Exit and Squeeze Out from Limited Liability Companies

Exit from a Limited Liability Company

Article 638 of the TCC regulates two main possibilities for the exit of a shareholder in a limited liability company. These are (i) the articles of association of the company may stipulate the right to exit and bind the exercise of this right to certain conditions, or (ii) in the presence of just cause, the request for exit from the court. In addition to these, under Article 639 of the TCC, a shareholder who has fulfilled one of the above-mentioned two reasons may also participate in an exit lawsuit filed by another shareholder.

Exit Based on the Reason Stipulated in the Articles of Association

Pursuant to Article 638/1 of the TCC, shareholders' right to exit may be regulated in the articles of association of the company. The exercise of this right may be subject to conditions to be determined in the articles of association, or it may be left free. These conditions may be for a certain situation or time interval. However, it should be noted that an arrangement granting the exit right to some shareholders and not granting it to others would be invalid pursuant to the principle of equal treatment set forth under Article 357 of the TCC.

When the conditions of the right to exit based on the articles of association are met (or if it is unconditionally regulated, at any time), the shareholder makes a declaration of exit to the company. This is an innovative declaration of will and, as a rule, is not subject to a form; however, if desired, the declaration of exit may be subject to a form in the articles of association.

Exit Based on a Just Cause

Exit from the company in the presence of just cause is regulated under Article 638/2 of the TCC. In order to exercise this right, it is not required to be stipulated in the articles of association.

In general terms, a just cause is a situation that makes the continuation of the partnership relationship impossible. This situation may arise from the affairs of the partnership or from the personal relations of the shareholders. Whether or not the shareholder is at fault in the occurrence of the situation is not important for the exercise of the right to exit.

Although just cause is not fully defined in the TCC, some situations are listed as just cause. For example, Article 245 of the TCC defines "a shareholder's betrayal of the company in the management affairs of the company or in the preparation of its accounts" or "a shareholder's failure to fulfill his/her primary duties and obligations" and similar cases as just cause. These cases listed in the Law are exemplary; whether there is a just cause in each concrete case is examined separately, taking into consideration the personal characteristics of the shareholder exercising the right to exit and the structure of the company.

In a decision of the 11th Civil Chamber of the Court of Cassation dated 2017^[1], it is stated that^[2] "Although there is no explicit regulation in the law on the concept of just cause for exiting the partnership of a limited liability company, the concept of just cause is accepted in the doctrine and in the practice of our Chamber as the situations that make the partnership relationship unbearable and cannot be expected from the shareholder to maintain the partnership relationship according to the rule of good faith. Although the concept of just cause must be appreciated by the court in each concrete case, the just cause must be in accordance with objective and objective measures."

Article 638/2 of the TCC stipulates that the right to exit shall be exercised through litigation in the presence of just causes. However, the doctrine accepts that the shareholder may submit a notice of exit to the company before the application to the court. If the company rejects this request, the shareholder may reiterate his/her request before the court.

The second sentence of Article 638/2 of the TCC is a provision that was not included in the Turkish Commercial Code No. 6762 and was adopted into the TCC from Swiss law. Under this sentence, if an exit lawsuit is filed for just cause, the judge may freeze some or all of the rights and obligations of the plaintiff arising from the shareholder or may take other measures to secure the status of the plaintiff shareholder.

Participation in Exiting

The right to participate in the exiting regulated under Article 639 of the TCC observes the principle of procedural economy and equal treatment. Pursuant to Article 639/1 of the TCC, if a shareholder files an exit request to the company or files an exit lawsuit, this situation shall be notified to the other shareholders by the managers. Among these shareholders, those who have grounds for exit may request from the managers or the court to participate in the exit within 1 month following the receipt of the notification.

The TCC has deliberately avoided including a clear provision on whether the reason for exit to be relied upon by the shareholder participating in the exit must be the same as the reason relied upon by the shareholder who has already submitted a request for exit. In the preamble of the Law, the discussions on this issue are left to the doctrine and judicial decisions. However, the court must evaluate the just cause separately for each shareholder.

Squeeze Out from Limited Liability Company

In a limited liability company, a shareholder may be squeezed out from the shareholder position in two cases. One of these situations is squeezed out by the decision of the Company in the presence of the reasons stipulated in the articles of association, and the other is squeezed out by a court decision in the presence of just cause.

