Null and Void Resolutions of Boards of Directors in Joint Stock Companies
Introduction
Invalidity of boards of directors’ resolutions in joint stock companies has been contentious, both in Turkish law, and in comparative law, for a long time. The inadequacy, or the reluctance, of the legislation to regulate cases of invalidity are frequently made subject to studies. Cases of invalidity may be classified as non-existence, nullity and annulability. The scope of this Newsletter is limited to null and void resolutions of boards of directors that have been established under Article 391 of Turkish Commercial Code No. 6102[1] (“TCC”), and the cases of non-existence and annulability are excluded. Unlike non-existence, legal transactions that are in serious breach of the law, and missing a condition of validity, are considered to be null and void, although their constituent elements have been established[2].
Although the nullity of boards of directors’ resolutions was not clearly regulated under the repealed Turkish Commercial Code No. 6762 (“Former TCC”), it was accepted by the Supreme Court in practice, and in the doctrine, that it was possible to determine nullity in accordance with the general provisions. On the other hand, the TCC explicitly regulates the request for determination of nullity by the court and lists null and void resolutions by analogy. This Newsletter discusses in which cases the resolutions of boards of directors shall be deemed null and void, those entitled to request the determination of nullity, and the method of such request.
Reasons for Nullity
Under Article 391 of the TCC, a board of directors’ resolution is null and void, especially if it (i) contradicts the principle of equal treatment, (ii) does not comply with the basic structure of a joint stock company or does not maintain the principle of protection of capital, (iii) violates the rights of shareholders, especially which are of indispensable nature, or restricts or makes difficult the exercise of the same, and (iv) is within the scope of non-delegable authorities of other bodies, and is relevant to the transfer of such authorities.
The wording of the Article where the expression “especially” is used, shows that the reasons for nullity are not exhaustively listed, and there may be other null and void resolutions not foreseen under the Article. The Article only lists frequent examples for null and void resolutions from practice. Each of the cases listed under the Article, as well as other probable cases for nullity, are discussed, below. It should be noted that an example given under a reason for nullity may at the same time fall under the scope of another reason.
Resolutions Contradicting the Principle of Equal Treatment
Although the Supreme Court considered resolutions contradicting with the principle of equal treatment null and void also under the Former TCC, the existence of an explicit provision under Article 357 of the TCC paves the way for determination of such resolutions. Pursuant to Article 357 of the TCC, shareholders of a joint stock company are equally treated under the same conditions. This provision is essential to the structure of a joint stock company. According to the preamble of the Article, although the shareholders are entitled to give up on the equal treatment principle with their votes and specific to the case at hand, this principle is absolute under certain conditions, and cannot be renounced as a whole and in all cases[3]. Therefore, inclusion of an explicit provision regarding the nullity of the resolutions that contradict this principle is appropriate.
For instance, a resolution stating that the shareholder who voted against the agenda item regarding distribution of dividends in a general assembly meeting cannot benefit from the right to dividends,[4] or a board of directors’ resolution not allowing shareholders to exercise their pre-emptive rights for newly issued shares due to their negative votes for the capital increase at the general assembly meeting, or requesting a lesser ratio of the balance from the founding shareholders when requesting the remaining capital contribution obligations[5], constitute violation of the principle of equal treatment.
Resolutions that do not Comply with the Basic Structure of Joint Stock Company or do not Maintain the Principle of Protection of Capital
The preamble of the Article explains the resolutions in contradiction with the structure of a joint stock company as follows, based on the Swiss doctrine:[6] Board of directors’ resolutions setting general rules of law that are contrary to mandatory provisions are invalid. For example, a board of directors’ resolution imposing an obligation for additional payment to all shareholders to cover balance sheet deficits is in contradiction with the principle of limited liability of shareholders, which stands as one of the components of the structure of a joint stock company (Article 421/2-a of the TCC is reserved).
The preamble of the Article offers a more concrete and comprehensive explanation as follows, with reference to the definition and organizational structure of a joint stock company:[7]
“Resolutions that are contrary to the definition of joint stock company, shareholders’ rights and obligations, and the organizational structure of the company are in breach of the main structure. The main structure corresponds to the essential elements that sustain a joint stock company. The “obligation for additional payment” mentioned, above, is among these essential elements. Assignment of rights that are the same or equivalent with the rights of a shareholder (such as dividends, liquidation share, participation in general assembly), to a third person; for example, a bank that extended a significant amount of loan, or granting it veto right over board of directors’ resolutions, are contrary to the organization of substantive rights; and assignment of rights to a non-member equal to that of a board member are contrary to the organizational structure.”
In terms of the principle of protection of capital, resolutions that are in breach of the provisions where this principle is established; for example, the provisions regulating the assets that can be invested as capital in kind under Article 342 of the TCC, the payment of the nominal amount of shares subscribed in cash under Article 344 of the TCC, the measures to be taken in case of loss of capital or bankruptcy under Article 376 of the TCC, shall be deemed null and void. Boards of directors’ resolutions that empower themselves for dividend distribution, instead of the general assembly, shall be also deemed null and void due to with the violation of the principle of protection of capital[8].
Resolutions that Violate the Rights of Shareholders, especially which are of Indispensable Nature, or Restrict or Make Difficult the Exercise of the Same
Under the preamble of the Article, subjecting actions for annulment to the approval of the board of directors, abandoning the purpose of generating and sharing profit, subjecting the issuance of an entrance card to the general assembly, or the right to receive information and examine, to the execution of an undertaking prepared by the board of directors, and prohibition of the attendance at the general assembly through a representative, are listed as examples to the resolutions that violate the rights of shareholders that are of indispensable nature, or restrict, or make difficult, the exercise of the same[9].
