Dissolution Of A Corporation For Cause

• Introduction

While the articles of association of joint-stock companies may provide for certain provisions regarding the withdrawal of shareholders from the partnership, this option may not always be sufficient or feasible. Article 531 of the Turkish Commercial Code No. 6102 (“TCC”) provides a significant protective mechanism for minority shareholders in such situations. Particularly in closed companies where the transfer of shares is effectively impossible, a minority shareholder may find themselves economically "locked in" within the company. For a shareholder who cannot participate in company management, cannot receive dividends, and has no ability to dispose of their investment, this situation can cause serious hardship.

The legislature has granted the court the authority to intervene in extraordinary circumstances and has provided for the possibility of restructuring the partnership relationship where just cause exists.

• The Concept of Just Cause

Under Article 531 of the Turkish Commercial Code, “Where just cause exists, shareholders representing at least one-tenth of the capital—or one-twentieth in publicly traded companies—may petition the local commercial court where the company is headquartered to order the dissolution of the company. The court may, instead of dissolution, order the payment to the plaintiff shareholders of the actual value of their shares as of the date closest to the decision date and the exclusion of the plaintiff shareholders from the company, or may decide on another solution appropriate to the circumstances and acceptable to the parties.” Under this provision, it is evident that shareholders of a joint-stock company may petition the court for the dissolution of the company if just cause exists.

One of the most notable aspects of Article 531 of the Turkish Commercial Code is that the concept of “just cause” is not defined in the law. As seen in the statutory provision, an abstract regulation has been preferred, aiming to evaluate each corporate dispute within its own specific circumstances. Therefore, the existence of just cause is examined separately for each concrete case.

In accordance with the decisions of the Supreme Court and scholarly opinions, the systematic exclusion of minority shareholders from company management, the obstruction of their rights to information and inspection, the use of company assets for the benefit of majority shareholders, the failure to distribute profits for an extended period without a valid reason, managerial deadlock, the irreversible damage to the trust relationship among shareholders, the avoidance of holding important meetings by corporate bodies, the inability to maintain regular corporate management, the company’s inactivity, and the emergence of disputes that undermine the sustainability of the partnership relationship—particularly in family-owned companies—stand out as the primary circumstances considered in the assessment of just cause.

In light of the above, if significant disagreements arise within the company and, as a result, company operations come to a standstill, termination for just cause may serve as a viable solution. However, the grounds for termination must necessarily be of a nature that justifies the dissolution of the company¹.

• Alternative Solutions

Although the statutory text initially appears to mandate the dissolution of the company, the subsequent provisions grant the court considerable discretion. Accordingly, instead of dissolution, the court may order that the plaintiff shareholders be paid the actual value of their shares as of the date closest to the decision date and be removed from the company, or may decide on another solution appropriate to the circumstances and acceptable to the parties.²

The aim is to preserve the company’s economic value and prevent the severe consequences that might arise from dissolution. Indeed, dissolving a company that continues its operations, employs staff, and remains economically viable solely due to a dispute among shareholders is often not a fair solution.

Examples of situations not considered valid grounds under legal doctrine include cases where, even if they result in harm to the minority, the company’s purpose is altered through an amendment to the articles of association, or where there is a presence of concern or fear that the majority will abuse its existing power in the future.³

• Conclusion

Article 531 of the Turkish Commercial Code constitutes one of the most effective legal mechanisms for protecting minority shareholders in joint-stock companies. Particularly in situations where the relationship among shareholders has become unsustainable, management deadlocks have occurred, or minority rights have been systematically violated, this provision offers shareholders a significant legal recourse . However, in practice, it is evident that the purpose of a dissolution action based on just cause is not always to dissolve the company. Courts evaluate dissolution as a last resort while safeguarding the company’s economic existence and the continuity of its operations; in most cases, they prefer resolving the dispute through the purchase of shares at their fair market value or by implementing alternative solutions tailored to the specific circumstances. In this regard, Article 531 of the Turkish Commercial Code serves not merely as a mechanism for dissolution but also as a significant corporate dispute resolution tool that establishes a balance between the company’s continuity and the interests of minority shareholders.

Footnotes

1. Assoc. Prof. Dr. Emrullah KERVANKIRAN, Liquidation of a Joint-Stock Company, March 2022, p. 56.

2. Turkish Commercial Code, Art. 531.

3. Assoc. Prof. Dr. Emrullah KERVANKIRAN, Liquidation of a Joint-Stock Company, March 2022, page 57.

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