Author: Ecem Cetinyilmaz
Introduction
In general, cases of invalidity of general assembly resolutions fall into the categories of non-existence, nullity and annullability. The scope of this Newsletter is limited to null and void resolutions of general assemblies established under Article 447 and related provisions of Turkish Commercial Code No. 6102[1] (“TCC”).
As accurately stated in the preamble of the Article[2], when the repealed Turkish Commercial Code numbered 6762 (“Former TCC”) first entered into force, it was controversial whether or not the nullity of general assembly resolutions could be challenged via a lawsuit for declaratory judgment; however, in the following years, the existence of null and void general assembly resolutions was accepted, in addition to annullable general assembly resolutions, both by scholars and by the Court of Cassation. This being the case, scholars and practitioners were seeking a solution based on the general provisions of the law of obligations, as the Former TCC was silent on the matter; this situation was causing the reasons for nullity determined in line with the general provisions to stand out, and was leaving the reasons specific to joint stock companies in the background, which are sourced from the fundamental structure of joint stock companies and are significant in terms of protecting the balance of interests in joint stock companies[3].
Article 447 of the TCC, considering this fact and legislating the settled practice, names the null and void resolutions by analogy. This Newsletter discusses the cases in which the resolutions of the general assembly shall be deemed null and void pursuant to Article 447 and the following provisions, as well as procedural issues such as who is entitled to request the determination of nullity, the procedure of making such a request, procedures publication, security issues, conditions for granting a stay of execution of the decision, and the effect of the resolution.
Reasons for Nullity
Under Article 447 of the TCC, a general assembly resolution shall be deemed null and void especially if it (i) eliminates or restricts shareholder rights such as the right to attend the general assembly, to have certain number of votes, to file a lawsuit and other indispensable rights arising from the law, (ii) restricts shareholder rights such as information, inspection and audit rights beyond the limits allowed by the law, or (iii) deteriorates the fundamental structure of the joint stock company or violates the principle of protection of capital.
The wording of the Article where the expression “especially” is used, shows that the reasons for nullity are not exhaustively listed, and there may be other null and void resolutions not foreseen under the Article. The preamble of the Article provides broad explanations on why null and void resolutions are not exhaustively listed, and on the determination of null and void resolutions. The relevant section is quoted directly to better convey the purpose of the legislature[4]:
“It would not be accurate if the draft law exhaustively (numerus clausus) determined null and void resolutions of the general assembly. If that had been done, so many resolutions that could be considered null and void would have fallen out of the scope of the provision. On the other hand, it is impossible to determine or define all of the nullity situations and reasons in the law. Therefore, it has been evaluated that distinguishing the null and void resolutions into two categories, leaving the reasons for null and void resolutions in terms of form to the precedents and doctrine, and precisely pointing out the resolutions that are null and void by means of subject by analogy -- and not being exhaustive, would be the most accurate method. The system has been adopted with the belief that the courts would show due care - by emphasizing the principle of avoiding dangers and threats in the determination of invalid resolutions in terms of form. Thus, Article 447 points out the especially null and void resolutions of the general assembly in categories. The expression “especially” used in the provision means that the null and void resolutions of the general assembly are not limited to those stated in the article; in other words, the article is not of an exhaustive (numerus clausus) nature. However, the expression “especially” shows a relative limit and at the same time, the chosen categories of decisions point out that the legislature approaches the matter cautiously and conservatively. Conservation is a principle that the provision adopts. For that reason, the expression “especially” has also a restrictive function.”
Considering the basic principles and explanations above, each of the cases listed under the Article, as well as other probable cases for nullity, are discussed below.
Resolutions Eliminating or Restricting Indispensable Shareholder Rights
Examples of resolutions eliminating or restricting indispensable shareholder rights arising from the law such as the right to attend the general assembly, to have certain number of votes, to file a lawsuit and other indispensable rights arising from the law include resolutions preventing shareholders from being represented in the general assembly meetings via proxy, providing dividend distributions without setting aside legal reserves, providing voting rights for the holders of dividend right certificates, and reducing the two week legal period for calling for a general assembly meeting[5].
Resolutions Restricting Shareholder Rights of Obtaining Information, Inspection and Audit Beyond the Limits Allowed by the Law
Besides the exceptions set out under the TCC, resolutions restricting the shareholders’ right to obtain information and demand inspection, or restricting lawsuit rights to that end, or providing that information will not be supplied to certain shareholders, shall be deemed null and void.
