Cancellation of Company Decisions: Guidelines for Filing Lawsuits Against General Assembly and Board of Directors Decisions
In joint stock and limited liability companies, important decisions that shape the future of the company are taken by bodies such as the general assembly and the board of directors. While the general assembly is the highest decision-making body where the will of the shareholders is manifested, the board of directors undertakes the day-to-day operation and strategic management of the company. However, the decisions taken by these bodies may not always be in accordance with the law, the articles of association or the interests of all shareholders. One of the main causes of internal disputes is that the majority shareholders make decisions by disregarding the rights of minority shareholders or in line with their own interests. The Turkish Commercial Code (TCC) establishes a check and balance mechanism against such unlawful decisions by granting shareholders and managers the right to file a “cancellation action”. In this article, we will examine in detail which resolutions can be cancelled, who can file a lawsuit, the time period for filing a lawsuit and the process of the process.
Cancellation of General Assembly Resolutions (Art. 445 TCC): Cancellation of general assembly resolutions in joint stock companies is regulated under Article 445 of the TCC. These provisions are applied by analogy for limited liability companies. The cancellation of a general assembly resolution must be based on one of the following three grounds
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Illegality: The resolution is contrary to the mandatory provisions of the Turkish Commercial Code or other relevant laws. For example:
- Calculation of meeting and decision quorums in violation of the law.
- Restriction of minority rights in violation of the law.
- Capital increase in violation of the procedures stipulated in the law.
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Violation of the Articles of Association: If the decision taken is contrary to the provisions of the articles of association, which is the constitution of the company. For example, while the articles of association stipulates a higher quorum for a certain transaction, a decision is taken without complying with this quorum.
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Violation of the Rule of Honesty: Even if the decision taken appears to be in compliance with the law or the articles of association, it is contrary to the rule of objective good faith, i.e. honesty, regulated under Article 2 of the Civil Code. This is the most abstract and most open to interpretation ground for cancellation. According to the jurisprudence of the Court of Cassation, the following are examples of breach of the rule of good faith
- The majority taking arbitrary decisions for their own personal interests to the detriment of the minority.
- Non-distribution of the company’s profit without a justifiable reason, adding it to the reserves and preventing the minority’s right to dividend.
- Systematic obstruction of a certain shareholder’s right to obtain or review information.
Who may file an action for cancellation (Art. 446 TCC): The right to file an action for cancellation is granted to the persons listed in the law in a limited manner:
- Shareholders Present at the Meeting and Dissenting to the Resolution: The shareholder must have attended the general assembly meeting, voted against the resolution to be annulled, and recorded this opposition in the minutes of the meeting.
- Shareholders Claiming that the Invitation to the Meeting was Irregular: Shareholders who claim that the invitation to the general assembly meeting is in violation of the law or the articles of association (for example, it was not made in due time), whether or not they are present at the meeting.
- Shareholders Claiming that the Agenda was not Duly Announced: Shareholders claiming that the agenda was not announced in accordance with the law.
- Board of Directors: The board of directors, as a whole, may file an action for cancellation if it considers that the implementation of the general assembly resolution will cause serious damages for the company.
- Each Member of the Board of Directors: Each member of the board of directors who believes that the fulfilment of the resolution will lead to their personal liability may also file a lawsuit.
Period for Filing a Lawsuit and Competent Court: The cancellation lawsuit must be filed within three months from the date of the general assembly resolution. This period is a forfeiture period; in other words, a lawsuit cannot be filed after this period has expired. The competent court is the commercial court of first instance where the company’s head office is located .
Cancellation of Board of Directors’ Resolutions: The TCC does not regulate a special type of lawsuit for the cancellation of board of directors’ resolutions, such as the cancellation of general assembly resolutions. However, this does not mean that the decisions of the board of directors are not subject to judicial review. According to the legal doctrine and jurisprudence of the Court of Cassation, legal remedies may also be applied against the resolutions of the board of directors:
- Action for Determination of Nullity (Nullity): If the decision of the board of directors is contrary to the mandatory provisions of the law, morality, public order or personal rights, or if its subject matter is impossible, this decision is deemed to be “null and void”, i.e. never legally born. For example, it is null and void for the board of directors to take a decision on a matter that is among the inalienable powers of the general assembly (such as amendment of the articles of association). For the determination of nullity, a declaratory action may be filed by anyone who has an interest, without being bound by any time limit.
- Cancellation Case According to General Provisions: In other cases of illegality that are not as severe as nullity, shareholders may file a lawsuit for the cancellation of the board of directors’ resolution based on general provisions (Code of Obligations, Civil Code). In this case, the shareholder must prove that he/she has a legal interest in filing this lawsuit.
Results of the Lawsuit: If the court finds the request for cancellation justified, it cancels the decision of the general assembly or the board of directors. The cancellation decision shall be effective for all shareholders after it becomes final. During the lawsuit, upon the request of the plaintiffs, the court may also issue a “preliminary injunction” to stay the execution of the resolution subject to the lawsuit in order to prevent irreparable damages in the future.
The action for annulment of company resolutions is the most important legal tool that shareholders, especially minority shareholders, have in order to protect their rights and prevent the company management from taking arbitrary or unlawful decisions. It is a fundamental requirement of corporate governance that the decisions of both the general assembly and the board of directors comply with the law, the articles of association and the rule of good faith. It is of critical importance for shareholders who believe that a decision is unlawful to initiate the legal process with the support of a commercial law specialist lawyer, especially without missing the 3-month period of deprivation of rights, together with the necessary evidence, in order to prevent loss of rights.