Squeeze out by Company Decision

Under paragraph 1 of Article 640 of the TCC, the articles of association of a company may stipulate grounds for the squeeze out of a shareholder from the company by a general assembly resolution. However, these reasons must be objectively acceptable and in compliance with the principle of equal treatment. If these reasons are fulfilled, the relevant shareholder may be squeezed out of the company by a general assembly resolution. Under Article 621 of the TCC, this resolution may be adopted if at least two-thirds of the votes represented and the absolute majority of the entire share capital with voting rights are present together.

The squeezed-out shareholder may request the cancellation of the decision of the general assembly of shareholders from the court within 3 months following the notification of the decision through a notary public. As a result of this request, the judge basically examines whether the regulated reason has been fulfilled or not. The validity of the regulated reason is examined only with respect to personal rights and general morality; the validity of the reason is not examined whether the reason is justified or not, based on the assumption that the reason regulated in the agreement will be important for the shareholders. If the reason is in accordance with personal rights and general morality and the reason is realized, the request for cancellation of the general assembly resolution shall be rejected.

Squeeze out by Court Decision

In the presence of just cause, as in the case of exit, the company has the right to squeeze out the shareholder, regardless of the articles of association agreement. Pursuant to paragraph 3 of Article 640 of the TCC, only the company may file a lawsuit for the squeeze out of a shareholder from the company based on just cause. There is no provision in the law stipulating that a shareholder may request the squeeze out of another shareholder from the company.

In a decision of the 11th Civil Chamber of the Court of Cassation dated 2017^[3], "According to the claim, defence, collected evidence and the entire file scope, Article 640/3 and paragraph 3 of the TCC regulates the squeeze out of the shareholder from the Company by court decision in limited liability companies upon the request of the company in the presence of just cause, Pursuant to the aforementioned legal regulation, the lawsuit for squeeze out from the Company must be filed by the company, party status is a condition of the lawsuit and must be taken into consideration ex officio, in the concrete case, the company has more than two shareholders and the lawsuit was not filed by the company, the lawsuit was dismissed out of procedure in accordance with Articles 114/1-d and 115/2 of the CCP. and 115/2 of the Code of Civil Procedure. The decision was appealed by the plaintiff's attorney. According to the information and documents in the case file, and the fact that there is nothing contrary to the procedure and law in the discussion and evaluation of the evidence relied on in the reasoning of the court decision, all appellate objections of the plaintiff's attorney are not relevant".

In the established decisions of the Court of Cassation, it is stated that in order for the company to file this lawsuit, the general assembly must make a decision on this issue, and it is a condition of the lawsuit that the general assembly of the limited liability company adopts a decision in this context by a qualified majority in accordance with Article 621/1-h of the TCC before the limited liability company applies to the court for squeeze out of the shareholder for just cause.

Financial Settlement

Paragraph 1 of Article 641 of the TCC stipulates that "In the event that a shareholder leaves the company, he/she has the right to demand the financial settlement corresponding to the real value of his/her capital share." This provision introduces a regulation. In another decision of the 11th Civil Chamber of the Court of Cassation dated 2017^[4], the 11th Civil Chamber of the Court of Cassation stated that the financial settlement should be determined by determining the real value of the assets of the company as of the date closest to the decision date and that it is not appropriate to determine the amount corresponding to the share of the leaving shareholder over the balance sheet base value according to the company's book records.

Pursuant to paragraph 2 of the same article, the company may regulate the financial settlement in a different manner in its articles of association due to the right of exit stipulated in the articles of association of the company.

Article 642 of the TCC regulates that the financial settlement is due and payable at the time of separation if (i) the company is able to dispose of available equity, (ii) the shares of the departing shareholder are transferable, (iii) the share capital has been reduced in accordance with the relevant provisions.

Conclusion

Unlike joint stock companies, the TCC regulates provisions enabling exit or squeeze out from the limited liability company in the presence of just causes. In addition to the provisions mentioned in this study, Article 636/3 of the TCC regulates the squeeze out of the plaintiff who requests the termination of the limited liability company for just cause. In the commercial law order, where the continuity of the company is essential, another type of exit and squeeze out occurs as a result of termination lawsuits.