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Dismissal of Board Members in Turkey

Dismissal of the board
members of a joint stock company is regulated under the Turkish Commercial Code
numbered 6102. According to Article 408/2 of the TCC, general
assembly of shareholders is granted with the sole power to appoint and dismiss
board members.

Dismissal of Board Members in
Turkey

I. Introduction

Dismissal of the board members
of a joint stock company is regulated under the Turkish Commercial Code numbered
6102 ("TCC"). According to Article 408/2 of the TCC, general
assembly of shareholders is granted with the sole power to appoint and dismiss
board members. The scope and implementation of such power is defined under
Article 364 of the TCC. Pursuant to such article, board members can be
dismissed through including an item in the agenda of the general assembly
meeting of shareholders for dismissal or with just cause even if the dismissal
is not in the agenda of the general assembly meeting of shareholders.

While the former Turkish
Commercial Code numbered 6762 contained provisions regarding dismissal, it did
not grant board members the right to claim damages and caused ambiguity in
implementation of the dismissal rules. Article 364 of the TCC tried to clear
such ambiguity by providing different options for dismissal and granted
indemnification rights to the dismissed board members.

II. Dismissal of
Board Members Through General Assembly of Shareholders Resolution

Article 364 of the TCC provides
two options for the dismissal of board members: (i) including an item in the meeting
agenda regarding dismissal, and (ii) dismissing with "just cause" even if no
such item is provided in the agenda for discussion.

Before explaining Article 364
of the TCC, it is important to describe the general rules which will be
applicable to the general assembly of shareholders meetings. Firstly, in order
to discuss dismissal of a board member and to have a valid general assembly
resolution, meeting and decision quorums of a general assembly meeting should
be met. In this respect, unless a heavier quorum has been provided in the
articles of association of a joint stock company, general assembly will convene
with the shareholders representing at least 25% of the share capital and the
resolution will be taken by a simple majority as per Article 418 of the TCC.

Secondly, the agenda will have
a binding effect for the general assembly resolution. Article 413/2 of the TCC
states that only the items specified in the agenda can be discussed during the
general assembly meeting. In other words, the general assembly will not be able
to resolve on a matter unless such an item is included in the agenda. However, the
TCC provides several exceptions to such rule. For instance, Article 364/1 of
the TCC requires an item relating to dismissal of a board member to be included
in the agenda; but also allows dismissal if there is a just cause without
including any item in the agenda.

Another example can be
inferred from interpreting Article 416 and Article 364 of the TCC together. In
principle, an item can be included in the agenda if all shareholders are
present and agree to do so when the general assembly has convened without
invitation as per Article 416 of the TCC. Likewise, if there is just cause as
per Article 364 of the TCC it would not be necessary to include an item in the
agenda for dismissal since the general assembly can dismiss the board members
without including any item in the agenda in such case.[1]

Lastly, Article 360 of the TCC
grants certain share groups and minorities the right to be represented in the
board of directors, provided that it is stated in the articles of association.
If such right is granted, general assembly's right to dismiss the board members
is restricted; meaning that "the general assembly will be able to dismiss the board
members representing such shareholders only if there is just cause".[2]

a. Procedure if the Dismissal is included in the Agenda

Article 364/1 of the TCC stipulates
that board members can be dismissed if there is an item related to dismissal in
the agenda; a specific wording is not required. Article 413/3 of the TCC gives
an example to an agenda item which can be related to dismissal. According to
such article, discussion of year-end financial tables is related to dismissal
of board members. In another words, the general assembly will be able to
dismiss a board member if there is an item in the agenda regarding discussions
of the year-end financial tables.

