The Members of the Board of Directors' Release: Analyzing Court of Cassation Decisions

Legal Nature and Effect of the Release Decision

The release decision, which has a constitutive novelty, cannot be revoked by a subsequent general assembly resolution. A general assembly resolution to the contrary shall be null and void. However, the right to file an annulment lawsuit for the general assembly resolution to which the release resolution is subject is reserved. 

The general assembly resolution of the company to release the company from liability shall extinguish the right of action of the company, the shareholders who voted in favor of the release, and the shareholders who acquired shares with knowledge of the release decision, concerning the material events described in the release. If a liability lawsuit is filed by the company against the members of the board of directors despite the release decision, the defendants may assert the release as a defense. Shareholders who disagree with the release resolution may file a liability lawsuit against the board members whose release has been resolved within six months. Regardless of the release resolution, the right of the creditors to file a liability lawsuit against the board of directors is reserved. The members of the board of directors may not assert the release resolution against the creditors.

Release Decision in Joint Stock Companies and its Scope

Under Article 408 of the TCC, resolutions regarding the discharge of the members of the board of directors are among the duties and powers that the general assembly cannot delegate. In this context, the general assembly resolution to approve the balance sheet shall result in the release of the members of the board of directors, managers and auditors, unless there is an explicit provision to the contrary in the resolution. A resolution of release in the form of approval of the balance sheet is considered an implicit release as per the doctrine. Regardless of the approval of the balance sheet, an explicit release decision may also be resolved by including a separate item in the agenda. Although, the release of the members of the board of directors is included in the agenda of the ordinary general assembly meeting under the Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Ministry Representatives to be Present at these Meetings, it does not have to be included in the agenda of the general assembly meeting but may also constitute the subject matter of the extraordinary general assembly meeting, as it is understood from the wording of Article 424/1 of TCC.

Under Article 424 of the TCC, the approval of the balance sheet shall not give rise to the effect of release, even if the agenda does not include a separate item for release, if certain matters are not stated in the balance sheet at all or as required, or if the balance sheet contains certain matters that prevent the real situation of the company from being apparent, and if this is done deliberately. This regulation is similarly reflected in the doctrine. Tekinalp states that by stating that the balance sheet has been approved, the members of the board of directors cannot claim that they have been released from events that are not directly or indirectly included in the balance sheet, but which give rise to legal liability (such as making an investment decision without conducting a serious market research, not entering a tender in favor of a competitor but related to the controlling shareholder, or withdrawing the joint stock company from the tender, etc.)^[1]. 

The general assembly may adopt a special release resolution by limiting or expanding the scope of release in terms of time, person and subject matter. However, a general release resolution may also be adopted for all members of the board of directors for the relevant accounting period without any limitation. In a case subject to the Court of Cassation Decisions, damages were claimed from a released board member^[2]. The defendant board member argued that he was released thus, he was not liable. However, the Court of Cassation ruled that the defendant, who used the budget for his personal expenses without a board decision, was not liable and the decision was reversed in favor of the defendant.

Litigation Rights of the Discharged Board Member 

The release of the members of the board of directors has been the subject of many Court of Cassation decisions. The subject of this article is a decision^[3] concerning the non-release of a board member who holds a 10% share in a company. In the case in question, the claimant, who is a member of the board of directors, is not released at the ordinary general assembly meeting which he could not attend.

The claimant stated that there was no reasonable justification for not releasing him, that this decision taken by the general assembly was arbitrary and that the major shareholder of the company did not release him to gain unfair advantage. The claimant requested the annulment of the decision since it is contrary to the provisions of the articles of association and especially the rule of honesty.

The Commercial Court of First Instance ruled that since no irregularities were detected in the books and documents of the company, including the annual activity report, income and expense statement, balance sheet and auditor's reports, there is no need to annul the decision of the general assembly regarding approval the financials. The release decision is annulled due to a violation of the rule of good faith. The Commercial Court of First Instance justified by stating the release of the other members of the board of directors other than the claimant, the fact that no irregularity of the claimant was detected in the company records, and the fact that there was no explanation for not releasing the claimant in the decision in question, although it is not a legal obligation to explain the reason for a negative decision taken in the general assembly.

The defendant submitted the file before the Criminal Court of First Instance as evidence in his defense. The case before the Criminal Court of First Instance was filed for the alleged abuse of power of attorney by the plaintiff board member and the crime of abuse of office. The Commercial Court of First Instance, on the other hand, determined that the filing of this lawsuit was not sufficient because the suspect's powers were based on a special power of attorney, there was no action of the suspect that would cause damage to the company, and there were no irregularities in the books and documents of the company in the financial examination of the company. Upon the appeal of the case by the defendant, the issue of release was examined by the Court of Cassation. 

The Court of Cassation underlined that the general assembly has a wide discretionary power for determining release by stating that this power is not unlimited. The Court of Cassation stated that the general assembly is obliged to release a board of directors that accounts for the transactions of the activity period with an unproblematic balance sheet and annual report, and that refraining from releasing the board of directors without any concrete reasons would be contrary to the rules of honesty.

Conclusion

Release is an institution that ends the liability of the members of the board of directors. However, the release should not be a guarantee that removes all kinds of responsibilities for the board members. Board members should consider the possibilities where the approval of the balance sheet may not be deemed as a release resolution, and the limited circumstances where the release resolution may be limited. As a rule, a resolution of release prevents the company and the shareholders who voted for the release from bringing a liability action against the board members, but it does not in any way prevent creditors from bringing a lawsuit.