Article Series on Joint-Stock Companies Under Turkish Law: The Limits to General Assembly Powers

Author: Atty. Deniz Nalbant

I. Introduction

The powers of the General Assembly can be limited in various ways. Under the Turkish Commercial Code (“TCC”), these limitations can be categorized under six headings, which are: situations without explicit legal authorization, powers reserved for the Board of Directors and Independent Auditors, privileged shares, minority rights, individual rights and rights of third-parties.

II. The Limits to General Assembly Powers

1. Situations Without Explicit Legal Authorization

Pursuant to the TCC, the General Assembly may only make decisions on matters stipulated in the Articles of Association or required by law. Legal provisions that do not explicitly grant authority to the General Assembly delineate the limits of its powers. Additionally, under Article 340 of the TCC, arrangements introduced via the Articles of Association are valid only if they pertain to matters explicitly permitted by the TCC.

2. Powers Reserved for the Board of Directors and Independent Auditors

The General Assembly cannot make decisions on matters that fall within the exclusive authority of the Board of Directors or independent auditors. For example, under Articles 365 and 375 of the TCC, the Board of Directors is the authorized body for managing and representing the partnership externally.

Moreover, the official preamble of Article 374 of the TCC, which enumerates the non-delegable and indispensable duties and powers of the Board of Directors, contains controversial statements regarding the powers of the General Assembly. The preamble states:

“This article delineates the boundary of the Board of Directors’ function, namely its management authority. All transactions and activities necessary to achieve the company’s business objectives fall under the authority of the Board of Directors—or the management, in case of delegation—except for those explicitly allocated to the General Assembly by law or the Articles of Association. For any activity or transaction falling within the scope of management authority to be exercised by the General Assembly under the Articles of Association, it must not be one of the non-delegable duties and powers specified in Article 375. Thus, this provision closes the door to the outdated understanding that in a joint stock company, all management powers inherently belong to the General Assembly as the supreme body, or that the General Assembly can reclaim any powers it has delegated to the Board of Directors at will. The draft adopts the principle of functional separation between corporate bodies.”

The preamble further leaves three issues to academic and judicial interpretation:

1. Whether ordinary matters such as concluding contracts can be assigned to the General Assembly through the Articles of Association, despite being unrelated to the General Assembly’s nature and are, in fact, inherent to management.
2. Whether management decisions, including those delegated, can be subjected to the approval of the General Assembly.
3. Whether the Board of Directors can submit its decisions to the General Assembly for approval to avoid liability.

According to the Turkish legal doctrine, while the General Assembly may render decisions on these issues and matters within the scope of Article 375 could be submitted to and approved by the General Assembly for consultation purposes, such decisions are deemed as “consultational” and are not technically binding decisions. . Regardless of such a consultation, the authority and responsibility shall remain with the Board of Directors[1]. Therefore, even when the Board is not the decision-making organ, it cannot avoid liability for matters concerning “management activities” mentioned in the preamble.

3. Privileged Shares

Under Article 478 of the TCC, privileges granting additional or superior rights to certain shares compared to others can be established through the initial Articles of Association or subsequent amendments. According to Article 454 of the TCC:

• Decisions to amend the Articles of Association,
• Decisions to authorize the Board of Directors to increase capital, and
• Decisions of the Board of Directors to increase capital

cannot be implemented if they infringe on the rights of privileged shareholders unless approved by a special meeting of these privileged shareholders[2].

The necessity of such a meeting is assessed by the Board of Directors. If deemed necessary, the Board must convene the special meeting within one month in accordance with Article 454/2-1(c). If the Board fails to call the meeting, any privileged shareholder may, within 15 days following the last day of the call period, request the Commercial Court of First Instance at the company’s headquarters to convene the meeting.

Until the privileged shareholders provide approval, the relevant General Assembly decision is considered temporarily ineffective. If privileged shareholders cast affirmative votes during the General Assembly meeting in compliance with the quorum requirements[3] under Article 454/3, a separate special meeting is not required.

