Squeeze Out Right (TCC Art. 208)
- The fundamental pieces of legislation that govern the transfer of shares of companies and minority rights within the Turkish legal system are the Turkish Commercial Code No: 6102 (the “TCC”) for nonpublic companies. The continuity and preservation of the ownership rights of any shareholder/partner in an entity/company are the basic norms and a fundamental tenet of the Turkish legal system. Currently, the concept of “squeeze-out” is a concept recognized by the TCC or in limited circumstances.
- The TCC envisages a squeeze-out right for majority shareholder holding at least 90% of the shareholding of a company under two occasions:
- in case of a disgruntled minority shareholder disrupting the activities or business; or
- in case of a merger with another company.
- Article 208 of the TCC which regulates the first possibility is as follows:
“If the controlling company who holds, directly or indirectly, at least 90 percent of shares and voting rights in a joint stock company and if the minority prevents the company from running its business, does not act in good faith, creates perceptible disruption or acts in a reckless manner, the controlling company can purchase the shares of the minority at stock exchange value, if any, or at the value determined in accordance with the method set forth in paragraph 2 of Article 202.”
And the related part of paragraph 2 of Article 202 provides that:
“…their shares must be purchased at stock exchange value if possible. If no such value exists or if the stock exchange value is not sufficient at actual values, or at a value to be determined in accordance with a method that is generally accepted, the data available at the date nearest to the date of the court order shall be the basis of this determination. The action for claim of compensation or purchase of shares is barred two years after the date of the resolution of the GA or of the date on which the board resolution is announced.”
- Application of the Squeeze Out Right in Turkish Law
- As per Article 208 of the TCC, the controlling company that would like to use the squeeze out right should directly or indirectly hold at least 90% of the shares and voting rights of the capital company. Since the squeeze out right can solely be implemented by a court decision, this percentage must be preserved until the date of the court decision. On the other hand, share and voting right criteria shall be taken into consideration together while calculating the ratio determined by TCC. From the perspective of exercising the squeeze out right, it does not matter how the ratio is exceeded.
- The minority shareholder(s) might abuse their provided minority rights in order to obtain benefits that are disproportionate to their legal status. To that end, they may choose to not attend the meetings when the qualified majority is required to do so, or they may obstruct the decision-making process by continually voting against resolutions. These behaviors which may result in a squeeze out of the minority shareholder(s) are illustrated through examples under Article 208 of the TCC. According to this provision, the controlling shareholder may apply to the court for the squeeze out of the minority shareholder(s), if the minority shareholder(s) prevent the company from running its business, do not act in good faith, create perceptible disruption or act in a reckless manner. The judge may evaluate whether the said actions are against good faith or not and the controlling shareholder shall have the burden of proof during the litigation.
- The share value to be paid to the minority shareholder(s) determined by the court is taken into consideration by the TCC when the controlling shareholder exercises its right of squeeze out. Article 208 of the Turkish Commercial Code states that, if available, the controlling shareholder may purchase the shares of the minority shareholder at stock-exchange value, and if such a value does not exist, they may be purchased at the value stated under Article 202/2. The second clause of Article 202 states that while the share value may be determined through the stock-exchange value, if this is not possible or if the stock exchange value does not correspond to a fair value, the share value may be determined through the net value (the balance sheet value), or through a value to be determined based on a commonly accepted method.
- How to Use the Squeeze Out Right
- Pursuant to Article 208 of the TCC, in the event of the specified conditions met, the controlling shareholder shall apply to the court for the squeeze out of minority shareholder(s). Therefore, during the process, which is started by the controlling shareholder filing a lawsuit against the minority shareholder(s), the court shall examine two important points and render a positive judgment. The first of these points is whether or not the ratio determined by TCC is exceeded by the controlling shareholder, and the second point is whether or not the minority shareholder(s) acted against the good faith principle through some unfavorable actions.
- In cases where these two conditions are met together, the court may rule for the squeeze out of the minority shareholder(s). Together with this decision, the shares belonging to the minority shareholder(s) will be transferred to the controlling shareholder. Apart from that, upon transfer of the minority shares to the controlling shareholder, a regulation guaranteeing the payment of the share value payment to the minority shareholder(s) have not been set forth under Article 208 of the TCC. In order to eliminate this kind of danger, we are of the opinion that the court may rule an interlocutory judgment about the payment of the share values within a determined time period and to a place of deposit determined by the court, before ruling the transfer of ownership. Within this interlocutory judgment, a warning may also be stated that a non-suit sentence may be ruled by the court in case the share values are not deposited within the determined time period.
- Due to the fact that the TCC does not define the conditions for the occurrence of such right, i.e. description of dishonesty or major trouble to be caused by the minority shareholder, the limits for the exercise of such squeeze-out right based on this ground are expected to be further delineated by the precedents of the commercial courts.