Private assembly of priviledged shareholders at joint stock companies pursuant to The New Commercial Code

The subject is the private assembly of preferred shareholders regulated in Article 454 of the Turkish Commercial Code No. 6102 (the ?TCC?). To determine the existence and the function of private assembly of preferred shareholders we should first understand the concept of preference, since, the primary condition for existence of the private assembly of preferred shareholders is existence of preference. In other words, with creation of preferences in the articles of association of a company the private assembly of preferred shareholders automatically forms without the need to mention it in the articles of association. Therefore, in the first part of our study we intend to give general information about ?preferences? and describe the basic principles regarding the same, based on which one can determine whether or not there is private assembly of preferred shareholders in a company. In summary, pursuant to the TCC, preference is a superior shareholders? right provided with respect to a certain subject and through a certain method to a group of shares, under the articles of association of a company (at the incorporation stage of the company or as amended thereafter) subject to a specific type of statutory protection. The first aspect to be considered about the preference is to determine in what respect the preference is granted, in other words, in order to determine the rights of a preferred shareholder it should be taken into consideration whether the superiority is in comparison to the rights of the remaining shareholders (theory of superiority in comparison to the shares) or to the rights given by law to the shareholders (theory of superiority with law). The reason why such distinction is so important is that whether or not preferences exist vary depending on which theory is accepted. In case theory of superiority with law is accepted, even if all shareholders have equal rights, if the granted to such shareholders are superior to the rights recognized by law then there may be preference. However, in case of theory of superiority in comparison to the shares, in the event where all the rights granted to the shareholders are equal it is not possible to mention the existence of preference. This has been an argumentative issue under the Commercial Code No. 6762, and has not been clarified in the TCC. However, in the text setting forth the reasoning of Article 478, of the TCC, it is clearly stated that although the theory accepted by the majority of scholars is the theory of superiority in comparison to the shares, such theory has been abandoned. In my opinion, the fact that this change is not reflected in the article itself and only mentioned in the reasoning is a significant deficiency. Another important matter to indicate about preferences is the limits of the rights which can be the subject matter of a preference. There is an important novelty on this matter in Article 478 of the TCC, which provides the option to create a preference by way of creating a new shareholders? right not provided under law. The current discussion in doctrine about this novelty is whether this provision contradicts with Article 370 of the TCC which specifies that one can only agree otherwise from what is provided by law to be set forth in the articles of association of a joint stock company if explicitly permitted so by law. In my opinion, Article 340 and Article 478 should not be interpreted as contradicting each other but, taking into consideration the fact that the law now explicitly recognizes creation of a preference by way of creating a new shareholder?s right, it should be accepted that all kind of rights can be subject matter of a preference, provided that there is no breach of the mandatory provisions of law. Finally, another matter that should be known about preferences is that the TCC provides an exception to the general rule pursuant to which ?a preference can only be granted to shares?. Accordingly, pursuant to Article 360 of TCC, preference in right of being represented in the board of directors, which has been for the first time legislated under the TCC, can be granted to shareholders with specific features or minority. The second subject of the first chapter of our study is the legal characteristic of the private assembly of preferred shareholders, the reason why it is provided and under which conditions it should gather. At this point, we must first explain the change in the perception of the concepts of preference and the private assembly of preferred shareholders in the TCC. Reviewing the reasoning text on Article 478 of the TCC, it is noted that the legislator did consider removing preferences wholly, but instead decided to re-regulate them with a restrictive approach, taking into consideration the disadvantages such a removal would create. Furthermore, this restrictive approach has been reflected to many of the new provisions set forth in Article 454. The main objective of the private assembly of preferred shareholders is to protect preferences of preferred shareholders. However, with the purpose of protecting the non-preferred shareholders, the legislator has re-regulated Article 454, taking into account the fact that the current mechanism of the private assembly of preferred shareholders hinders the non ?preferred shareholders? (i.e often the majority) usage of their rights. The private assembly of preferred shareholders is a special organ with limited authority. This was recognized under Article 389 of the Commercial Code No. 6762, and the fact that all general assembly decisions whereby the articles of associations is amended in a way to violate the rights of preferred shareholders? rights must be subject to the approval of the preferred shareholders, was set forth as the general rule. However, in the Commercial Code No. 6762, capital increase was regulated separately under Article 391 and this Article provided the general assembly decisions regarding capital increase to be subject to the approval of the preferred shareholders, regardless of whether or not such capital increase violates the rights of preferred shareholders. This distinction which was heavily criticized among the scholars has been removed in Article 454 of the TCC whereby the approval of the private assembly of preferred shareholders is required only if the preferences are violated for all type of general assembly decisions which amend the articles of association. One of the important novelties in the TCC is that registered capital system is now possible for non-public joint stock companies pursuant to Article 460 and the