Turkish Law Blog

Not a Widely Enjoyed Right: Joint Stock Company Shareholders’ Right to Derivative Suit in Turkey

Müge Önal Başer Müge Önal Başer/ Müge Önal Legal Consultancy
23 June, 2019
167

Preamble

A derivative suit is a right granted to joint stock company shareholders, which was regulated under former Turkish Commercial Code No. 6762[1] and which is preserved in the “new” Turkish Commercial Code No. 6102[2] (the “TCC”) which came into force on 01 July 2012.

The subject matter of the derivative suit is basically claiming compensation of losses incurred by the company if the founders, board members, executives or liquidators negligently violate their obligations arising from the law and the articles of association. (Article 553 of the TCC) Each shareholder has the right to file this suit. (Article 555 of the TCC)

Limited liability company shareholders can also enjoy this right. (Article 644 of the TCC)

In this study, the derivative suit against the board members or executives (the “Executives”) in joint stock companies is examined.

I. Scope and Characteristics

The derivative suit is a lawsuit to be filed for the “losses of the company”. (Articles 555 and 1534(1) of the TCC) The distinction between “direct loss” and “indirect loss” sheds light on what should be understood from the losses of the company.

If a shareholder herself has suffered losses due to the actions of the Executives, this is the direct loss of the shareholder (loss of the shareholder)[3]; whereas if the company has suffered losses due to the actions of the Executives, this is the indirect loss suffered by the shareholder due to her shareholding in the company (loss of the company)[4], such as a decrease in the value of shares[5], inability to receive dividends, decrease in liquidation share[6], etc.

The shareholder shall ask for the compensation to be paid to her when she sues the Executives for the direct loss; this is a “direct suit”[7] and does not fall under the scope of the derivative suit.

The lawsuit to be filed by the shareholder to compensate the company for the losses suffered by the company is a “derivative suit”[8]. In this context, the shareholder may only request the compensation be paid to the company, but not to her[9]. (Article 555(1) of the TCC)

Only if the company is bankrupted, there is an exception to this rule. If the derivative suit is filed in the case of bankruptcy, the shareholders are given priority over the company in the distribution of the compensation to be awarded as a result of the lawsuit. (Article 556(2) of the TCC)

The fact that the compensation shall be paid to the company but not to the shareholders individually contributes to the equal benefit of all shareholders[10]. This is in line with the principle of equal treatment of shareholders, which is one of the basic principles for joint stock companies. (Article 357 of the TCC)

II. The Reason behind the Right to Derivative Suit

It may be expected that the company itself should file a lawsuit for claiming the company’s losses. However, if such losses arise from the actions of the Executives, it is possible that the company may not file a lawsuit for some legal or factual reasons[11]. That is why the legislator has granted the right to file the lawsuit for compensation of losses to each shareholder as well[12].

The deadlock in the decision-making process of the board of directors due to the management and representation provisions of the articles of association is an example of legal reasons[13]. Company’s negligence, responsible Executives’ presence in the company management, personal relations of the Executives with the other party of a transaction that cause losses to the company, are examples for factual reasons[14].

III. Conditions

Under Turkish law, the derivative suit is an independent lawsuit[15]; the shareholders do not have to wait for the company to take any action before filing this lawsuit. On the contrary, it grants the shareholders the right to file the lawsuit with the anticipation that the company (the Executives who manage the company) may not file the lawsuit[16].

Only if the company is bankrupted, there is an exception to this rule. (Article 556 of the TCC) In the case of bankruptcy of the company, the shareholders shall first have to wait for the bankruptcy administration to file the lawsuit, and if the bankruptcy administration fails to file the lawsuit, then the shareholders shall be able to file this lawsuit. (Article 556(2) of the TCC)

The plaintiff must be a shareholder at the date the lawsuit is filed[17]. Article 555(1) of the TCC, which states that “The company and each shareholder may claim compensation for the loss incurred by the company.”, is clear in this respect.

