ABSTRACT
The mandatory bodies for incorporated companies are the Board of Directors and General Assembly. According to the Turkish Commercial Code (“TCC“) article 530, if the mandatory bodies for the maintenance of the company do not exist for a long period of time or if the bodies fail to convene within a specified amount of time, the company shall be dissolved. These matters are developed more under case law in some states such that these bodies may be declared “null,“ and the duration of the time is no longer regulated by the Law. There is no consensus regarding how long is “long term” in relation to an absence of mandatory bodies either in case law or among academics. The issue is examined here under the maintenance of joint-stock companies.
I. INTRODUCTION
A joint-stock company is a legal entity. The representation, management, and supervision of an incorporated company is enforced through company bodies. According to the TCC, the mandatory bodies of incorporated companies are the general assembly and the board of directors. If there is no existing board of directors or if the general assembly cannot convene, the company may be dissolved as an incorporated company. In this article, the absence of mandatory bodies in incorporated partnerships is examined in relation to current law.
II. MANDATORY BODIES OF INCORPORATED COMPANIES
Legal entities require bodies that can manage the business and represent it regarding its right to income and its debt obligations. The bodies can consist of real persons or legal entities. However, any statutory body elected to the board of directors or management must be represented by a real person.1 “If a legal entity is elected to the board of directors, with the legal entity, in the name of the legal entity, decided by the legal entity, can only be registered and declared by the real person; also, it will be announced immediately on the company’s website where the registration and the declaration is made. The registered person can attend the meetings and vote only in the name of the legal entity2.
“ In incorporated partnerships, a body means “a body formed by real persons”. There are two bodies that can make decisions regarding an incorporated company and carry out governance of the whole business, the general assembly and the board of directors3. The general assembly is formed of all the shareholders, all of whom, or their authorized agents, have the right to join general assembly meetings. The assembly must convene at least once a year and must be quorate in order to carry out company business.4 The board of directors, composed of one or more persons, is responsible for the management and representation of the business. As the board of directors is the “administrative body” of the company, its decisions are binding. The board exists from the establishment to the dissolution of the company5.
III. ABSENCE OF BODIES IN INCORPORATED COMPANIES
Under the TCC6, the auditing of incorporated company accounts changed, removing the supervision committee as a mandatory body7. According to Law no: 6762, published in Legal Gazette on 09.07.1956, the supervision committee was a third legal body of incorporated companies and auditing could be carried out by supervisors who did not require any expertise. The new TCC, however, requires this function to be carried out by experts, so the supervision committee was removed as a mandatory body of incorporated companies. Today in Turkish Law, the mandatory legal bodies of incorporated companies are the general assembly and the board of directors; they shall act within the framework of their authority as laid out in the Law8.
The tenth section of the TCC regulates reasons for the dissolution of incorporated companies. The issue of the absence of bodies in incorporated companies is restricted as a particular dissolution condition. As article 530(1) of the TCC states: “If one of the legally required bodies do not exist or the general assembly cannot convene, shareholders, company creditors or, by the request of the Ministry of Customs and Trade, commercial court that is found at the company head office, by listening to the board of directors the court will determine a duration for the company to bring the company into compliance with the Law. If the situation is not corrected by this time, the court will decide on the dissolution of the company.
Accordingly, an absence of bodies or failure of the general assembly to convene for a long period of time shall be considered reason to dissolve a company. As the only legally mandatory bodies are the general assembly and the board of directors, the non-existence of any other company body is not considered a reason to dissolve, as such a body does not affect the corporate structure.9 The absence of the general assembly or board of directors, on the other hand, are reasons to dissolve a company. The following is a review of issues that constitute a “absence of body.”