11th Civil Chamber
of Court of Appeals (the "Court")
with its decision dated December 12, 2016 with merit no. 2016/2098 and decision
no. 2016/9484, further emphasized the relationship between the discussion of
year-end financial tables and dismissal of board members. In the case, the
agenda contained discussion of the year-end financial tables but the
shareholders decided to postpone the discussions. Nevertheless, the majority
shareholders voted for dismissal of some board members. The minority
shareholders filed a lawsuit arguing that it is not possible to dismiss board
members when the discussions of financial documents have been postponed. The Court
concurred with the minority shareholders and stated that discussions of
financial tables are related to dismissal of board members and thus, the general
assembly cannot resolve on dismissal when discussions about financial documents
have been postponed.

There is no consensus between
the scholars and the Turkish courts with respect to the requirement of just
cause when there is an item in the agenda regarding dismissal. For example,
some scholars argue that if discussion of year-end financial tables is included
in the agenda and the shareholders are not pleased with the results of the
financial tables, such reason itself will be sufficient to dismiss a board
member.[3] On the other hand, others argue that it is not necessary to have a just cause since
the wording of Article 413/3 of the TCC is clear, and once discussion of
year-end financial tables is in the agenda it is possible to dismiss a board
member.[4]

b. Procedure if there is a Just Cause

The second option is to
dismiss the board members based on just cause. While Article 364 of the TCC
does not provide a definition of just cause, its preamble sets some examples. According
to the preamble of Article 364 of the TCC, corruption, inadequacy, violation of
duty of loyalty, inability to perform duties due to being a board member in
multiple companies, discord, and abuse of power could be deemed as just cause. In
addition, the preamble notes that dismissing a board member who is beneficial
to the company solely for political reasons may not be deemed as just cause.

Furthermore, the Court gives
an example to just cause in its decision dated 30.10.2017 with merit no.
2015/14781 and decision no. 2017/5821, stating that ongoing disputes between a
joint stock company and a real person representative of a legal entity board
member constitutes just cause since the board member and the company is unable
to work harmoniously due to such disputes.

c. Effect of Dismissal of the Board Members

While there are many different
legal opinions with respect to the legal nature of the relationship between a
joint stock company and a board member, the Court tends to rule that the
relationship is governed by a mandate contract.[5] According to Article 512 of
the Turkish Code of Obligations numbered 6098 ("TCO"), which regulates the mandate contracts, a mandate contract
can be terminated with the unilateral declaration of either party. In this
respect, general assembly resolution regarding dismissal of a board member can
be considered as the unilateral declaration of a party.

In terms of the internal
affairs of a joint stock company, dismissal will become effective "once the
general assembly's dismissal declaration is received by the relevant board
member."[6] In case the board member is
present in the general assembly meeting, the board member will "immediately
receive the dismissal declaration and become informed on the matter."[7] If the board member is not present at the general assembly
meeting, "with the interpretation of Article 514 of the TCO, it is possible to
say that dismissal will become effective once the board member is informed."[8]

The TCC does not contain any
provision about the steps to be taken following the general assembly resolution
or its effect to the third parties. On the other hand, Article 373 of the TCC
stipulates that board of directors is obliged to submit the board of directors
resolution indicating the authorized signatories of the joint stock company to
the trade registry for its registration and announcement. In addition, any
change in matters that have been registered with the trade registry has to be
registered as per Article 31 of the TCC. Based on the foregoing provisions, it
can be inferred that "the board of directors has to register the dismissal of a
board member for such resolution to bind third parties."[9]

Once the dismissal decision
enters into force in accordance with the foregoing, the board member will no
longer have any rights (e.g. salary and attendance fee) and obligations. As a
result, the board member "will have to terminate his/her activities in the
company immediately."[10]

d. Rights of the Dismissed Board Members

Board members' rights can
arise when (i) there is an item in the agenda regarding dismissal but there is
no just cause, (ii) there is just cause but no item in the agenda regarding
dismissal, and (iii) there is neither an item in the agenda nor just cause. In
principle, the dismissed board member request cancellation of the general
assembly resolution and/or ask indemnification of the damages.

