Minority Rights in Joint Stock Companies: Protection Shield Against Majority Decisions
Joint stock companies are structures in which capital is at the forefront and decisions are generally taken with the “majority principle”. Although this principle is necessary for the effective management of the company, it also brings with it the risk of majority shareholders making arbitrary decisions by ignoring the rights and interests of minority shareholders. In order to balance this risk and ensure fairness in corporate governance, the Turkish Commercial Code (TCC) recognises a number of important “minority rights” that minority shareholders can exercise against the will of the majority. These rights are legal safeguards that enable the minority to be heard, to control the management of the company and, most importantly, to prevent the abuse of the power of the majority. In this article, we will examine in detail the concept of minority in joint stock companies and the most fundamental and effective rights of minority shareholders.
The Concept of Minority: According to the TCC, “minority” refers to shareholders representing at least one tenth (10%) of the capital in closed joint stock companies and at least one twentieth (5%) in public joint stock companies. These rights may be exercised by a single shareholder by reaching this ratio or by more than one shareholder by combining their shares to reach this ratio.
The Most Basic Minority Rights:
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The Right to Call the General Assembly to Meeting and to Add Items to the Agenda (Art. 411-412 TCC): This is the most fundamental right that enables the minority to bring its will to the company’s agenda.
- Calling the Meeting: Minority shareholders may request the board of directors to convene the general assembly meeting by applying to the board of directors through a notary public, stating the reasons that they deem important or that are inconvenient for delay.
- Adding Items to the Agenda: The minority may request, also through a notary public, that additional items (e.g. dismissal of board members and election of new members) be added to the agenda of a general assembly already convened.
- Application to the Court: If the board of directors does not accept these requests or does not respond positively within seven business days, the minority shareholders may apply to the commercial court of first instance where the company’s head office is located and request a decision to convene the general assembly or to add items to the agenda.
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Right to Request the Appointment of a Special Auditor (TCC Art. 438-439): This is the most effective tool enabling the minority to supervise the management of the company.
- Request: Minority shareholders may request the general assembly to appoint a “special auditor” in order to clarify certain events (e.g. a suspicious transaction, an irregularity of the board of directors) and to identify those responsible. This request may be submitted even if it is not included in the agenda of the general assembly.
- Application to the Court in Case of Refusal of the General Assembly: If the general assembly rejects this request, the minority shareholders may apply to the commercial court of first instance within three months following the decision and request the court to appoint a special auditor. In order to apply to the court, the shareholders must convincingly demonstrate that the founders or company organs have violated the law or the articles of association and caused damage to the company or the shareholders.
- Report of the Special Auditor: The court-appointed special auditor submits a report to the court on the results of his/her examination. This report constitutes important evidence for a liability lawsuit that may be filed later.
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Right to Postpone the Discussion of Financial Statements (TCC Art. 420): If the minority shareholders believe that they are not sufficiently informed about the financial statements (balance sheet, profit and loss statement) of the company, or that they would like to make a further examination, they may request the postponement of the discussion of these statements and related issues in the general assembly until one month later. Upon this request, the general assembly must adjourn the meeting without taking any decision. This gives the minority the opportunity to obtain more detailed information about the financial situation of the company and to make preparations.
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Right to be Represented in the Board of Directors (Art. 360 TCC): Provided that it is stipulated in the articles of association, certain share groups and minorities may be granted the right to be represented in the board of directors. This is an important way to ensure the direct participation and control of the minority in the management of the company.
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The Right to Sue for the Dissolution of the Company for Just Cause (Art. 531 TCC): This is the last and most radical remedy available to the minority.
- Request: Minority shareholders may request the Commercial Court of First Instance to decide on the dissolution of the company in the presence of “just cause”.
- Justified Reasons: The law does not define what just cause is; this is to be assessed by the court according to each concrete case. According to the jurisprudence of the Court of Cassation, the situations that can be considered as just cause are as follows
- Failure of the company organs (general assembly, board of directors) to meet for a long time and the company becoming dysfunctional.
- Systematic and continuous violation of minority rights.
- The realisation of the company’s purpose becomes impossible.
- Complete breakdown of the relationship of trust between the partners.
- Discretion of the Court: Even if the court deems the request for dissolution appropriate, it is not obliged to decide directly on dissolution. Instead of dissolution, the court may decide on a more appropriate solution to remedy the situation, in particular, the removal of the plaintiff shareholders from the company by purchasing their shares at their real value. This is an approach that aims to protect the existence of the company.
Minority rights in joint stock companies are the fundamental guarantees of capital democracy and corporate justice. By balancing the power of the majority, these rights ensure that minority shareholders have a say in the management of the company, obtain information and protect their interests. These rights, which range from calling for a general assembly meeting to requesting the appointment of a special auditor and even demanding the dissolution of the company for justified reasons, offer an important legal protection shield to the minority. It is critical for every minority shareholder to be aware of the existence of these rights and to know how to exercise them. In order for these processes to be carried out correctly and effectively, getting support from a commercial law expert will ensure that the rights are fully protected.