A. Non-Convening General Assembly
A joint-stock company acts through its legal bodies. Decision making, management and representation are carried out by different company bodies. If one of the legally required bodies of an incorporated partnership does not exist or if the general assembly is not convened, the company can be dissolved under article 530. Within the context of the article, the absence of a body has a broad meaning, including not being able to elect the body, preventing formation of the body by not appointing members or causing the body not to function through failure to reach quorum. In such cases, the court can be requested to dissolve the incorporated partnership as a result of the “absence of body”. From time to time the general assembly may fail to take decisions due to disputes or conflicts of interest between shareholders. In this case, the partnership has failed to govern continuously. Thus, if the body fails to fulfil its purpose (Funktionsunfähigkeit von Organen), there is not only an absence of body but also a dissolution of the company. In the justification under article 530 of the TCC, it states that the absence of a mandatory body is a situation where this body doesn’t exist.9 However, the absence of bodies, or non-existence of bodies, has a broad definition. Article 530 of the TCC regards non-functionality of a mandatory body as a reason for dissolution. In the situation described above, the body has lost its function; in other words, because the general assembly is unable to carry out its responsibilities, the company cannot take any major decisions, and this may provide a legal basis for a dissolution lawsuit against the partnership under article 531 of the TCC. According to article 410, “(e)ven if the time of the general assembly is up, the board of directors can convene a meeting. In the event of the board of directors continuously not convening, not being able to reach quorum or not being present, with the permission of the court, one shareholder can convene the general assembly.” According to the article, if the general assembly is not convened due to the absence of the board of directors, the lawmaker has demonstrated its willingness to ensure that this does not constitute an absence of body. Additionally, members of the board of directors can conduct any necessary and urgent matters for the company11 and therefore can continue to exist under article 533 of the TCC.10 The use of this clause in relation to the inclusion of the election of the board of directors within the general assembly’s non-assignable authority and the essential will of the shareholders is considered limited.
B. Absence of the Board of Directors
The board of directors is responsible for the management and representation of a joint-stock company12. It is one of the mandatory bodies but in many cases it can be absence. Case law deals with the absence of the board of directors from different perspectives. In the doctrine, Arslanlı showed that failure to have the required number members on the board of directors is an example of failure to form the governing body, which may be because membership elections cannot be held or all the members resign and cannot be replaced at the general assembly13. In these situations, there is an absence of the board of directors as a mandatory body.“Moroğlu stated that during his explanation under the Former Turkish Commercial Code Regarding the board of directors, the absence of bodies should be understood as the fact that the members of the board of directors cannot be elected or they can’t meet even if they are elected14.” Tekinalp stated that an absence of bodies can have a broad meaning15. He provides scenarios where the body is present but is unable to perform its activities, for example, it is unable to elect the board of directors or the elected board cannot work continuously due to the failure to reach quorum16.
The board of directors shall ensure the representation and management of the joint-stock company through real persons. It therefore needs to be considered whether the absence of a body results when the time of office of persons representing the board of directors expires. The Supreme Court in fact stated that in the event that the board of directors’ members time in office expires and new members cannot be elected to the board, the board of directors of the company will be unable to function and this, therefore, constitutes an absence of bodies.
“Although it is possible for the remaining members of the board of directors to temporarily appoint a member if one or two memberships are opened, these members may manage until the first general assembly meeting (Art.315 /1 of the TCC). There is no provision in the TCC on the process if all the board members’ terms expires. In the event that the tenure of the members of the board of directors has expired and new ones have not been appointed, is it possible to accept in absolute terms that the company is deprived of a body, as stated in article 435 of the TCC? In accordance with article 397/2 of the Code of Obligations, it is also possible to acknowledge that the continuation of the members of the board of directors whose term has expired may continue until the election of new members, at least for the purpose of electing a board of directors, and be limited to existing works and services (in the same view, see Domaniç, 380/b, c). However, there are some drawbacks for that approach. To acknowledge that the powers of the former members of the board of directors remain in full force, and those whom the general assembly cannot elect and do not appoint or do not want to give, shall be indirectly given this authority, in which case the will and wishes of the shareholders of the company will be excluded. Moreover, accepting that the duties of the former members of the board of directors continue until the election of new members, allows retired members to delay the vote of new members as much as possible, as well as not taking the company business as seriously as necessary. In this case, under article 435/1 of the TCC, it is a more accurate way to accept that the company is left without a body17.
“ According to the Istanbul 9th Commercial Court of First Instance, “solely the company’s board of directors could not convene and was still body-less in this respect, the company has not distributed dividends due to the constant losses of the company, the reason for the constant losses is the high financial expenses, the general assembly is locked, both bodies are absent, and this can be accepted as justification with both the absence of bodies and its expression in the doctrine.