i. When there is an item in the
agenda regarding dismissal but there is no just cause:
Under this option, it is likely that the board member's
claim for cancellation of the general assembly resolution will be rejected by
the courts if it is based on lack of just cause. The reasoning behind this
derives from Article 364 of the TCC, which grants the general assembly the
absolute power to decide on dismissal of board members and allows dismissal even
without a just cause. Nevertheless, the board member can request cancellation
of the general assembly resolution based on the grounds that the meeting and
decision quorums are not satisfied. Also, the board member can claim
indemnification of his/her damages.


ii.
When there is just cause but no
item in the agenda regarding dismissal:
Under this option, it is
unlikely that cancellation of the general assembly resolution will have a
positive outcome if it is based on the fact that the agenda does not contain
any item since Article 364 allows dismissal with just cause. Still, the board
member can claim that the dismissal was unjust and ask for damages. In such
case, the courts will look at the facts of each case to determine if there was
an unjust dismissal decision.


iii.
When there is neither an item
in the agenda nor just cause:
Under this option, the board
member can request cancellation of the general assembly resolution and claim damages,
since the general assembly decision is not based on any options provided by Article
364 of the TCC.

The Court in its decisions dated January
09, 2017 with merit no. 2015/12189 and decision
no. 2017/120, and dated November 30, 2017 with merit no. 2016/3773 and decision
no. 2017/6778, stated that the damages incurred by a board member should be
calculated in accordance with the provisions related to mandate contracts. The
Court then referred to Article 512 of the TCO, stating that the party who has
terminated the contract in an improper time (i.e. unjust termination) will be responsible
for the damages and the board member can claim wages until the end of his/her
term as a board member.

III. Conclusion

In
conclusion, the general assembly has broad powers to dismiss the board members
and the scope of such power is defined under Article 364 of the TCC. With
Article 364 of the TCC, the shareholders, through a general assembly
resolution, can use their right to dismiss board members by including an item
in the agenda or with just cause. In return, the same article granted board
members the right to claim damages under certain circumstances to provide
assurance to the board members, especially for the instances where the
dismissal is not based on just cause.

Authors: Gönenç Gürkaynak, Nazlı Nil Yukaruç and Defne Kahveci
of ELIG Gürkaynak Attorneys-at-Law

(First
published by Mondaq on December 6, 2019)

[1] Pulaşlı, Hasan, Şirketler Hukuku Şerhi, 3rd ed.,
Book I, January 2018, pg.944

[2] Pulaşlı, Hasan,
Şirketler Hukuku Şerhi, 3rd ed., Book II, January 2018, pg.1249-1250

[3] Pulaşlı, Hasan,
Şirketler Hukuku Şerhi, 3rd ed., Book I, January 2018, pg.942

[4] Kırca, İsmail/Şehirali Çelik,
Feyzan Hayal/Manavgat, Çağlar: Anonim Şirketler Hukuku Book I, Ankara, 2013,
pg.460

[5] Yargıtay 11.H.D.
, 9.1.2017, E.2015/12189, K.2017/120

[6] Erdem, Nuri, Anonim Ortaklık Genel
Kurul Toplantılarında Gündeme Bağlılık İlkesi Çerçevesinde Yönetim Kurulu
Üyesinin Azli, İstanbul Hukuk Mecmuası, 76/2, 2018, 503-528, 524

[7] Id.

[8] Id.

[9] Karaege, Özge, Anonim
Şirketlerde Genel Kurulun Yönetim Kurulu Üyelerini Görevden Alma (Azil) Yetkisi
(TTK m. 364), Ankara Barosu Dergisi, 2014/1, pg.104

[10] Erdem, Nuri,
Anonim Ortaklık Genel Kurul Toplantılarında Gündeme Bağlılık İlkesi
Çerçevesinde Yönetim Kurulu Üyesinin Azli, İstanbul Hukuk Mecmuası, 76/2, 2018,
503-528, 524