The Executives, against whom the derivative suit shall be filed, should not have been released from liability during the general assembly of the company. Otherwise, such decision shall exclude the shareholders’ right to file a lawsuit in respect of the matters covered by the release. (Article 558(2) of the TCC)

Statute of limitations should also be considered. The right to file the lawsuit against the Executives is time-barred by two years from the date the plaintiff shareholder has become aware of the losses and responsible Executives and in any case five years from the day the action which caused losses has occurred. If this action does also constitute a crime and criminal laws require longer statute of limitations, then the longer statute of limitations shall apply to this civil lawsuit as well. (Article 560 of the TCC)

IV. Basis of the Claim

The basis of the liability of the Executives towards the shareholders due to the company’s loss arising from the Executives’ violation of the law and the articles of association, contracts, as there is a contractual relationship between the Executives and the company[18].

In evaluating the acts of the Executives contrary to the contract, the “duty of care and loyalty” regulated under the TCC shall be considered. (Article 369 of the TCC) This duty obliges the Executives to perform their functions with the care of a prudent manager and protect the company's interests in good faith.

In the TCC Article Justifications, it is stated that the business judgment rule draws the boundaries of the prudent manager concept[19], however, there is no mention to the business judgment rule in the TCC itself. Thus, it is not possible to accept this as a criterion for the Executives’ duty of care[20].

The Executives’ degree of care is like the degree of care of an attorney-in-fact, as the relationship between the Executives and the company is acknowledged as an attorney and principal contract unless there is an employment contract[21].

In determining the liability of an attorney arising from the duty of care, the behavior expected from a prudent attorney who undertakes business and services in a similar field is taken as the basis. (Article 506(3) of the Turkish Code of Obligations No. 6098[22] (the “TCO”)) This is an objective criterion, which does not consider the personal knowledge, capacity, experience or education of the Executives who may be held liable[23]. This is a higher level of care when compared to the business judgment rule, because the business judgment rule makes a “presumption that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation’s best interest.”[24]

However, the legislator, considering that no superhuman behavior can be expected from the Executives[25], has limited their liability through stating that “No one shall be held liable for any breaches of law or articles of association or other corruption beyond his control; this non-liability cannot be overridden by citing the duty of care and loyalty.” (Article 553(3) of the TCC)

V. Burden of Proof

If a contract is breached, the person who violates the contract “is obliged to compensate the creditor's loss unless she proves that no negligence can be attributed to her. (Article 112 of the TCO) In line with this rule, when the TCC was first published in the Official Gazette[26], Article 553(1) on the liability of the Executives was stated as follows:

“If founders, board members, executives or liquidators violate their obligations arising from the law and the articles of association, they shall be liable for compensation towards the company, the shareholders and the creditors of the company unless they prove that no negligence can be attributed to them.”

In this version of the provision, in accordance with the TCO, the Executives’ negligence was considered as a presumption and the Executives were held liable for compensation unless they proved that they were not negligent.

Just before the TCC came into force on 01 July 2012, this provision was amended by the Law No. 6335 published in the Official Gazette on 30 June 2012[27], the presumption of negligence has been removed and the burden of proof has shifted. According to the new and current version of the provision:

“If founders, board members, executives or liquidators negligently violate their obligations arising from the law and the articles of association, they shall be liable for compensation towards the company, the shareholders and the creditors of the company.”

According to this new version of the provision, shareholders who shall file a derivative suit have to prove that the Executives are negligent, otherwise, the lawsuit may be dismissed[28].

Although this amendment is consistent with the general rule that the burden of proof falls to the plaintiff first[29], it is not easy for the shareholders to prove that the Executives are negligent, given that shareholders are not involved in company management in joint stock companies (Articles 408 and 375 of the TCC) and in this context the shareholders have limited access to information about the company under certain conditions. (Articles 437 and 438 of the TCC)

In addition to this drawback, the amendment also contradicts the principles of the TCO, the basic law governing debt relations[30]. Particularly for this reason, despite the new wording of Article 553(1) of the TCC, there are opinions of scholars commenting that this provision should be interpreted within the framework of the TCO[31].

However, considering that the legislator has specifically made this amendment, it is possible for the courts to read the TCC without taking into account the TCO[32], since the Justice Commission Report on the amending law makes it clear that the aim of the amendment was to put the burden of proof on the plaintiff[33].

