Right to Information and Inspection by the Shareholders in Limited Liability Companies
The purpose of natural and legal entities in bringing funds into a company is to invest for profit sharing. The right to information and inspection by the shareholders is of great importance in terms of enabling the shareholders to audit the ability of the company to achieve those goals, and to exercise another partnership rights.
For limited liability companies, which is the most common form of business in Turkey, this right is regulated under Article 614 of Turkish Commercial Code numbered 6102 (“TCC”). This Newsletter article examines the limitations to the right to information and inspection by the shareholders in limited liability companies, and aims to raise shareholders’ awareness[1].
The Essence of the Right to Information and Inspection
In contrast to joint stock companies, the transfer of shares in limited liability companies is subject to stricter provisions, and the approval of the general assembly is mandatory. For this reason, auditing becomes more valuable for shareholders in limited liability companies. According to Article 614 of the TCC (“Article”), which regulates the right to information and inspection by the shareholders in limited liability companies:
(1) Each shareholder may request information about all company business and accounts from managers and can conduct inspections regarding certain matters.
(2) If there is a risk that a shareholder who obtained information may use it in such a way that will damage the company, the managers may prevent access to information and inspection to the extent necessary; a shareholder who wishes to dispute this motion may apply to the general assembly, which may decide whether this individual shall have access to the information.
(3) If the general assembly prevents access to information and inspection without just cause, the shareholder may seek a court order on this issue, and the court’s decision shall be final.
The first paragraph of the Article regulates both the right to information and the right to inspection. The shareholder’s right to information of the company’s manager is a passive right, as it causes passive access to information, as the manager provides the information upon the shareholder’s request[2]. However, the shareholder actively exercises the right to inspection, for requesting information about the company’s business. Another difference between these two rights is that the right to inspect must be exercised at the company’s headquarters, or at workplaces in the presence of company officials; therefore, the company books and documents cannot be taken outside of the company[3]. Doctrinal opinions state that the shareholder may exercise both the right of information and examination on the same subject, for the purpose of confirmation[4].
Although the Article does not include any specific provisions, the German Limited Liability Companies Act (“GmbHG”) Paragraph 51a[5], which is the Article’s legal basis, contains explicit provision that the right of the shareholder to information and inspection may not be derogated by the articles of association. This right is an indispensable right for the shareholder, but this does not put the shareholder under the obligation to exercise this right, or to audit the company. The right to information leads to the indirect audit of managers.
Scope and Limits of the Right to Information and Inspection
In Terms of Person
The right to information and inspection arises from the partnership, and is exercised by shareholders, without taking the number of shares and restrictions on voting rights into account[6]. The right may also be exercised by legal representatives, such as parents, guardians, trustees, and bankruptcy officials acting on behalf of shareholders who lack the capacity to act. However, pledgees or beneficial owners of shares do not have the right to information and inspection because they do not hold the shareholder title[7]. On the other hand, the right may be exercised by another shareholder or an expert who are bound by the confidentiality obligation (such as lawyers, tax or financial advisors) on behalf of the shareholder without violating the loyalty obligation to the company[8].
In Terms of Content
Any information and documents that are of interest to the company and not belonging to a third party fall within the scope of this right due to the wording of “all business and accounts of the company” of the Article. However, the right does not cover the records held at the company on behalf of third parties, even if the records are related to company business[9].
In the abstract, “all business of the company” means information about company assets, financial obligations, relations with other public institutions, the company’s affiliates, customers, dealers, suppliers, representatives and agencies, current contracts, reports, drafts, meeting minutes, as well as the company’s future activities. Referring to the wording of “all accounts of the company,” balance sheet, profit and loss accounts, reports, stocks, funds and donations may be examined. These documents and accounts do not need to be physically at the company’s registered address. The shareholder may request to examine company documents located outside the company premises, for example, in an accountant’s or lawyer’s offices, and the company must provide these documents to the requesting shareholder.
Some doctrinal opinions argue that no general information or inspections may be requested concerning the company’s business and its accounts, and the shareholder should state the specific matter in the request[10]. On the other hand, some opinions are that the questions posed should be as specific as possible, but it should also be possible to obtain general information concerning all important events. It may be possible for a shareholder to request general information, unless there is a loss of goodwill. An example of this may be that the legal successor who desires to have general information about the company, or the shareholder, has been away from the business, due to illness or for another reason[11].
In Terms of Form and Time
The shareholder is not required to provide justification for the request and, as well, the exercise of the right is not subject to any statutory condition as to form in the Article. However, the company may regulate the form of the request without derogating the right to information and inspection. In this respect, the provisions of the articles of association stipulating that the exercise of the right shall be in writing are valid[12].
However, the provisions that derogate the right in terms of time are invalid. The shareholder, in limited liability companies, may exercise this right at any time, not only during general assembly meetings. The shareholder may so demand prior to or after the general assembly meeting, and also during the general assembly meeting, but this does not mean that the request will be discussed at that meeting[13]. There is no need to respond to the request immediately. Managers may take a reasonable period of time to respond, with respect to the functioning of the company’s business[14].
The response format to the request is at the discretion of the managers. The time required for response is also undetermined, but the response should be reasonably given with respect to the functioning of the company’s business, as GmbHG 51a states that the response shall be given “immediately”.
