Deadlock in Joint Stock Companies

Deadlock

In practice and the doctrine, deadlock is defined as a situation in which the members of the bodies of a joint stock company or shareholders vote differently or do not attend the meeting due to differences of opinion or conflicts of interest, and as a result of such reasons, the company body becomes unable to take decisions on any matter or on matters that are important for the activities and functioning of the company under the valid meeting and decision quorums.^[1] 

Companies whose main purpose is to generate economic benefits are expected to provide direct/indirect value first to their shareholders, then to their employees and also to other people with whom they have commercial relations, and perhaps even to the national economy, depending on the scale of the company. However, when a company enters a state of deadlock and loses its functionality, the company becomes unable to take any action. It is quite likely that a company in this situation will not be able to keep its current status quo, and also lose value and incur losses day by day. The micro- and macro-scale damages arising from this situation mean that the company will cause negative effects on the outside world. 

This deadlock between shareholders and/or board members can prevent the company from taking action on even the simplest issues. In such cases, how the company will be able to function again should be determined with the correct legal instruments before the company enters a state of deadlock. Otherwise, it may be left to the discretion of the dispute resolution authorities as the only remedy to rescue the company, which is already in an immobilized state. 

Appearances of Deadlock

Deadlocks may occur in general assemblies or boards of directors of joint stock companies. In these bodies, which are composed of multiple shareholders and board members, deadlocks may occur in various ways. Below, various appearances of deadlock in terms of general assemblies and boards of directors are discussed. 

In terms of General Assembly

Firstly, the possibility that the general assembly cannot convene from the very beginning due to the failure to meet the meeting quorum will be discussed. Under Article 418 of the Turkish Commercial Code No. 6102 ("TCC"), general assemblies convene with the presence of the shareholders or their representatives who hold shares representing at least one-fourth of the share capital, except in cases where the TCC or the articles of association stipulate a higher quorum. Especially in cases of aggravated quorum, the absence of certain shareholders from the meeting may lead to failure to meet the quorum. However, it should be noted that under Article 418 of the TCC, if the quorum is not reached in the first meeting (except in cases where there is a special provision), no quorum shall be sought for the second meeting to be held. Therefore, it can be said that the failure here will not last for a period which can be defined as a deadlock.  

Another appearance may be that the general assembly is never called for a meeting. As a general principle, the authority to convene the General Assembly belongs to the board of directors. If the Board of Directors does not convene the General Assembly (or fails to convene the General Assembly due to a deadlock in the Board of Directors), the General Assembly may become unable to convene. In this case, as a solution, even a single shareholder may convene the general assembly with the permission of the court under Article 410 of TCC. Therefore, this scenario is also likely to be resolved without turning into a deadlock.

Although the meeting quorum for the general assembly meeting is met, failure to meet the quorum for the resolution of the issues on the agenda may lead the company to a deadlock situation. There are opinions that to talk about a deadlock situation, either no decision should be taken on any issue or at least no decision should be taken on important issues that are indispensable in terms of the shareholding structure or activities.^[2] A deadlock may also occur if the general assembly constantly rejects the agenda items or if there is constant equality in the decisions to be taken.^[3] Another possibility is that shareholders who are granted "veto rights" and whose affirmative votes are required on certain issues may prevent the company's decisions on strategic issues by continuously voting negatively on these issues.

In terms of Board of Directors

Under Article 390 of the TCC, unless there is an aggravating provision to the contrary in the articles of association, the board of directors convenes with the majority of the total number of its members and takes its decisions with the majority of the members present at the meeting. If these quorums cannot be reached due to the non-attendance of certain member(s), the board of directors may become unable to take resolutions and a deadlock may occur. Another possibility is that the votes cast at the meeting are equal despite the meeting quorums being met. Under Article 390/3 of the TCC, if the votes are equal, the matter shall be discussed at the next meeting. If there is equality in the second meeting as well, the proposal in question shall be deemed rejected. Thus, the Board of Directors can be deadlocked as a result of equal voting.

