Annulment of General Assembly Decisions in Joint-Stock Companies

If decisions made by the general assembly of joint-stock companies violate the company’s articles of association, the law, or especially the principle of good faith, lawsuits seeking annulment of these decisions can be filed.

General assembly annulment lawsuits provide a mechanism to prevent majority shareholders from exercising their control over the company in a manner contrary to law and good faith. From a corporate governance perspective, this serves as a critical tool to ensure internal company democracy for minority shareholders.

Procedure in Annulment Lawsuits

Shareholders, the board of directors, and board members have the right to file lawsuits for annulment of general assembly decisions under certain conditions. Such annulment lawsuits must be filed within three months from the date of the decision, at the commercial court of first instance where the company’s headquarters is located. In these lawsuits, the company is represented by the board of directors. If the lawsuit is filed by the board as a collective body, a trustee must be appointed to represent the company.

Who Can File Annulment Lawsuits?

1.          Shareholders

The Turkish Commercial Code divides shareholders who can file annulment lawsuits into two groups:

• Those who attended the general assembly meeting and voted against the decision, and

• All shareholders regardless of their attendance at the meeting.

Shareholders filing annulment lawsuits must maintain their shareholder status until the court’s final decision. Supreme Court rulings support this principle. Therefore, shareholders intending to file an annulment lawsuit against a general assembly decision should avoid transferring all their shares until the lawsuit concludes with a final judgment; otherwise, they will lose their standing in the lawsuit.

1.1.      Shareholders Present at the General Assembly

Shareholders who attend the meeting can file an annulment lawsuit provided they vote against the decision and record their dissent (objection) in the minutes. The dissent can be recorded against some or all of the decisions made.

A key issue is that if a shareholder does not have a duly recorded dissent, the court may reject the annulment lawsuit for lack of a procedural prerequisite. In other words, shareholders must present their written dissent explaining the reasons for opposition at the general assembly to have a valid dissent record and have their annulment lawsuit reviewed by the court.

Another important point is that a dissent submitted in advance of the general assembly decision may not be accepted as a valid dissent. According to settled Supreme Court practice, a dissent submitted prematurely can prevent the shareholder from filing an annulment lawsuit later.

Therefore, shareholders should ensure to vote against the relevant decisions and record separate dissent entries for each decision if they intend to file multiple annulment lawsuits, in order to preserve their right to sue.

1.2.        All Shareholders Regardless of Attendance or Voting

Shareholders who did not attend the meeting or did not vote against the decision may also file annulment lawsuits if they claim that:

• The meeting notice was not properly given,

• The agenda was not properly announced,

• Persons without the right or their proxies improperly attended or voted,

• They were wrongfully denied participation or voting,and in any case, these irregularities affected the adoption of the decision.

The “Effect” Rule

In an annulment lawsuit filed by a shareholder who voted against and recorded dissent, the shareholder must prove that the alleged irregularity affected the decision. According to the “effect” rule, if the irregularity had not existed, the general assembly would not have adopted the decision, and thus annulment can be requested.

Turkish courts generally apply this effect rule based on meeting and quorum requirements. For example, if the plaintiff shareholder’s attendance and voting rights would have been sufficient to change the decision, the court will find the irregularity to have an effect. But if the shareholder’s votes would not have been enough to alter the decision, the court will consider the irregularity as not affecting the outcome.

In one Supreme Court case, shareholders representing 50% of the capital were deemed able to affect the decision if they had attended, and the notice irregularity was found contrary to the principle of good faith, leading to acceptance of the lawsuit.

Therefore, it is important to assess each case individually, considering shareholders’ voting rights and required quorums under the effect rule. In practice, several shareholders with small shares may collectively bring lawsuits, offering an alternative path when a single minority shareholder cannot succeed alone due to the effect rule.

Some scholars criticize Turkish courts’ strict application of the effect rule based solely on vote counts, arguing that the potential influence of minority shareholders’ information and arguments on other shareholders’ votes should also be considered.

2.     Board of Directors

The board of directors, as the management and representation organ, may file annulment lawsuits without any restrictions.

3.     Board Members

If execution of a general assembly decision would cause personal liability for board members, each member may individually file an annulment lawsuit.

Conclusion

Annulment lawsuits filed by shareholders are based on limited grounds. For lawsuits filed by shareholders attending the meeting, it is crucial that their dissent is properly recorded in the minutes. Also, shareholders who rely on fundamental procedural violations can file lawsuits regardless of attendance, provided they prove the violation affected the decision, in order to succeed.

If successful, the court decision annulling the general assembly resolution will be binding on all shareholders and will retroactively nullify the resolution from the date of the court decision.

Given their importance as a tool to protect shareholders’ internal company interests, participation in general assembly meetings and appropriate planning in line with the principles and Supreme Court decisions mentioned is critical for success in these lawsuits.

Author

Ömer Faruk Çıkın