis of legal structures and provisions that are available now and were or were not available in the Former Commercial Code, their similarities or subtle differences etc. This understanding is also reflected upon the legal resources that we used as references as we tried to focus more on the legal literature that is published after the enactment of the TCC or if not published thereafter that relate to or have applicability also in the era of the TCC as opposed to the Former Commercial Code.
TCC is a brand new codification governing Turkish commercial law and practice, having replaced the Former Commercial Code in its entirety. TCC introduces significant changes as compared to the old commercial legal regime under the Former Commercial Code, one of which is on the issue of shareholder rights in general . The motive to address to shareholder rights were mainly fueled by earlier discussions that shareholders, especially having a minority equity position, did not enjoy adequate legal protection otherwise afforded to minority shareholders in many other developed legal regimes. TCC aims to rectify this deficiency. Be it minority or majority equity position, statutory shareholder rights bear pivotal importance from the perspective of this study. Those equity investors especially foreign, must be aware of the statutory protection afforded to their equity interest. In the following chapters we attempt to explain at least some of those shareholder rights (including those in the form of available law suits), the ones which we deem relevant from our perspective.
As mentioned, TCC affords numerous statutory rights to a shareholder, including to those minority shareholders. In this respect it is pivotal to focus first on the right of a shareholder to receive information (directly or through directors) on company’s business affairs. After all adequate information is key to determine what needs to be done as next steps. For any further legal action that may be taken against other shareholders or directors, shareholder first needs to be fully aware of the necessary factual background surrounding the company’s past and ongoing business and possess documentary evidence in this respect. Therefore, we believe that information and document compilation constitutes a priority task. Jumping onto legal action phase without possessing the necessary factual and documentary background will yield nothing but result in a waste of effort and more money on part of the already unhappy investor. • Kanuni Hissedar Hakları
• Şirket Yöneticilerinin ve Hissedarların Diğer Hissedarlara Karşı Hak ve Yükümlülükleri
• Şirket Yönetimine Karşı Talep ve Davalar
• Hissedarlar Arası Hukuki İhtilaflar
• Önleyici Hissedar Hakları ve Şirket Zararından Dolayı İşlem Sonrası Çareler