” The Supreme Court held that “(t)he duties of the members of the board of directors in a joint-stock company shall continue until new members are elected in place. It is necessary to accept that the members of the board of directors whose term expires until the election of new members are obliged to continue their duties18.” Under this evaluation, it may be stated that the board members shall continue their duties until new members of the board of directors are appointed. It can be argued that if the original members of the board of directors continue their duties and no new members are elected to the board of directors, this should not constitute an absence of body. However, it should be noted that it is possible for a board of directors not elected by the general assembly of the company to have all the authority to carry out decisions against the wishes and desires of the shareholders.
Although the continuation of the company’s activities is important, considering that the tenure of the members of the board of directors is regulated and limited by the TCC, and if the members of the board of directors cannot be elected ‘for a long time’, it should be accepted as an absence of bodies in line with Moroğlu and Tekinalp. In addition, article 530 of the TCC states, “Although the term of the board of directors has expired, if a new board of directors has not been elected or if the board of directors has resigned and there is no possibility of filling their seats, it should be recognized that the board does not exist19.” In short, the expiry of the board of directors should be interpreted as the absence of that body.
C. The Concept of Lengthy Period of Absence
According to article 530 of the TCC on the absence of mandatory bodies, the Law considers the non-existence of legally necessary bodies “for a long time”. However, how long a “long time” is is still in question in the literature and in case law.
In one case the Supreme Court stated: “in the case, the request for the grant to recall the general assembly did not apply as pure absence of bodies. Also, it was attributed on the grounds of not convening the general assembly. It can be observed that the plaintiff company’s per annum general assembly meetings have not been made since the last general assembly dated 28th of October 1997. As the court has to rule according to the outcome by taking into account that the plaintiffs want the recall grant on the grounds of failure of general assembly meetings taking place, the decision needs to be quashed in favor of the plaintiffs as the written judgment is not established on the grounds that absence of bodies is not a matter.”20
Accordingly, the Supreme Court held that the general assembly must convene at least once a year, otherwise it will constitute an absence of body. However, the Supreme Court ruled in favor of the plaintiff by pointing out that, “plaintiff’s counsel claimed that their client is a shareholder for the defendant firm, and the general assembly had not been convened for six years, which led to the failure of forming the board of directors and regulation, that there is an absence of bodies, that the last elected board of directors is using the company for their benefit.21 Therefore, they request and sue for the dissolution and the liquidation of the company.” In a different decision, the Supreme Court stated that “according to the facts of the case, plaintiff’s counsel claimed that the three-membered board of directors dropped to two members and the company was left with no bodies, additionally the supposed annual general assembly meetings were not held since 22nd of September 2006. Indeed, according to the trade register record, the general assembly had not been held since the 22nd of September 2006. Therefore, the court, on the grounds of company’s board of directors decreasing, thus having an absence of bodies, should have ruled to appoint a trustee, who would aim to hold a general assembly meeting and eliminate the absence of bodies, and, in the case of the trustee not being able to accomplish this aim, should have ruled for the company’s rescission and liquidation, but instead, the court ruled to reject the case because the expert fee was not deposited, which was a wrong decision, and made it necessary to quash the court’s decision.“22 Accordingly, the court argued that it is appropriate to identify a failure to convene the general assembly for four years as an absence of body.
On the other hand, Tekinalp, a prominent legal academician, explains the phrase “long time” for shareholders as ten to twelve months, while for creditors the time may be longer.23 If no “long time” condition is sought, it should be determined according to the facts of the case in cases where the absence of bodies arises due to the failure to convene the general assembly.24 The issue of length of time in which the general assembly fails to meet is subject to the evaluation of the facts of the case, as stated the Supreme Court decisions above.
III. THE OUTCOMES OF ABSENCE OF BODIES AS A REASON TO DISSOLVE JOINT-STOCK COMPANIES
A. Cases of Rescission of the Joint-Stock Companies
The dissolution of joint-stock companies is regulated under article 529 of the TCC. Shareholders, creditors, and the Ministry of Customs and Trade may request rescission of a company from the courts on the grounds of the absence of mandatory bodies or other legitimate reasons for the company’s dissolution. After consulting with the board of directors, the court will stipulate a time period for addressing the issues. If the situation is not addressed in the given time, the court will rule for the company’s rescission. As the situation should not be pronounced immediately following an application for a company’s rescission, the court may order for dissolution as a final step. The court will rule in favor of rescission in cases where “efforts to maintain the company have failed” and “the dissolution is more beneficial for the partnership”. In this context, the lawmaker may grant the judiciary discretion and, according to the specifics of the case, all means should be exhausted for the “continuity of the company”. According to the Code of Civil Procedure No: 6100, in rescission cases, commercial courts deal with the corporate offices, while civil courts of first instance deal with cases where there is no corporate office25.
