Introduction
The most important and fundamental objective of
incorporated companies is to generate profit at the end of their operating
periods and to distribute such profit obtained. This objective has a nature
that cannot be waived or eliminated. However, this does not mean that every
profit earned must necessarily be distributed. The right to dividends granted
to shareholders is subject to certain limitations. Such limitations arise from
the necessity to preserve the company’s economic stability and to ensure the
continuation of its development.
Dividends are defined as the specific and determinable
portion of the profit, the distribution of which has been resolved by the
general assembly, that must be paid by the company to each shareholder [1].
Article 507 of the Turkish Commercial Code (“TCC”) defines the right as
follows: “Each shareholder is entitled to participate in the net period profit
resolved to be distributed to shareholders in proportion to their shares, in
accordance with the law and the provisions of the articles of association.” Dividends
may be granted not only to shareholders but also to certain persons specified
by law. Furthermore, provided that there is a provision in the articles of
association, profit shares may also be allocated to usufruct right holders,
holders of usufruct certificates, founders, and members of the board of
directors.
Resolution on the Distribution of Dividends
The authority to decide on the distribution of
dividends belongs to the general assembly. This authority is set out under the
TCC [2]. However, in order for a resolution on dividend distribution to be
adopted, a proposal must first be prepared by the board of directors.
Subsequently, this proposal must be submitted to the general assembly (TCC Art.
437/I). The dividend distribution proposal prepared by the board of directors
must be made available for the examination of shareholders at the company’s
headquarters and branches at least fifteen days prior to the general assembly
meeting, in an appropriate manner (TCC Art. 437/I). The resolution on dividend distribution
must be adopted by the general assembly by taking into consideration the
proposal together with the financial documents, accounts, and financial
statements. The authority to decide on dividend distribution is listed among
the non-transferable powers of the general assembly under the Law.
While adopting a resolution on dividend distribution,
the general assembly must take into consideration the provisions of the law and
the articles of association. Otherwise, such circumstance would require the
annulment of the general assembly resolution. The provisions of the articles of
association setting out dividend distribution must comply with the mandatory
provisions of the law and the nature of the dividend right [3]. If the articles
of association do not contain any provision regarding dividend distribution,
the resolution on dividend distribution must be adopted freely, provided that
it is in compliance with the law.
Annulment of the Resolution on Dividend Distribution
The annulment of general assembly resolutions is set
out under Article 445 of the TCC. Pursuant to this provision, if a resolution
adopted by the general assembly is contrary to the law, the articles of
association, or the principle of good faith, an action for annulment may be
filed before the commercial court of first instance, seated at the company’s
headquarters, in three months. The general assembly resolutions subject to
litigation shall remain valid until a judgment is rendered. An annulment action
may be brought in three months as of the date on which the resolution was
adopted, and this period is a peremptory time limit. Company shareholders have
the right to request the annulment of the general assembly’s decision either to
distribute or not to distribute dividends [4]. However, in cases where the
general assembly has not adopted any resolution regarding the distribution of
dividends, it is not possible to file an annulment action, since there is no
resolution that can be subject to annulment. The subject matter of an annulment
action is a legally existing resolution of the general assembly. Indeed, under one
of its decisions, the Court of Cassation explicitly stated that it is not
possible to request the annulment of a non-existent general assembly
resolution.
