Reasons for Annulment of the General Assembly Resolution

THE NATURE AND FUNCTION OF THE GENERAL ASSEMBLY IN JOINT STOCK COMPANIES

Joint-stock companies are structures where capital is divided into shares, and capital takes precedence over individuals. Their operation is based on a democratic decision-making mechanism, the heart of which the General Assembly. To understand the process of annulling General Assembly decisions, it is first necessary to clarify what this body is, its powers, and its hierarchical relationship with other organs of the company.

1. What is a General Assembly?

The general assembly is the highest decision-making body of a joint-stock company, where shareholders exercise their rights and express their will regarding company affairs. the Turkish Commercial Code No. 6102 (TTK) , the general assembly is not an executive body, but a "decision-making and oversight" body. While the daily operations of the company are managed by the Board of Directors, strategic decisions that alter the company's fundamental structure or determine its future are made by the general assembly.

The general assembly consists of all shareholders of the company. Shareholder rights (voting rights, right to information, etc.) are exercised here. The decisions taken by the general assembly are binding on all shareholders and company bodies, regardless of whether they are present at the meeting or whether they vote for or against the decision.

2. Non-transferable Powers of the General Assembly (Turkish Commercial Code Article 408)

The power of the general assembly is not unlimited; however, the legislator has reserved certain powers exclusively for this body and prohibited the transfer of these powers to another body (for example, the Board of Directors). Article 408/2 of the Turkish Commercial Code, some of the non-transferable powers of the general assembly are as follows:

• Amendment of the Articles of Association: Changing fundamental rules such as the company's name, headquarters, purpose, or capital structure.

• Election and Dismissal of Board Members: Determining and removing the individuals who will manage the company.

• Approval of Financial Statements and Dividend Distribution: The company's financial situation is deemed satisfactory, and a decision is made on how the profits will be distributed.

• Company Dissolution (Liquidation): A declaration of intent to terminate the legal personality of a company.

• Significant Asset Sale: Radical decisions such as divesting a large portion of the company's assets.

3. Procedures and Types of General Assembly Meetings

General assemblies are divided into two categories according to the time they convene:

1. Ordinary General Assembly: It is mandatory to convene within three months of the end of each fiscal year (usually by the end of March). Routine but vital matters such as financial statements, approval of the board of directors, and election of members whose terms have expired are discussed at this meeting.

2. Extraordinary General Assembly: A meeting convened whenever the interests of the company so require, without being bound by a specific time frame.

The procedure for calling meetings Article 410 and subsequent articles of the Turkish Commercial Code. Procedures such as publication of announcements in the Turkish Trade Registry Gazette and sending registered mail to shareholders form the basis of the most frequently cited allegations of "irregularity" in lawsuits challenging the decisions of general assembly meetings.

4. The Legal Nature of the General Assembly: A Mechanism for Declaring Will

The general assembly transforms the will of numerous shareholders into a single "company will." However, the danger of "majority rule" always exists when this will is formed. To protect against the possibility of large shareholders making decisions that harm smaller shareholders, the legal system has designed judicial review (annulment action) of general assembly decisions as a safety valve.

At this point, the functioning of the general assembly the Principle of Integrity (Article 2 of the Turkish Commercial Code) . Even if a decision appears formally compliant with the law, if its sole purpose is to oppress the minority or to secure an advantage contrary to the company's interests, this renders the general assembly decision invalid.

5. Decision-Making Process and Quorums

For decisions made at the general assembly to be valid, certain quorum requirements must be met. While Article 418 of the Turkish Commercial Code (TTK ) regulates the general quorum, Article 421 requires higher quorums for more serious matters such as capital increases or mergers . Decisions made without complying with these quorums are directly subject to annulment proceedings and may be deemed "null and void" by the court.

In conclusion

The general assembly is the domain of sovereignty of a joint-stock company. However, this sovereignty is bounded by the principles of the rule of law and the mandatory rules of corporate law. The "Annulment Action,", is the most powerful weapon available to shareholders when these boundaries are crossed. Understanding the nature and operating procedures of the general assembly is the first and most important step in understanding why and how a decision can be annulled.

REASONS FOR THE INVALIDITY AND ANNULMENT OF GENERAL ASSEMBLY DECISIONS

General assembly decisions take effect on the company and all shareholders from the moment they are made. However, these decisions can be reviewed through legal means if they are contrary to the law, the articles of association, or the principle of good faith.