B. Measures to be Taken in the Case of a Corporation’s Dissolution
Shareholders may request necessary measures in a dissolution case. According to article 530/2 of the TCC, “courts, when a lawsuit is filed, can take necessary measures upon the request of either party.“ Even though the law does not specify the necessary measures, measures can be requested such as imposing a cautionary judgment on the corporation’s receivables or preserving or protecting the corporate book26.
Another order to be requested from the court may be “ to appoint a trustee to the corporation.“ Parties may request the appointment of a trustee by applying to the court on grounds of an absence of mandatory bodies, or despite expiration of the board members’ election period, new members have failed to be elected. This is, in fact, a positive situation as it protects the interests of the corporation in terms of continuing the corporation’s legal entity. In some cases, it may be difficult to decide effectively on disputes between shareholders, in which case, the mandatory bodies have become dysfunctional. In such cases, the shareholders may request the court appoint a trustee to the management of the company. It is the responsibility of the trustee to protect the corporate interests, consider the shareholders’ and creditors’ interests, and to consider these interests in confidence27. According to Yıldız, the corporation must be deranged from its management body for a trustee to be appointed to the corporation and if there is no other way to get rid of the derangement. Also, should there exist a board of directors, it would not be allowed to appoint a trustee due to the inability to convene the general assembly28.
In a relatively recent Supreme Court case, “it does not change the fact that the corporation is left with no body. In the case of the company having no bodies, parties with a legal interest reserve the right to ask for a management trustee appointment, until other bodies are elected by the general assembly29.” Since there is no regulation in this scope in the TCC, parties may request the appointment of a trustee under Turkish Civil Code No:4721. Under the Turkish Civil Code Article 427/4, there are some conditions to applying for the appointment of a trustee to a legal entity “if a legal entity is deprived of its necessary bodies and the management was not established in another way.” Accordingly, “a management trustee” will be appointed to the company.30 However, a trustee shall be appointed where the corporation is deprived of vital bodies and there is no other way to uphold the management. In other words, it is not possible to select a trustee on the grounds of “poor management of the corporation.” The essential purpose that should be emphasized is the need to maintain continuity for the company’s own good.
IV. CONCLUSION
Since the current provisions on the absence of corporations’ mandatory bodies are not particularly clear in the literature, it is a subject that is still being questioned. This subject has been developing under case law. This article covers the mandatory bodies of joint-stock companies, dissolution cases arising from the absence of these bodies, and the measures that can be taken in such a lawsuit. If the mandatory bodies, that is the general assembly and the board of directors, do not convene, shareholders, the corporation’s creditors, and the officials from the Ministry of Customs and Trade may request dissolution of the company. At times, the general assembly may not convene for a long period of time or the board of directors is not elected for a long time. Such cases are grounds for dissolution. However, the law regulates the use of temporary measures in the interests of the corporation. Rather than immediately dissolving the corporation in such cases, the corporation can continue with the “appointment of a trustee” should the parties request. What is import with this measure, however, is that the corporation should not be in the hands of a trustee for a long period of time; instead, it will be “managed for a specific period” as a temporary measure in the interests of the corporation. The lawmaker assesses the issue of absence of mandatory bodies in cases of dissolution by balancing the conflicting interests in order to protect the interests of the public and to ensure, in general, for the maintenance of jurisprudence, doctrine and the incorporated company and also the partnership.