For a board of directors’ resolution to be null and void within the scope of this paragraph, the violated right does not have be “indispensable.” Although this situation is particularly emphasized in the Article, violation or restriction of other rights of the shareholders may also result in the nullity of a board of directors’ resolution.
Resolutions within the Scope of Non-delegable Authorities of other Bodies and Relevant to the Transfer of such Authorities
Even though the Article uses the expression “other bodies,” the only body other than the board of directors in a joint stock company, is the general assembly. Therefore, it should be accepted that the Article refers to the resolutions adopted by the board of directors on matters that fall within the scope of the non-delegable authorities of the general assembly.
In accordance with Article 408 of the TCC, except those listed under other Articles, amendment of the articles of association, appointment of board members, as well as the determination of their terms, remuneration and rights, such as honorarium, bonuses and premiums, resolutions on their release and dismissal, appointment and dismissal of the auditor, resolutions on financial statements, annual reports of the board of directors, disposals on annual profit, determination of dividends and profit shares, use of the reserve funds, including their addition to the capital or distribution as profit, dissolution of the company and wholesale of a significant amount of company assets, are among non-delegable authorities of the general assembly.
Other Reasons
There may be other reasons for nullity since the reasons are not exhaustively listed under the TCC. According to the preamble of the Article, the nullity of a board of directors’ resolution shall be determined in accordance with the general provisions[10]. Accordingly, resolutions of the boards of directors against morality, public order, personal rights, and against the provisions that protect investors, creditors, and employees, shall be null and void as per the general provisions:[11] For instance, resolutions of the boards of directors to sell and transfer companies’ assets below market value to shareholders and third parties in order to redirect assets from creditors shall be null and void due to the violation of good morals. Similarly, resolutions of the boards of directors that establish payments, such as high wages or honoraria to board members, companies’ employees, or persons doing business with the company, that are disproportionate to their services, or to the financial status of the company shall be null and void because, on the one hand, they cause a decrease in the company’s assets and, on the other hand, are contrary to good morals.
The Procedure and Consequences of Determination of Nullity
A lawsuit regarding a null and void board of directors’ resolution shall be directed to the company, and is a declaratory lawsuit consisting of the request for determination of nullity only. It is always possible to assert this claim as an objection in a lawsuit, or to bring it forward without a lawsuit; the judge and the trade registry officer, in case of a resolution subject to registration, must ex officio take nullity into account[12].
As appropriately stated in the preamble of the Article, a case for determination of nullity may be filed by anyone with a legitimate interest, without being subject to any time limit[13]. “Anyone” also includes the creditors of the company according to some legal scholars[14].
Consequences of nullity shall be established according to the general provisions as stated in the preamble of the Article[15]. Accordingly, determination of nullity of a board of directors’ resolution shall result in the invalidity of the resolution as of the date the resolution has been adopted, and in the invalidity of the transactions and practices carried out based on such resolution, retroactively, and the resolution shall have no effect on the company, shareholders, or creditors[16].
Conclusion
Boards of directors’ resolutions that are in serious breach of the law and missing conditions of validity are considered to be null and void in accordance with the general provisions, although their constituent elements have been established. Article 391 of the TCC clearly establishes that a lawsuit can be initiated for determination of nullity, and lists examples of cases for nullity. Accordingly, resolutions of the boards of directors shall be rendered null and void, especially if they (i) contradict the principle of equal treatment, (ii) do not comply with the basic structure of a joint stock company or do not maintain the principle of protection of capital, (iii) violate the rights of shareholders, especially which are of indispensable nature, or restrict or make difficult the exercise of the same, and (iv) are within the scope of non-delegable authorities of other bodies, and are relevant to the transfer of such authorities. These examples are not exhaustively listed and may be duplicated. A lawsuit for the determination of nullity may be filed by anyone with a legitimate interest, without being subject to any time limit. A resolution determined to be null and void shall be deemed invalid ex tunc, and shall have no effect on the company, shareholders, or creditors.
[1] TCC (Official Gazette, 14.02.2011, No. 27846) entered into force on 01.07.2012.
[2] Kırca, İsmail (Şehirali Çelik, Feyzan Hayal / Manavgat, Çağlar): Anonim Şirketler Hukuku, C. 1, Ankara 2013, p. 513.
[3] The Preamble of Article 357 of the TCC.
[4] Pekdinçer, Tamer: “Anonim Şirketlerde Yönetim Kurulu Kararlarının Geçerliliği (Özellikle Batıl Yönetim Kurulu Kararları) (TTK m. 391)”, Marmara Üniversitesi Hukuk Fakültesi Hukuk Araştırmaları Dergisi C. 18, S. 2, Y. 2012, https://dergipark.org.tr/en/download/article-file/802571, s. 677 (date accessed: 10.12.2020).
[5] Pulaşlı, Hasan: Şirketler Hukuku Genel Esaslar, Güncellenmiş 2. Bası, Ankara 2013, p. 418.
[6] The Preamble of Article 391 of the TCC.
[7] The Preamble of Article 391 of the TCC.
[8] Pulaşlı, p. 420.
[9] The Preamble of Article 391 of the TCC.
[10] The Preamble of Article 391 of the TCC.
[11] Üçışık, Güzin: “Türk Hukuku’nda Anonim Şirket Yönetim Kurulu Kararlarının Sakatlığı Konusunda Getirilen Düzenlemelerin Değerlendirilmesi”, Finansal Araştırmalar ve Çalışmalar Dergisi, C. 3, S. 5, Y. 2011, https://dergipark.org.tr/tr/download/article-file/3981, p. 61-62 (date accessed: 10.12.2020).
[12] Pekdinçer, p. 675-676.
[13] The Preamble of Article 391 of the TCC.
[14] Pekdinçer, p. 676.
[15] The Preamble of Article 391 of the TCC.
[16] Üçışık, p. 64.
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