Resolutions Deteriorating the Fundamental Structure of the Joint Stock Company or Violating the Principle of Protection of Capital
The preamble of the Article[6] makes a reference to the preamble of Article 391 of the TCC,[7] which regulates the null and void resolutions of the board of directors on this basis. Accordingly, resolutions setting general rules of law that are contrary to the mandatory provisions are invalid. Resolutions that are contrary to the definition of a joint stock company, to shareholders’ rights and obligations, or to the organizational structure of the company, are in breach of the main structure. Examples of this would be the resolutions that violated the non-delegable authorities of bodies, burdened the shareholders with covering the loss of the company except for the exceptions stated under the law, or provided interest to the capital paid by the shareholders. Another example would be a resolution that delegated the authority to appoint and dismiss members of the board of directors and auditors to another body or certain shareholders. Issuing shares without a nominal value would also be deemed null and void[8].
In terms of the principle of the protection of capital, resolutions that are in breach of the provisions where this principle is established, for example, the provisions regulating the assets that can be invested as capital in kind under Article 342 of the TCC, the payment of the nominal amount of shares subscribed in cash under Article 344 of the TCC, and the measures to be taken in case of loss of capital or bankruptcy under Article 376 of the TCC shall be deemed null and void.
Other Reasons
As explained above, there may be other reasons as the grounds for nullity are not exhaustively listed under the TCC. Article 447 of the TCC is a special provision compared to Article 27 of the Turkish Code of Obligations numbered 6098[9] (“TCO”); however, this does not lead to the conclusion that the TCO becomes inapplicable for the nullity of the resolutions of the general assembly[10]. Hence, resolutions of the general assembly having an impossible subject or violating the mandatory provisions of the law or articles of association, morality, public order, or personal rights, shall be deemed null and void even if they are resolved in compliance with procedural and formal rules.
Some examples to the resolutions that are not expressly named under Article 447 but that may be considered null and void include resolutions providing the sale of all assets of the company in order to harm the creditors, and resolutions appointing a mentally ill person as a board member.[11]
Procedure for Determination of Nullity
The explanation of the preamble of the Article is as follows[12]:
“A null and void general assembly resolution shall be deemed invalid ex tunc, and shall not be cured afterwards; shall be considered by the courts ex officio; can be claimed as a plea,[13] and may also be a subject for a lawsuit for a declaratory judgment, without being subject to any time limit. Furthermore, such resolutions create an important disadvantage for transaction security. The danger and threat that a company's resolution may be nullified even years after the resolution is adopted may cause great uneasiness in the company's management, shareholders, creditors and potential investors in the capital market. Years later, the court's determination of nullity removes many of the dealings established based on that resolution, often retroactively. Due to this drawback, the courts should rule for invalidity after detailed and multi-dimensional evaluations, and the legislature should clearly define the limits of invalidity and nullity. Article 706b of the Swiss Code of Obligations, which is the source of the provision, is frequently criticized for that reason. It is claimed that the said provision is unsuccessful in drawing the lines, and that it cannot eliminate the danger. However, no suggestions for a better provision were made either.”
A lawsuit regarding a null and void general assembly resolution shall be directed to the company and may be filed by anyone with a legitimate interest (shareholders, board of directors, creditors, etc.). The fact that the legislature did not limit the assertion of nullity to a certain period of time while emphasizing transaction security has been criticized by some scholars.[14] The term for filing a lawsuit should be limited in line with the rule of good faith.
Announcement and Security
Pursuant to Article 448 of the TCC, the board of directors of the company must duly announce that a lawsuit for the determination of nullity was filed, as well as the date of the hearing, and put the announcement on the company website. Upon the request of the company, the court may rule for the plaintiffs to provide security against potential damages. In that case, the quality and amount of the security shall be determined by the court.
Stay of Execution of the Resolution
Article 449 of the TCC regulates perhaps one of the most important issues in practice. According to the provision, in the event that a lawsuit for nullity is filed against a general assembly resolution, the court may rule for a stay of execution of the resolution after obtaining the views of the members of the board of directors.
