Hukuk Hakkı Korumaktır

May-Haz 2019

General Overview Regarding the Special Committee of the Privileged Shareholders in Joint Stock Companies

The special committee of the privileged shareholders is regulated by the article 454 of Turkish Commercial Code numbered 6102 (“TCC”). According to the said article, if a decision of the general assembly concerning an amendment of articles of association, or a decision to authorize the board of directors to increase the company capital and a decision of the board of directors regarding the capital increase violate the rights of the privileged shareholders, such decisions shall not be implemented unless the shareholders in question approve them by the decision taken in a special meeting.

The goal of the mandatory provision of the article is to protect the privilege of the privileged shareholders. In this regard, the privileged shareholders, whose rights might be violated by the decision of the general assembly concerning the amendment of the original contract or the decision to authorize the board of directors to increase the company capital and under the registered capital system the decision of the board of directors regarding the capital increase, should gather a special committee in order to approve these decisions. Otherwise, such decisions will not be implemented.

The article 454 titled "The Special Committee of the Privileged Shareholders" of the TCC corresponds the article 389 of the former Turkish Commercial Code numbered 6762. The article 389 of the former code is following: "If the decision of the general assembly to amend the articles of association violates the rights of the privileged shareholders, this decision shall not be executed unless such shareholders give consent to this decision in a special meeting. This board should be called by the board of directors. This can also be done by any member of the board. The decisions and the negotiations in this special meeting are subject to the third and fourth clauses of the article 388."

The abolished provision that consisted a single clause was regulating the issue under "the general committee of privileged shareholders". It has been repealed comprehensively by the article 454 of the TCC numbered 6102 under 8 clauses, and written under title of “the special committee of the privileged shareholders.

On the other hand, according to the article 391 of the abolished law "if there are shareholders who hold numerous types of shares with privileges, shareholders of every type of shares should hold a special meeting, separate from the general assembly, to make a decision. Rulings of the second and third clauses of the article 389 have also been implemented for such meetings." Accordingly, the regulation of the abolished law was that, if there are privileged shareholders, the capital increase decision will be subject to the approval of these shareholders regardless of whether the rights of the privileged shareholders are violated.

Hence, it sets forth a different system for the decision of the general assembly for capital increase than the amendment of the articles of association. As a result, when there are amendments to the articles of association other than the capital increase, approval from the privileged shareholders was contingent on whether the rights of the privileged shareholders are violated or not but in the case of capital increase, approval from the privileged shareholders was necessary regardless of violation of rights existed or not.  As such separation was amended by the TCC, approval from privileged shareholders is only necessary when the capital increase violates the rights of the privileged shareholders.

Cases That Require Special Committee

Cases that require the privileged shareholders to hold the special committee meeting are listed in the article 454/1 of the TCC. These are the following cases: the decision of the general assembly concerning the amendment of the articles of association, or the decision to authorize the board of directors to increase the company capital and under the registered capital system the decision of the board of directors regarding the capital increase. It should be noted that, according to the article 18/4 of the Capital Market Law numbered 6362, in case of the existence of the privileged shares, resolutions of the general assembly regarding the amendment of the articles of association to be made within the scope of this article shall be approved by the special committee of the privileged shareholders according to the principles of the article 454 of the TCC numbered 6102. However, in the capital increases within the upper limit of the registered capital, the decision of the special committee of the privileged shareholders is not required. In this context, for the joint stock companies that are open to public, within the scope of the upper limit of the registered capital, the capital increase made by the board of directors does not require an approval from the special committee of the privileged shareholders.

In line with the TCC's ruling about the special committee of the privileged shareholders, the article 71/3 of the Commercial Registry Regulations (TSY) sets out that the decision of the general assembly regarding the amendment of the articles of association cannot be registered unless approved by the special committee of the privileged shareholders or considered to be approved by fifth paragraph of the article 454 of the law or, for the companies subject to the registered capital system,  the decision of board of directors for capital increase approved the special committee of the privileged shareholders. In addition, for the registration of the amendment to the articles of association, “if the decision of the general assembly for the amendment of articles of association may violate the rights of the privileged shareholders, the notarized copy of the decision of the special committee of privileged shareholders regarding the approval of the decision of the general assembly” is amongst the documents that should be presented to the directorate (TSY m. 71/1).