1. Legal Basis: Turkish Commercial Code Article 445 (Grounds for Annulment)

For general assembly decisions to be subject to annulment proceedings, in Article 445 of the Turkish Commercial Code No. 6102 must exist:

1. Illegality: The decision violates mandatory legal rules (e.g., failure to comply with the quorum requirement for the meeting).
2. Breach of Articles of Association: Violation of the provisions of the articles of association, which constitute the company's own "constitution".
3. Violation of the Principle of Good Faith: Even if the decision appears to be lawful, it is taken in violation of the principle of good faith (Turkish Civil Code Article 2) with the aim of oppressing the minority or solely protecting the interests of the majority.

2. Voidability vs. Nullity (Invalidity)

A crucial distinction must be made here. Not every irregularity can be resolved through an "annulment lawsuit"; some decisions are inherently dead (void).

• Voidable Decisions (Turkish Commercial Code Article 445): These decisions are contrary to law or contract, but remain valid until a lawsuit is filed and the court annuls them.
• Void Decisions (Turkish Commercial Code Article 447): These are decisions that violate the non-transferable powers of the general assembly, completely eliminate the fundamental rights (inalienable rights) of the shareholder, or are seriously contrary to mandatory provisions. Voidness can be invoked at any time and is considered ex officio by the judge.

3. Prerequisite for Annulment Action: Dissenting Opinion (Turkish Commercial Code 446/1-a)

The most fundamental legal requirement for a shareholder who opposes a decision at the general assembly to file a lawsuit for annulment opinion.

• The shareholder must attend the meeting
• We should vote against the decision
• And this negative vote should be noted in the meeting minutes (record) with the statement "I am opposed"
• Exception: Shareholders who were unfairly excluded from the meeting, claim that the invitation was not properly issued, or argue that decisions were made outside the agenda are exempt from the requirement to submit a dissenting opinion.

PARTIES TO THE CASE AND STATUTE OF LIMITATIONS

Because the cancellation lawsuit directly affects the company's corporate structure, the legislator has both limited who can file the lawsuit and stipulated a very short time frame.

1. Plaintiff Status (Active Standing)

Article 446 of the Turkish Commercial Code, the following persons may file an annulment lawsuit:

1. Shareholders: Those who were present at the meeting, opposed the decision, and had their opposition recorded in the minutes.
2. Board of Directors: In situations where the execution of the decision would lead to the personal liability of the board members or the bankruptcy of the company, the board of directors may file a lawsuit "as a board".
3. Board Members: Each member may file a lawsuit individually if the implementation of the decision will result in their personal liability.

2. Defendant Status (Passive Standing)

The lawsuit is always filed against the company as a legal entity . The defendant is the board of directors, representing the company. If the board of directors has filed the lawsuit, a receiver is appointed by the court to represent the company in court .

3. Statute of Limitations: 3 Months (Turkish Commercial Code Article 445)

It is mandatory to file an annulment lawsuit within 3 months from the date the general assembly decision was made .

• This period is a "preclusive" period; that is, after this period, the right to file a lawsuit completely expires.
• The judge is obliged to observe this time limit ex officio.

 PROCEDURE, SUSPENSION OF EXECUTION AND SECURITY DEPOSIT

A lawsuit challenging the annulment of general assembly decisions is not simply a debt collection case; it directly interferes with the corporate operations of the company and to a special procedural code .

1. Suspension of Execution of the Decision (Turkish Commercial Code Article 449)

The filing of an annulment lawsuit does not, as a rule, automatically suspend the execution of a general assembly resolution. However, if the execution of the resolution would cause irreparable harm, Article 449 of the Turkish Commercial Code No. 6102 comes into play.

"If a lawsuit is filed to annul or invalidate a general assembly decision, the court, after obtaining the opinion of the board members, may decide to postpone the execution of the relevant decision."

• Conditions: The decision must be manifestly unlawful, and its implementation must pose a risk of irreparable harm to the company or its shareholders.
• Interim Injunction: The court issues an interim injunction suspending the enforcement of a decision until the case is concluded. This could, for example, suspend the registration of a capital increase decision or the powers of a board member.

2. Obligation to Provide Security (Turkish Commercial Code Article 448)

Filing a cancellation lawsuit can sometimes be used by malicious minority shareholders to paralyze the company. To protect the company, the legislator has included the following provision in Article 448 of the Turkish Commercial Code :

“At the company’s request, the court may order the plaintiff to provide security against potential damages. The court will determine the nature and amount of the security.”