As the enforcement of null and void general assembly resolutions can give rise to irreparable damages, or damages that are difficult to compensate in the future, a stay of execution of the decision is frequently requested from the courts. However, while evaluating the said irreparability or difficulty, the court should also evaluate the consequences of the stay of execution. For instance, it would need to look at how the company would be managed and represented if a resolution on the appointment of the board of directors was not enforced.
Consequences of the Resolution
A null and void general assembly resolution has no legal effect. Yet, it is clear that a shareholder or creditor who is not party to the lawsuit cannot learn by themselves about the outcome of the lawsuit. Article 450 of the TCC, aiming to solve this issue, expressly provides that the final court decision ruling that the general assembly resolution is null and void shall be effective for all shareholders, and that the board of directors of the company shall register an official copy of this decision with the trade registry and post it on the company’s website.
Liability for Filing a Lawsuit for the Determination of Nullity in Bad Faith
As explained in detail above, the determination of the nullity of a general assembly resolution or the stay of execution of such resolution may give rise to irreparable consequences. This being the case, certain parties may file a lawsuit for illegitimate intents, such as deferring the execution of a decision until the finalization of the case, or preventing the company from carrying out certain transactions by simply filing a lawsuit.
In order to prevent the bad-faith filing of such lawsuits, Article 451 of the TCC provides a liability regime. As per the Article, plaintiffs shall be jointly and severally liable for the damages incurred by the company, if the nullity lawsuit against the general assembly resolution is filed in bad faith.
Conclusion
A general assembly resolution shall be deemed null and void especially if it (i) eliminates or restricts shareholder rights such as the right to attend the general assembly, to have certain number of votes, to file a lawsuit, and other indispensable rights arising from the law, (ii) restricts shareholder rights such as information, inspection and audit rights beyond the limits allowed by the law, or (iii) deteriorates the fundamental structure of the joint stock company or violates the principle of protection of capital. Null and void resolutions are not limited to those named under the relevant provision; general assembly resolutions having an impossible subject or violating the mandatory provisions of the law or articles of association, morality, public order, or personal rights shall also be deemed null and void. A lawsuit for the determination of nullity may be filed by anyone with a legitimate interest. A resolution determined to be null and void shall have no effect ex tunc, and cannot be cured afterwards. The TCC provides announcement obligations to allow interested parties to be informed about the lawsuit and the outcome thereof. While a lawsuit is pending, the enforcement of the resolution subject to the lawsuit can be deferred, provided that the views of the members of the board of directors are obtained.
[1] TCC (Official Gazette, 14.02.2011, No. 27846) entered into force on 01.07.2012.
[2] The preamble of Article 447 of the TCC.
[3] Çamoğlu, Ersin (Poroy, Reha / Tekinalp, Ünal): Ortaklıklar Hukuku I, Revised 13th Edition, İstanbul 2014, p. 528.
[4] The preamble of Article 447 of the TCC.
[5] Üçışık, Güzin / Çelik, Aydın: Anonim Ortaklıklar Hukuku, Vol. I, Ankara 2013, p. 344; Pulaşlı, Hasan: Şirketler Hukuku Genel Esaslar, Revised 2nd Edition, Ankara 2013, p. 372.
[6] The preamble of Article 447 of the TCC.
[7] For detailed information about the null and void resolutions of the board of directors, see the previous Newsletter article of the author: Çetinyılmaz, Ecem: “Null and Void Resolutions of Boards of Directors in Joint Stock Companies”, http://www.erdem-erdem.av.tr/publications/newsletter/null-and-void-resolutions-of-boards-of-directors-in-joint-stock-companies/ (date accessed: 16.08.2021).
[8] Üçışık/Çelik, p. 346; Pulaşlı, p. 374.
[9] TCO (Official Gazette, 04.02.2011, No. 27836) entered into force on 01.07.2012.
[10] Çamoğlu (Poroy/Tekinalp), p. 528. For different views as to this matter, see Çamoğlu (Poroy/Tekinalp), p. 529-530.
[11] Üçışık/Çelik, p. 348.
[12] The preamble of Article 447 of the TCC.
[13] For the view that nullity is technically an objection, not a plea, see Pulaşlı, p. 370.
[14] Kendigelen, Abuzer: Yeni Türk Ticaret Kanunu Değişiklikler, Yenilikler ve İlk Tespitler, İstanbul 2011, p. 299.