Annulment of the General Assembly Resolution
The general assembly is the highest decision-making
and governing body of an incorporated company. For this reason, resolutions
adopted by the general assembly are binding on all shareholders. Where the
conditions for annulability are met, such resolutions may be annulled, thereby
preventing them from producing legal effects and consequences. This matter is set
out under Article 445 of the TCC. Through this provision, limitations are
imposed on shareholders holding majority voting power and on those who could
otherwise pass resolutions at will. In this context, an annulment action may be
brought against general assembly resolutions. In order for such an action to be
filed, the resolution must be contrary to the law, the articles of association,
or the principles of good faith. The Law also sets out the persons entitled to
bring this action and the time limits within which it must be filed. The
persons listed under the Law may file an annulment action in three months
before the commercial court of first instance seated at the place where the
company’s headquarters is situated. The persons entitled to bring such an
action are set out under Article 446 of the TCC. Accordingly; the following
persons may bring an annulment action:
-
Shareholders who were present at the meeting and voted
against the resolution and had their dissenting vote duly recorded in the
minutes;
- Shareholders, whether they attended the meeting or
not, regardless of whether they voted against or in favor, who allege that: the
meeting was not duly convened, the agenda was not properly announced, persons
or their representatives who were not entitled to attend the general assembly
participated and voted, they were unlawfully prevented from attending or
voting, and that the aforementioned irregularities affected the adoption of the
resolution;
-
The board of directors;
-
Each member of the board of directors, if the
implementation of the resolutions would result in their personal liability.
The legal nature of the annulment decision is that of
a destructive formative right. Since the annulment of general assembly
resolutions is a right that seeks the retroactive elimination of a resolution
from the date it was adopted, it constitutes a destructive formative right. The
exercise of this right is possible only through litigation, pursuant to Article
445 of the TCC [5]. In light of all the foregoing, an action for annulment
brought against general assembly resolutions is a destructive formative action
in legal nature, and the judgment rendered as a result of such action is a formative
decision. [6]
The Effect of the Court Judgment in an Annulment Action
A court judgment annulling a general assembly
resolution produces legal effect only upon becoming final. Until the judgment
becomes final, the general assembly resolution continues to produce its legal
effects.
Provided that an annulment action has been filed, it
is also possible to request the suspension of the execution of the general
assembly resolution. The court may decide to stay the execution after hearing
the members of the board of directors and the auditors. At the same time, if
the court considers that it is in the interest of the company, it may also
order the suspension of execution without hearing the members of the board of
directors and the auditors. There are also decisions of the Court of Cassation
adopting this view.
Conclusion
In an annulment action brought against a general
assembly resolution not to distribute dividends, the court may decide not to
annul the resolution. In order for annulment to be granted, the resolution must
have been adopted in violation of the articles of association or the law, as
explained above. Likewise, if the general assembly has not adopted any
resolution regarding the distribution of dividends, an annulment action cannot
be filed in such a case either.
The general assembly is not always obliged to adopt a
resolution on dividend distribution. A resolution not to distribute dividends
may also be adopted due to the need to preserve the company’s economic
stability and ensure the continuation of its development. As long as this
situation does not become continuous, it will not be annulled by the court. The
non-distribution of dividends must not become a permanent practice. These
resolutions adopted by the general assembly must comply with the principle of
good faith set out under Article 2 of the TCC. In several decisions, the Court
of Cassation has also emphasized that this right must not be abused.
Accordingly, it is understood that when assessing the validity of resolutions
concerning dividend distribution, not only the company’s economic
justifications but also whether the resolution was adopted in good faith must
be examined.
Fatma Şengün, Legal Intern
References:
1. Ünal, O.
Kürşat, Sermaye Piyasası Mevzuatında Birinci Temettü ve Sermaye Piyasası
Değişiklik Tasarısında Bu Konuda Öngörülen Yenilikler (First Dividend in
Capital Markets Regulations and the Innovations Envisaged in the Draft
Amendments to Capital Markets Regulations), Yaklaşım Dergisi, Issue: 64,
September 1998, p. 43; Canözü, Salih, Anonim Şirketlerde Kâr Payının Tespiti ve
Dağıtılması (Determination and Distribution of Dividends in Incorporated Companies),
2nd ed., Ankara, 2016, pp. 23–24.
2.
Ateşağaoğlu, 2012, p.79.
3. Birsel,
1998, p.137
4. Erem, p.180.
5. Önen, p.
14; Kuru ve Budak, p. 209
6. Anonim
Ortaklıklarda Genel Kurul (General Assembly in Incorporated Companies), Istanbul,
2004, p. 249; Bahtiyar, Partnerships, p. 206; Çamoğlu (Poroy/Tekinalp) p. 543;
Önen, p. 116.