Similar to the general assembly, there may be a possibility that the board of directors is never called for a meeting. Under Article 392/7 of TCC, each member of the board of directors may request the chairman in writing to call the board of directors for a meeting. There are opinions in the doctrine that in cases where the call is not made by the chairman of the board of directors, the decisions taken at that meeting shall be deemed as "null and void". Therefore, since the decisions taken in the board of directors meeting that is not duly convened are null and void, it is considered that a deadlock may occur.^[4] 

Contractual Solution Mechanisms

Solution by Negotiations

The solution to the deadlock situations mentioned above may be regulated in the shareholders' agreement to be signed by the shareholders of the company. Here, the definition of the deadlock, the duration of the deadlock, the solution mechanisms to be applied and how the solution mechanisms will operate should be regulated in detail. Thus, how these problems will be overcome can be determined in advance before the company becomes unable to function. 

Firstly, a process can be designed under the shareholders' agreement for the solution of the deadlock by the parties themselves. Within the scope of this process, a certain period may be stipulated for the parties to solve the deadlock. Here, the parties are expected to make efforts to resolve the problem amicably and in good faith. 

If the parties are unable to resolve the problem on their own within the stipulated period, it may be arranged that the problem will be resolved by a third party or a committee. This process, which will be jointly designed by the parties before the deadlock occurs, may help to resolve the deadlock more quickly and easily.

Solution by Share Options

The main mechanisms regulated in shareholders' agreements for deadlocks are share options. If a call option is granted, a shareholder has the right to purchase some or all of the shares of other shareholders. If a put option is granted, a shareholder may sell some or all of its shares to other shareholders. As for the tag-along right, when a shareholder sells their shares, other shareholders have the right to participate in this sale. If it is desired that other shareholders shall be obliged to sell their shares, a drag-along right can be regulated. For detailed information on these options, please refer to our article titled "Options and Similar Rights of Shareholders in Respect of the Shares of Joint Stock Companies".^[5] 

Finally, shoot-out provisions may be considered as a solution to deadlock. Under the shoot-out provisions, in the event of a deadlock, each shareholder has the right to initiate a procedure that results in the transfer of all of the shares of the other shareholder to itself or, on the contrary, the transfer of all of its shares to the other shareholder. However, unlike the call or put options, in this procedure, it is not initially clear which of the two shareholders will acquire the company shares and at what price. Which shareholder will exit the company by transferring his shares and the price to be paid for the shares to be acquired will be shaped according to the course of the procedure.^[6]

Legal Solution Mechanisms

If the deadlock cannot be resolved, especially in cases such as the failure of the general assembly to convene or the failure to elect the members of the board of directors whose terms have expired, it is also possible to request the dissolution of the company on the grounds of lack of company bodies under Article 530 of TCC.^[7]   

Under Article 530 of the TCC, if one of the legally required bodies of the company is absent for a long period, or if the general assembly is unable to convene, upon the request of the shareholders, the company's creditors or the Ministry of Customs and Trade, the commercial court of first instance in the place where the company's head office is located shall, after hearing the board of directors, set a deadline for the company to bring its situation into compliance with the law. If the situation is not corrected within this period, the court shall decide to dissolve the company. If the expression "for a long period" in the article coincides with the state of deadlock, this article may be applicable. 

There are opinions that deadlock may also constitute a just cause for the dissolution of the company within the scope of Article 531 of TCC. Under Article 531 of the TCC, in the presence of just cause, the holders of the shares representing at least one-tenth of the share capital and twentieth in publicly traded companies may request the commercial court of first instance in the place where the company's head office is located to decide on the dissolution of the company. Instead of dissolution, the court may order the plaintiff shareholders to pay the real value of their shares as of the date closest to the date of the decision and to remove the plaintiff shareholders from the company, or to make an appropriate and acceptable settlement.