It is important to note here that the security deposit can be requested not by the court on its own initiative, but only upon the request of the company (defendant) .

3. Competent and Authorized Court

• Competent Court: Since the dispute arises from commercial transactions, the competent court is the Commercial Court of First Instance
• Competent Court: The court of the place where the company's headquarters are located has exclusive jurisdiction. Filing a lawsuit elsewhere will result in procedural dismissal.

4. Announcement and Notification Obligation

The board of directors is obligated to immediately announce the filing of the cancellation lawsuit and the hearing date Article 448/1 of the Turkish Commercial Code and to post this on the company's website. This is intended to inform other shareholders and creditors who may be affected by the outcome of the lawsuit.

 SPECIFIC CANCELLATION REASONS AND EXAMPLE CASES

Not every decision made at the general assembly is always overturned in the same way. Special legal provisions exist for certain specific situations.

1. Financial Statements and Dividend Distribution Decisions

If the financial statements (balance sheet) do not reflect the truth, and a decision to distribute or not distribute dividends has been made based on these statements, this decision may be annulled on the grounds of violating the principle of good faith. In particular, withholding a company's profits from reserves and not distributing them to minority shareholders is frequently considered a ground for annulment by the Supreme Court.

2. Annulment of Discharge Decisions

The discharge (acquittal) of board members is directly related to shareholders' audit rights.

• Article 436/2 of the Turkish Commercial Code , board members cannot vote on their own discharge from liability.
• If a member, despite being barred from doing so, votes for their own discharge and that vote influences the outcome of the decision, that discharge resolution can be challenged in court.

3. Capital Increase and Restriction of Pre-emptive Rights

In capital increase decisions, the restriction of existing shareholders' pre-emptive rights without justifiable cause constitutes one of the strongest grounds for an annulment lawsuit. Here, the court examines whether the decision was made "in the company's best interest" or "to sideline minority shareholders.".

 CONSEQUENCES, REGISTRATION AND EFFECTS OF THE COURT DECISION

The annulment of a general assembly resolution has legal consequences that affect not only the shareholder who filed the lawsuit, but also all organs of the company, its partners, and even, in some cases, third parties.

1. Scope of the Annulment Decision and the "Erga Omnes" Effect

The decision rendered as a result of an annulment lawsuit has a binding effect, not a personal one, but collective (effective against everyone) consequence.

• Article 450 of the Turkish Commercial Code : "A court decision regarding the annulment or nullification of a general assembly resolution shall be binding on all shareholders once it becomes final."
• This means that even if the lawsuit was filed by only one partner, all partners who are not parties to the lawsuit will benefit from the annulment provision.

2. Retroactive Effect of the Decision (Retroactivity)

As a rule, a decision to annul a resolution has retroactive effect. That is, a general assembly resolution annulled by a court decision is considered invalid from the date it was adopted.

• Exception: However, it is essential that this situation does not prejudice the rights of third parties (e.g., bona fide third parties doing business with the company). Article 451 of the Turkish Commercial Code contains provisions protecting vested rights in this regard.

3. Registration and Publication of the Decision (Turkish Commercial Code Article 450)

Just as general assembly decisions are registered and published in the Commercial Registry, court decisions regarding the annulment of these decisions are subject to the same procedure.

• The board of directors is obligated to register the cancellation decision with the Commercial Registry and publish it on the company's website immediately after the decision becomes final
• The registration process ensures that the decision can be enforced against third parties.

4. Responsibility of the Board of Directors and Implementation of the Decision

If the annulled decision relates to the election of a board member or a capital increase, the board of directors is obligated to immediately restore the company to its legal status "prior to the annulment decision".

• Board members who are at fault in the implementation of a flawed decision may face liability for damages to the company as a result, in accordance with Article 553 of the Turkish Commercial Code

Annulment lawsuits concerning general assembly decisions are subject to very strict formal requirements under Articles 445-451 of the Turkish Commercial Code . For a successful annulment process, the following three golden rules must be kept in mind:

1. Dissenting Opinion: Voting against the resolution at the meeting and having the dissenting opinion recorded in the minutes (with exceptions) is key to the case.
2. Three-Month Period: Exceeding this period by even one day will result in the loss of the right.
3. Suspension of Execution: A request for a "stay of execution" must be made when filing a lawsuit; otherwise, even if the case is won, the decision may have already been implemented and the consequences may be irreversible.

Note: This text is for general informational purposes only. Since disputes in corporate law require highly technical knowledge, the opinion of a specialist lawyer should always be sought for each specific case.