If a special meeting is held, a notarized copy of the decision must be submitted to the Trade Registry along with the registration request for the relevant General Assembly decision, pursuant to Article 71/1(ç) of the Trade Registry Regulation. Failure to do so shall prevent the registration of the General Assembly decision.

If the privileged shareholders do not approve the decision, the Board of Directors may file a lawsuit within one month under Article 454/7 of the TCC to annul the rejection decision, arguing that the General Assembly decision does not violate the rights of said shareholders.

4. Minority Rights

Minority rights under the TCC are granted to shareholders representing a certain portion of the capital. This is generally one-tenth of the capital or one-twentieth for publicly traded companies[4]. Additionally, those with a minimum total nominal value of one million Turkish Liras are also defined as minority shareholders within the meaning of Article 439/1 of the TCC[5].

Minority rights include:

• Requesting the convening of a General Assembly meeting under Articles 411 and 412 of the TCC,
• Postponing the discussion of financial statements for one month under Article 420 of the TCC,
• Petitioning the court for the appointment of a special auditor if the General Assembly rejects such a request under Article 439[6],
• Objecting to the approval of compromise and release agreements under Article 559,
• Requesting the dissolution of the company in the existence of valid ground under Article 531 of the TCC.

5. Individual Rights

Certain rights are granted individually to shareholders under the TCC. The General Assembly cannot restrict these individual rights[7], which include:

• Attending the General Assembly under Article 425,
• Appointing a representative under Article 427,
• Voting under Article 434, and
• Right to inspect and request information under Article 437.

6. Rights of Third Parties

Third parties may also be granted rights. The General Assembly cannot unilaterally violate these rights. For instance, a contractor’s rights arising from a construction contract concluded with the Board of Directors cannot be annulled or limited by the General Assembly without the contractor’s consent[8].

References

[1] Mehmet Bahtiyar, Şirketler Hukuku (Beta) 150-1.

[2] During the period of the former Turkish Commercial Code (eTK), holders of privileged shares had an absolute approval right in capital increases. The new Turkish Commercial Code, however, has abolished this absolute approval right and included amendments to the Articles of Association within its scope, introducing the condition that rights must be adversely affected.

[3] A special assembly convenes with the majority of sixty percent of the capital represented by privileged shares and makes decisions with the majority of the shares represented at the meeting.

[4] Consequently, within the framework of these percentages, shareholders holding, for instance, 10%, 15%, or 42% of the capital are classified as minority shareholders. However, under the majority principle, a shareholder holding 51% of the capital is deemed the controlling shareholder and cannot exercise minority rights. Minority rights must be exercised collectively when achieved through the combination of shares held by multiple shareholders, or individually if the required threshold is held by a single shareholder.

[5] The minority referenced here is a nominal minority. It is important to note that meeting the required nominal value alone is insufficient; the shareholder must also be in a position where exercising this right is necessary. In other words, if the shareholder holds the majority vote in the General Assembly, there is no legal interest in exercising this minority right. Furthermore, in a single-shareholder company where the entire capital amounts to one million Turkish LiraS, a concrete minority cannot exist; See. Erol Ulusoy, Anonim Şirketlerde Bireysel ve Azınlık Pay Sahibi Hakları (2016, Bilge) 69.

[6] According to TCC Article 439, petitioners are not required to prove their damage with absolute evidence. The Court of Cassation has deemed it sufficient for the situation to be convincingly presented. For instance, in decisions by the 11th Civil Chamber Decision No. 2000/6335, dated July 3, 2000, and Decision No. 2002/557, dated January 28, 2002—it was stated that “it is not necessary for minority shareholders to definitively prove the reasons for the appointment of a special auditor, and evidence or indications that reasonably confirm the facts presented for such a request are sufficient.”

[7] An example of an exception is TCC Article 434/2, which stipulates that “the number of votes granted to those holding multiple shares may be limited by the articles of association.” 

[8] Bahtiyar (n 1) 153.

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