If the decision concerned may result in violation of the rights of the privileged shareholders, the decisions mentioned above are subject to approval from the special committee of the privileged shareholders. The special committee will consist of the privileged shareholders whose rights have been violated by the decision. If the special committee decides that the rights of the privileged shareholders have been violated, the decision should be indicated in the minutes of the meeting. According to this, "whether the rights of the privileged shareholders have been violated or not" will be decided by the special committee held by the privileged shareholders.

It should be noted that if the privileged shareholders or their representatives voted in favor of the amendment of the articles of association in the general assembly meeting, in a way complying with the meeting and decision quorum set out in the third paragraph of the article 454, a separate meeting could not be held. (TCC m. 454/4). Therefore, in order to hold the special committee of the privileged shareholders, the privileged shareholders or their representatives should vote against the amendment of the articles of association in the general assembly meeting, and the vote should comply with the meeting and decision quorum of the said paragraph.

Calling the Special Committee to the Meeting

A process should be followed in order for the privileged shareholders to hold the special committee meeting. There is no provision in the law that allows the privileged shareholders to hold the meeting without fulfilling the invitation procedure, as there is for the general assembly meetings according to the article 416 of the TCC.

The process is regulated by the second paragraph of the article 454 of the TCC. According to the said paragraph, "the board of directors calls the special committee to the meeting at latest one month after the announcement of the general assembly decision. Otherwise, every privileged shareholder, starting from the last day of the period for the board of directors to call, has the right to demand from the commercial court of first instance to call the special committee to the meeting in the following 15 days."

Two possibilities are mentioned in the second paragraph of the article 454 of the TCC. The first one is the invitation of the special board of the privileged shareholders to the meeting by the board of directors. The other possibility is that upon the failure of the Board of Directors to convene the special committee, the privileged shareholders may initiate the procedure for calling the meeting through the court.

In a case where the board of directors does not convene the special committee, in the context of the article 553 of the TCC, the board of directors’ responsibility may be raised since the said article is a mandatory provision.  In the doctrine, it is stated that the relevant decision will be null and void if the meeting is not called.

As stated in the aforementioned clause and the article justification, if the board of directors fails to convene the special committee of the privileged shareholders whose rights have been violated from the decision of the general assembly, it is aimed to eliminate the danger of not inviting the special committee to the meeting by granting the right of each privileged shareholder to apply to the court. It is mentioned in the relevant article that the board of directors should convene the special committee of the privileged shareholders within a month after the announcement of the general assembly decision. The problem here is that since the announcement of the decision has not been distinguished from the implementation of it, the first and second paragraphs of the article 454 contradict with each other.

Even though the provision sets forth that the invitation of the special committee will be made by the board of directors within a month after the announcement of the general assembly decision, as per the Regulation on The Procedures and Principles of the Meetings of General Board of Joint Stock Companies and Representatives of the Ministry of Customs and Trade, the period for the board of directors begins after the general assembly makes the decision, not after the announcement of the decision. The first paragraph (c) of the article 7 states 'if the  general assembly makes a decision for amendment of the articles of association, which may violate the rights of the privileged shareholders, at the latest one month after the mentioned decision, the special committee will be called to the meeting. If the call is not made for the meeting of the privileged shareholders until the end of this period, each privileged shareholder may request from the court that the special committee be called for a meeting within fifteen days starting from the last day of the call period of the board of directors.

By the article 454/1, the law clearly subjects the implementation of the decision to the approval of the special committee of privileged shareholders. Hence, the decision of capital increase can be implemented, in other words can be registered and announced if it is approved by the special committee of the privileged shareholders. On the other hand, this created a contradiction since the second paragraph of the article 454 initiates the period for the board of directors to call the special committee to the meeting after the announcement of the decision. Different opinions have been raised on this issue in the doctrine. One of them is that the process should start after the general assembly makes a decision, as it is mentioned in the first clause of article 7/1 (c) of the Regulation on The Procedures and Principles of the Meetings of General Board of Joint Stock Companies and Representatives of the Ministry of Customs and Trade.

In case the special committee of the privileged shareholders is not invited to the meeting by the board of directors, each privileged shareholder may ask the court to call this board to the meeting within fifteen days starting from the last day of the call period of the board of directors. Even though the article is phrased in a way that the call will be made directly by the court, what should be understood from the article in question is to demand the permission to make the call [3].  As a matter of fact, the seventh paragraph of the article 9 of the Regulation on The Procedures and Principles of the Meetings of General Board of Joint Stock Companies and Representatives of the Ministry of Customs and Trade, each of the privileged shareholders authorized by the court in accordance with the second paragraph of Article 454 of the TCC may call the special committee of the privileged shareholders to the meeting.