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FOOTNOTE
1 Hasan Pulaşlı, Company Law General Principles, Ankara: Adalet Publisher, 2017, p. 349.
2 TCC, No: 6102, article 359/2, Dated 14.02.2011, No: 27846 Official Gazzette
3 Hasan Pulaşlı, Company Law General Principles, Ankara: Adalet Publisher, 2017, p. 349.
4 Merdan Çalışkan, General Assembly of Joint-stock Companies: Adalet Pulisher, 2019, p. 23.
5 Dr. Tamer Bozkurt, company law, Ankara: Legem Publishing, 2018, p. 240.
6 Turkish Commercial Code No. 6102, Article 397.
7 Hasan Pulaşlı, Company Law General Principles, Ankara: Adalet Publisher, 2017, p. 349.
8 Reha Poroy/ Ünal Tekinalp/ Ersin Çamoğlu, Partnership Law II (Poroy/Tekinalp/Çamoğlu, Partnership Law II ), İstanbul: Vedat Publishing, 2017, p. 337.
9 Nuri Erdem, Rightful Termination of the Joint-stock Company, Istanbul: Vedat Publishing, 2012, p. 154-155.
10 Article 533 of the TCC.
11 Özge KARAEGE, “Anonim Şirketlerde Tek Pay Sahibinin Genel Kurulu Toplantı Cağrı Yetkisi”, Gazi Universitesi Hukuk Fakultesi Dergisi, 2015, N: 4, p. 106.
12 İsmail Cem SOYKAN, Absence of Bodies in Joint-stock Companies, (Istanbul: On İki Levha Publishing, 2012), p. 84.
13 Halil ARSLANLI, Joint-stock Companies IV-V Joint Venture Accounts Liquidation and Liquidation of Joint-stock Company, (Istanbul: Printing House of the Faculty) 1961, p. 190, transferred from KARAEGE, p. 96. 14 Erdoğan MOROĞLU, “Protection of Minority Shareholders in Joint-stock Companies and Termination for Fair Reasons“, Articles I, (İstanbul: On İki Levha Pubishing, 2001), p. 96, transferred from KARAEGE, p. 96.
15 Reha POROY/ Ünal TEKİNALP/ Ersin ÇAMOĞLU, Partnership Law I, (İstanbul: Vedat Publishing, 2014), p. 840, transferred form KARAEGE, p. 97.
16 KARAEGE, s. 96-97
17 The Court of Cassation, 11. CD, E. 1981/4751, K. 1981/5019, D 24.11.1981.
18 The Court of Cassation.19. CD, E. 2012/6029, K. 2012/12726, T. 11.09.2012.
19 TCC, article 530.
20 Court of Cassation 11. Deparment of Law, E. 2001/1613 K. 2001/3439 T. 24.04.2001
21 Court of Cassation11. Deparment of Law, E. 2016/4245, K. 2017/6420, T. 22.1.2017.
22 Court of Cassation, E. 2010/15120, K. 2012/5649, T. 22.1.2017.
23 Poroy/Tekinalp/Çamoğlu, Partnership Law p. 338.
24 Poroy/Tekinalp/Çamoğlu, Partnership Law p. 338.
25 Oruç Hami ŞENER, Teorik ve Uygulamalı Ortaklıklar Hukuku, (Ankara: Seçkin Yayınevi, 2019), p. 630.
26 İsmail Cem Soykan, Absence of Bodies in Joint-stock Companies, Istanbul: On İki Levha Pubishing, 2012, p. 264.
27 Burcu Günaydın, “Termination Case Based on Mandatory Body Deficiency in a Joint-Stock Company,” 2011, p. 90, http://openaccess.bilgi. edu.tr:8080/xmlui/bitstream/handle/11411/417/Anonim%20%C5%9Firkette%20zorunlu%20organ%20 eksikli%C4%9Fine%20dayanan%20 fesih%20davas%C4%B1.pdf?sequence=1&isAllowed=y (Access date: 01.08.2019).
28 Şükrü Yıldız, “Cases Requiring Appointment of Management Trustees to Capital Companies,” Istanbul Commerce University, Journal of Social Sciences, Fall 2017, V. 32, p. 9, http://acikerisim.ticaret.edu.tr/ xmlui/bitstream/handle/11467/1841/ M00962.pdf?sequence=1&isAllowed=y (Access Date: 01.08.2019).
29 HYPERLINK “https://www. lexpera.com.tr/ictihat/yargitay/11hukuk-dairesi-e-2009-12668-k-201110598-t-20-09-2011” Yargıtay 11. HD., E. 2009/12668, K. 2011/10598, T. 20.09.2011.
30 Turkish Civil Code, Article 427/4, Tarih 08/12/2001, Official Gazzette Numbered 24607.