VI. Legal Expenses

No collateral is required for filing the derivative suit. However, claiming that the Executives violated their obligations arising from the law and the articles of association may impair the company's reputation and thus the company may suffer losses if such claim lacks any basis.

The legislator's preference for this lawsuit was to encourage the shareholders to file the lawsuit. The TCC, regarding the legal expenses, states that:

“If the lawsuit filed by the shareholder is justified through legal and material reasons, the court shall distribute the litigation costs and the attorney's fees between the plaintiff and the company equitably, in cases where these expenses cannot be awarded to the defendant.” (Article 555(2) of the TCC)

This provision has brought a new approach in respect of the procedural law. In terms of the procedural law, the rule is to award the litigation costs and the attorney's fees on the party who loses the lawsuit[34]. (Articles 323 and 326 of the Law on Civil Procedure No. 6100[35] (the “Law No. 6100”)) According to this general procedural rule, if the plaintiff shareholder loses the derivative suit, the litigation costs and the attorney’s fees shall not be awarded to the defendant (the Executives). However, in this case, in accordance with the exceptional rule introduced by the TCC, the litigation costs and the attorney's fees may be distributed between the company and the plaintiff shareholder.

The reason behind this rule is the fact that under certain circumstances, the shareholder claims the company’s loss as a result of the company’s failure to do so for some “legal or factual reasons” as stated in part II above. If for these reasons, the derivative suit is justified, the company shall have to equitably contribute to the litigation costs and attorneys' fees, which shall be incurred by the shareholder as a result of the loss of the lawsuit. The legislator has introduced this rule anticipating that some shareholders may not consider filing a derivative suit because of litigation expenses and attorney’s fees[36].

VII. Court of Competent Jurisdiction

The derivative suit may be filed against the Executives at the commercial first instance court of the place where the headquarters of the company is located. (Article 561 of the TCC) The rules stated in Law No. 6100 on the court of competent jurisdiction, are reserved. The precondition of mandatorily applying to a mediator before filing a commercial lawsuit with a compensation claim under Article 5/A of the TCC, which was added to the TCC by the Law No. 7155[37] and came into force on 01 January 2019, should not be overlooked.

VIII. Courts’ Approach

The limited number of derivative suits were filed in Turkey. The main reasons why a derivative suit is filed are waste of company assets[38] and mismanagement[39].

The right to derivative suit, granting the shareholders the right to file a lawsuit for compensation of the company’s loss caused some of the first instance courts to render erroneous judgments in terms of legal standing. These courts dismissed the derivative suits on the ground that only the company may claim the losses it suffered and that the shareholders were not entitled to such a request, but the Supreme Court, in line with the apparent rule stated in Article 555(1) of the TCC, reversed these judgments[40].

The Supreme Court rendered a similar judgment in a derivative suit where the subject matter company was bankrupted. The first instance court dismissed the lawsuit on the ground that only the bankruptcy administration had legal standing, but the Supreme Court, in line with the apparent rule stated in Article 556(2) of the TCC, reversed this judgment[41].

Unfortunately, these judgments are not satisfactory enough to guide the derivative suit practice in Turkey. Once pending lawsuits are examined and concluded on the merits, there will be more to comment on.


[1] Published in the Official Gazette dated 09 July 1956 numbered 9353.

[2] Published in the Official Gazette dated 14 February 2011 numbered 27846.

[3] Akdağ Güney, Necla: Anonim Şirket Yönetim Kurulu, İstanbul 2012, p. 188; Pulaşlı, Hasan: Şirketler Hukuku Şerhi, V. II, Ankara 2014, p. 2045.

[4] Pulaşlı (Şirketler Hukuku Şerhi), p. 2048.

[5] TCC Article Justifications, TCC Draft and Justice Commission Report (1/324), 27 September 2007, https://www.tbmm.gov.tr/sirasayi/donem23/yil01/ss96.pdf (Article 555) (Accessed 13 June 2019).

[6] Akdağ Güney, p. 190.

[7] Yongalık, Aynur: Şahıs Şirketlerinde Ortak Davası (Actio Pro Socio), Ankara 2010, p. 20.