Refusal of the Request for Information and Inspection by Managers
If there is a risk that the shareholder who obtained information may use it in such a way that it will damage the company, the managers may prevent access to information and inspection to the extent necessary. The legislator does not seek concrete and specific damages here. It is sufficient only to merely identify the potential hazard. But the hazard must be supported by concrete evidence[15].
The causes of refusal may be the requesting shareholder’s partnership in a competitor company, the risk of unsanctioned release of confidential information to news media or to competitors, thereby creating unfair competition. The damage may be material or moral. If the request has the risk to damage the reputation of the company and to cause customer loss, it may be refused. The hazard may be claimed if the requesting shareholder has a family tie with a competitor company, or if the shareholder operates in the same commercial field as the company[16].
A doctrinal opinion states that “abuse of the rights,” which is one of the fundamental principles of law, may be a reason for refusal[17]. For instance, if it is understood that the request is unnecessarily made and carries the purpose of harassment, this request constitutes a special aspect of abuse of rights and may be refused by the managers[18].
Application to the General Assembly upon Refusal of the Request
The shareholder whose request for information and inspection was refused may apply to the general assembly. Although the TCC does not foresee any statutory condition as to form for the application to the general assembly, the refusal should be taken into consideration, and the application should be made in writing in terms of provability. Upon the application, the managers should call a general assembly meeting at the first opportunity and add the requested subject to the meeting’s agenda[19].
The legislator has not enacted any regulations regarding the right to vote in the general assembly of the shareholder whose request for information and inspection was refused. According to the most strongly supported doctrinal opinion, the shareholder lacks the right to vote at the said meeting because no one should be a judge in his own case (nemo iudex in causa sua)[20].
Judicial Review
If the request is not discussed at the general assembly meeting, or is refused by the general assembly, the shareholder may seek a court order on this issue. The examination of the court is not limited to the investigation of the justness of the reasons for refusal which the managers have put forward. In contrast, the court determines whether the shareholder has the right to information and inspection during the examination.
Pursuant to Art. 1521 of the TCC, the case is a summary proceeding, and the decision of the court is final. If the use of the right is still refused despite the court’s decision, the court decision shall be enforced by enforcement officers. The TCC does not set out the statute of limitation that applies to this proceeding; therefore, the general provision of the statute of limitation in Art. 147/4 of the Turkish Code of Obligations, which is five years, shall apply.
Conclusion
The right to information and inspection is of great importance in terms of using other partnership rights, and auditing the company’s activities. Shareholders may respectively apply to the managers, the general assembly, and the court to exercise this right, and may request information and inspection on all business matters and accounts of the company.
[1] Please see the Newsletter article of October 2015 for further information on the right to information and inspect in joint stock companies: http://www.erdem-erdem.av.tr/publications/law-post/right-to-request-information-of-the-shareholders-in-joint-stock-companies/ (access date: 29.11.2017)
[2] Please see the German Federal Court Decision requesting stricter conditions for the right to information since it requires an active act of the company contrary to the passive nature of the right to inspect: BGH, 12.06.1954 - II ZR 154/53 https://www.jurion.de/urteile/bgh/1954-06-12/ii-zr-154_53/ (access date: 29.11.2017)
[3] Çamoğlu, Ersin, Limited Ortağın Bilgi Alma ve İnceleme Hakkının Kullanılması ve Sınırları, Prof. Dr. Hamdi Yasaman’a Armağan, Oniki Levha Yayıncılık, İstanbul 2017, p. 149.
[4] Baştuğ, İrfan / Göksoy, Can, Limited Şirkette Ortakların Denetleme Hakları, Prof. Dr. Oğuz İmregün’e Armağan, İstanbul 1998, p. 56.
[5] “Section 51a Right to information and right of inspection - (1) Upon their request the managers must without undue delay provide each shareholder with information on the company’s affairs and allow them to inspect the books and company documents. (2) The managers may refuse to provide information or permit inspection if there is a concern that the shareholder may make use thereof for non-company purposes and thereby put the company or an associated company at a not insignificant disadvantage. Refusal shall require a resolution of the shareholders. (3) These provisions may not be derogated by the articles of association.” You may find the full text of the law on the cited link: (access date: 29.11.2017)
[6] Baştuğ / Göksoy, p. 49.
[7] Çamoğlu, p. 151.
[8] Baştuğ / Göksoy, p. 50-51.
[9] Baştuğ / Göksoy, p. 57.
[10] Çamoğlu, p. 152-153.
[11] Baştuğ / Göksoy p. 52.
[12] Baştuğ / Göksoy, s. 46.
[13] Çamoğlu, p. 156.
[14] Baştuğ / Göksoy, p. 53.
[15] Çamoğlu, p. 159.
[16] Baştuğ / Göksoy, p. 64.
[17] Çamoğlu, p. 158; Baştuğ / Göksoy, p. 67.
[18] Baştuğ / Göksoy, p. 50; Çamoğlu, p. 156.
[19] Çamoğlu, p. 161.
[20] Can, Ozan, Bilgi Alma ve İnceleme Talebi Müdürler Tarafından Reddedilen Limited Şirket Ortağının Genel Kurulda Oy Kullanıp Kullanamayacağı Sorusu Üzerine Düşünceler, Ankara Barosu Dergisi Yıl:2015 Sayı:2, Ankara 2015, p. 61.
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