It should be noted that the special board of the privileged shareholders shall not consist of all privileged shareholders holding shares in the company, but only the privileged shareholders whose rights have been violated as a result of the relevant decision. This situation can be understood from the expressions stated in paragraph 1 of the article 454 of the TCC “(…) if this decision violates the rights of the privileged shareholders in a special meeting to be held by the said shareholders (…)” In this context, the call will be made only to the privileged shareholders whose rights have been violated.

Finally, if the special committee is not convened although the call stated in the paragraph 4 of the article 454 have been made, the decision of the general assembly will be considered as approved. However, there is no regulation on the status of the related decision in case the special committee cannot convene due to the absence of the call.

Holding the Meeting of the Special Committee

The paragraph 3 of the article 454 of the TCC regulates the meeting and decision-making quorum of the special committee. The article also stipulates what kind of process should be followed in case the privileged shareholders decides that their rights have been violated. According to this, “The special committee convenes with the majority of the sixty percent of the capital representing the privileged shares and takes decisions with the majority of the shares represented in the meeting. If it is concluded that the rights of the privileged shareholders have been violated, the decision shall be indicated in a justified record. It is mandatory to submit the minutes to the board of directors within ten days. In addition to the minutes, a list containing the signatures of those who vote negative for the approval of the General Assembly resolution, the number of signatures constituting at least the quorum and a joint notification address to be filed in accordance with the provisions of paragraph eight of this article shall be given to the board of directors. The minutes of the meeting, along with registration information supplied and will be announced in Turkey Trade Registry Gazette. If the conditions in this provision are not complied with, the decision of the special committee is not taken.”

In the above paragraph, it is stated that the special committee shall convene with the majority of sixty percent of the capital representing the privileged shares. However, there is also uncertainty in this paragraph of the article. In the present version of the paragraph, it is unclear whether the special committee will convene with a 60 percent quorum or a majority of 60 percent This issue has been explained by the 13th paragraph of the article 22 of the Regulation on The Procedures and Principles of the Meetings of General Board of Joint Stock Companies and Representatives of the Ministry of Customs and Trade, It is regulated that shareholders or their representatives holding at least sixty percent of the capital representing the privileged shares should be present at the meeting. It should be noted here that, according to the article 454/1 of TCC, the 60 percent quorum of the meeting will be calculated based on the privileged shareholders whose rights have been violated, not all privileged shareholders in the company. In the special committee meeting, the decision shall be taken by the majority of the shares represented in the meeting.

In the event that the privileged shareholders conclude that their rights have been violated at the meeting of the special committee, they are required to submit this report to the Board of Directors within 10 days. The minutes of the special committee meeting shall be registered in the trade registry and announced in the Trade Registry Gazette.

The amendment of the articles of association shall not be implemented until the meeting of the privileged shareholders' special board is held, and in case the relevant decision is not approved, such amendment of the articles of association shall not be applicable. In this case, the board of directors may file a case of annulment of the special meeting decision and registration of the general meeting decision within the first-instance commercial court on the grounds that the said decision of the general assembly does not violate the rights of the shareholders, within one month from the date of the special committee’s decision (TCC 454/7).

Since the annulment case will be filed against those who vote negative for the approval of the general assembly decision, the law regulates that the minutes of the special meeting of the shareholders as well as the list of those who voted for the approval of the general assembly resolution and a joint notification address should be given to the board of directors.

Conclusion

The article 454 of TCC is a mandatory provision. If the decision of the general assembly concerning the amendment of the articles of association, or the decision to authorize the board of directors to increase the company capital and the decision of the board of directors regarding the capital increase violate the rights of the privileged shareholders, such decisions shall not be implemented unless the shareholders in question approve them by the decision taken in the special meeting. The meeting that will take place is mentioned in the article as the special committee meeting of the privileged shareholders.

Although the article 454 of the TCC has been criticizing in the doctrine due to the uncertainties in many ways, the mandatory provision clearly states that the amendment of the articles of association cannot be applied without the approval of the special committee. The high court decisions given during both the abolished law and the current TCC period, it was clearly emphasized that the amendments of the articles of association cannot be executed without a special committee decision.

 Attn. Kerem TOKLU