[8] Yongalık, p. 42, p. 65.

[9] Yongalık, p. 20.

[10] Yongalık, p. 65.

[11] Yongalık, p. 43-44.

[12] TCC Article Justifications (Article 555).

[13] Yongalık, p. 44.

[14] Yongalık, p. 44.

[15] Yongalık, p. 70.

[16] TCC Article Justifications (Article 555).

[17] Yongalık, p. 62-63; Pulaşlı, Hasan: Şirketler Hukuku Genel Esaslar, Ankara 2017, p. 703.

[18] Hacımahmutoğlu, Sibel: “The Business Judgment Rule: İşadamı Kararı mı Yoksa Ticari Muhakeme Kuralı mı?”, BATİDER 2014, V. 30, I. 4, p. 129; Pulaşlı (Şirketler Hukuku), p. 703; Bozkurt, Tamer: Şirketler Hukuku, Ankara 2018, p. 240, p. 474.

[19] TCC Article Justifications (Article 369).

[20] Hacımahmutoğlu, p. 139.

[21] Hacımahmutoğlu, p. 129; Pulaşlı (Şirketler Hukuku), p. 703; Bozkurt, p. 240, p. 474.

[22] Published in the Official Gazette dated 04 February 2011 numbered 27836.

[23] Hacımahmutoğlu, p. 136; Eren, Fikret: Borçlar Hukuku Özel Hükümler, Ankara 2017, p. 731.

[24] Black’s Law Dictionary, St. Paul, MN 2004, p. 212.

[25] TCC Article Justifications (Article 553).

[26] Official Gazette dated 14 February 2011 numbered 27846.

[27] Official Gazette dated 30 June 2012 numbered 28339.

[28] Arslan, Ramazan/Yılmaz, Ejder/Taşpınar Ayvaz, Sema: Medenî Usul Hukuku, Ankara 2017, p. 379.

[29] Arslan/Yılmaz/Taşpınar Ayvaz, p. 380.

[30] Bozkurt, p. 473.

[31] Pulaşlı (Şirketler Hukuku Şerhi), p. 2109; Bozkurt, p. 474.

[32] E.g., 23rd Civil Chamber, 06 February 2019, E. 2016/2905 K. 2019/301, https://www.lexpera.com.tr/ (Accessed 13 June 2019).

[33] Draft Law Amending the TCC and the Law on the Effectiveness and Application of the TCC, and the Justice Commission Report (1/630), 18 June 2012, https://www.tbmm.gov.tr/sirasayi/donem24/yil01/ss303.pdf (Accessed 13 June 2019).

[34] Arslan/Yılmaz/Taşpınar Ayvaz, p. 715.

[35] Published in the Official Gazette dated 04 February 2011 numbered 27836.

[36] TCC Article Justifications (Article 555).

[37] Published in the Official Gazette dated 19 December 2018 numbered 30630.

[38] E.g., 11th Civil Chamber, 02 March 2016, E. 2015/7914 K. 2016/2291; 1st Civil Chamber, 03 November 2015, E. 2015/11996 K. 2015/12510; 1st Civil Chamber, 10 June 2015, E. 2014/6572 K. 2015/8667, https://www.lexpera.com.tr/ (Accessed 13 June 2019).

[39] E.g., 11th Civil Chamber, 01 June 2015, E. 2015/2592 K. 2015/7421; 11th Civil Chamber, 04 March 2015, E. 2014/18180 K. 2015/2931, https://www.lexpera.com.tr/ (Accessed 13 June 2019).

[40] E.g., 1st Civil Chamber, 03 November 2015, E. 2015/11996 K. 2015/12510; 1st Civil Chamber, 10 June 2015, E. 2014/6572 K. 2015/8667; 11th Civil Chamber, 04 March 2015, E. 2014/18180 K. 2015/2931, https://www.lexpera.com.tr/ (Accessed 13 June 2019).

[41] 11th Civil Chamber, 02 March 2016, E. 2015/7914 K. 2016/2291, https://www.lexpera.com.tr/ (Accessed 13 June 2019).

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