subsequent articles. In parallel with this, it is provided that, the general assembly decisions which give to the board of directors the authority to increase the capital, i.e. the decisions whereby the registered capital system is adopted, cannot be enforced until and unless approved by the private assembly of preferred shareholders. The second chapter of our study is about the regulations in the law concerning the meetings and decision making of the private assembly of preferred shareholders. The Commercial Code No. 6762 regulated the persons/organs authorized to call the private assembly of preferred shareholders for a meeting and the meeting and decision quorums. The detailed provisions regarding, meeting time, call procedure etc. was regulated under the secondary legislation (Komiserler Yönetmeliği). The TCC, however, sets forth in details all procedural rules and principles applicable to the meetings of the private assembly of preferred shareholders. First, it should be noted that there is an order between the preferred shareholders and the board of directors for the call for a meeting. Accordingly, the preferred shareholders can only call the private assembly of preferred shareholders for a meeting, by way of applying to courts and in the event and to the extent the board of directors does not call the assembly for a meeting with the period provided by law. In such case, if the preferred shareholders do not use their right to call the private assembly of preferred shareholders, the decision of the relevant general assembly or board of directors will be teemed as approved. Another important novelty in the TCC regarding the meeting and decision procedure is provision concerning negative decisions taken in the private assembly of preferred shareholders. Accordingly, in case the decision of the private assembly of preferred shareholders is negative, the assembly must follow a special procedure and otherwise the decision taken will be deemed as ?not taken?. Being deemed as ?not taken? is a new concept and there is no indication in the law as to which type of illegality such new concept refers to. Moreover, in the TCC unlike the Commercial Code No. 6762 the meeting quorums have been aggravated. Finally, in the third chapter, we have tried to evaluate under the title of ?Special Issues? the legal characteristic and effects of and legal means against general assembly decisions in breach of Article 454 or the decisions of private assembly of preferred shareholders in breach of law. Pursuant to the TCC, general assembly and board of directors decisions cannot be enforced without the approval of the private assembly of preferred shareholders. We believe that the discussions held in relation to the legal effects of the private assembly of preferred shareholders and the general assembly decisions not approved by the private assembly of preferred shareholders during the period when the Commercial Code No. 6762 was in force will still continue. In my opinion, the view among the majority of the scholars should prevail. In other words, the decisions of the private assembly of preferred shareholders should not affect the validity of the general assembly or the board of directors, but the validity of the actions and transactions taken based on such general assembly and board of directors decisions. Taking into consideration the legal nature of the rule regarding the private assembly of preferred shareholders (i.e. that such rule does not arise from public order), its breach should only result in the cancellation of actions and transactions taken further to such breach pursuant to the provisions regarding cancelation of general assemblies which should apply by analogy. The invalidity applicable to the decisions of the private assembly of preferred shareholders has been analyzed under a subheading in the third chapter. During the period when the Commercial Code No. 6762 was in force, whether the decisions of the private assembly of preferred shareholders can be cancelled, if so what types of decisions will be subject to such cancelation, and what will be the rules applicable in such lawsuits have been subject to discussions. We must say that Article 454 (paragraphs 7 and 8) give a response to such discussions to a certain extent. Accordingly, the board of directors can initiate a cancelation lawsuit against the preferred shareholders, for negative decisions taken by the private assembly of preferred shareholders, within one month as of the date when such decision is taken, based on the grounds that the relevant general assembly/board of directors? decision does not violate the rights of the preferred shareholders. I believe that the most critical issue here is that, the grounds for such a lawsuit is foreseen as the non-violation of the preferred shareholders? rights. In my opinion, this is contradictory with the rule which provides the violation of preferences as the main condition for the requirement to seek the approval of the preferred shareholders to be applicable. Accordingly, the ground for a cancelation lawsuit should be breach of the good faith principles. Although the legislator has explicitly regulated the cancelation lawsuits to be initiated against the decisions of the preferred shareholders, the fact that it has only limited such regulation to negative decisions should be criticized, since such restrictive approach creates question marks as to the legal characteristic of the positive decisions of the private assembly of preferred shareholders and whether they can be subject to cancelation lawsuits. Moreover, there is no explicitly as to whether the decisions of the private assembly of preferred shareholders can be deemed null and void or whether the negative decisions can be subject to cancelation for grounds other than as set forth under paragraph 7 of Article 454. In my opinion, it should be possible to claim the nullity or cancelation of these decisions as it is the case for general assembly decisions. The grounds based on which a decision of a private assembly of preferred shareholders is null and void should be the same as the grounds based on which a general assembly decision would be deemed null and void. However, since the decisions of private assembly of preferred shareholders are only in type of ?acceptance? or ?refusal?, they cannot be deemed invalid based on the invalidity grounds provided by law or accepted among scholars, but can only be deemed invalid because of approving a general assembly or board of directors? decision which is invalid. Lastly, the decisions of private assembly of preferred shareholders can be cancelled by way of analogy of the general provisions of the law.