Turkey: Termination Of Founders' Liability In A Joint Stock Company By Dismissal And Settlement

INTRODUCTION

In the establishment of a joint stock company, the founders carry out the necessary procedures and work for the establishment of the company in accordance with the procedures specified in the law. For this reason, the founders are liable for the establishment of the company. In the TCC, the liability of the founders, members of the board of directors and auditors are grouped under a single title. The reasons for the termination of the liability of the founders are mainly regulated under Article 559 of the TCC.

In Article 559 of the TCC, the concepts of release and settlement come to the forefront in relation to the termination of the liability of the founders of joint stock companies. For this reason, our study will focus on the concepts of settlement and release in terms of the termination of the liability of the founders of joint stock companies and the legal effect of these concepts on the liability cases.

While conducting this study, the provisions of the TCC, the opinions on the subject in the doctrine and the decisions of the Court of Cassation on this subject have been taken into consideration in the termination of the legal liability of the founders of joint stock companies. In our study, the concepts of settlement and release are explained, and then the legal nature of the release within the framework of the provisions of the TCC, its types and its effect on liability cases are emphasised.

I. IN GENERAL TERMS

Incorporation of a joint stock company is the whole of the works and transactions from the execution of the articles of association to the acquisition of the legal personality of the company. The persons responsible for the incorporation procedures are the founders, members of the board of directors and auditors. The founders among these persons are regulated under Article 337 of the TCC¹. Article 559 of the TCC contains an explicit provision on the settlement and release of liability that may terminate the liability specific to the liability arising from the establishment ².

The important concepts that need to be explained in the face of this regulation in the law are release and settlement.

II. TERMINATION BY SETTLEMENT

Although settlement is mentioned in the TCO and various articles of the TCC, there is no clear definition of the settlement decision ³. However, according to the definition in practice and doctrine, settlement is the termination of an existing dispute or uncertainty between the parties by mutually sacrificing some rights without the intervention of an external official institution.⁴

Settlement is a contract due to its legal nature. With this contract, the parties can end the existing dispute between them by mutually making concessions to each other. For this reason, the settlement agreement is a contract that imposes an obligation on both parties. The aim of the parties is to prevent the filing of a lawsuit or to put an end to an existing lawsuit. Settlement eliminates the dispute in terms of substantive law and the lawsuit in terms of procedural law⁵. According to Article 313 of the CCP; "Settlement is an agreement made by the parties before the court in order to partially or completely terminate the dispute between them in a pending lawsuit."

It is always possible to settle a dispute over a right that is the subject of a lawsuit with a contract between the parties to the lawsuit. The settlement agreement between the parties out of court is a material law transaction. However, if one of the parties claims that an out-of-court settlement agreement has been made and states that a decision should be made regarding this agreement, the burden of proof belongs to the claiming party, unless this request and demand is accepted by the other party ⁶.

Regarding the effect of the settlement agreement signed between the company and the responsible parties on the rights of the shareholders and creditors, the settlement agreement affects only the parties. The settlement agreement is not binding for third parties. The approval of the agreement by the general assembly does not change this situation. The settlement agreement cannot be asserted as a defence against creditors who are third parties. However, it is possible to conclude a settlement agreement between the shareholders and creditors who are directly or indirectly damaged, and the responsible parties. The concluded agreement binds only the parties and the settlement agreement shall give rise to the right of defence in the liability lawsuit to be filed⁷.

III. TERMINATION BY RELEASE

A.In General Terms

Release as a word, in the TDK dictionary, means justification, exoneration ⁸. Release is regulated under both the TCO and the TCC. While in the Law of Obligations, a release is a bilateral disposition transaction between the creditor and the debtor, in the Corporate Law, it is a contract that gives rise to innovation and has legal effect upon reaching the other party⁹.

There are differences between the release in the meaning of the TCC and the release in the meaning of the TCO. According to the TCO, there is a receivable between the creditor and the debtor and the parties make an agreement to eliminate the receivable with the release agreement. However, in joint stock companies, the release is that the parties state that there is no debt in order to terminate this situation with the suspicion that there is a receivable, or that they are not responsible for the elimination of legal disputes that may arise due to this debt. While the release in the TCO is related to the termination of the debt; in joint stock companies, the release is related to the termination of the liability¹⁰.

Pursuant to Article 408/2 b of the TCC, the legislator has stated that the general assembly is the body to decide on the release of the members of the board of directors and that this is among the inalienable duties of the general assembly. If the general assembly abuses its duty while deciding on the release of the board members, the persons who have been unjustly discharged may apply to the court and request their release¹¹.

B. Release in Incorporation and Capital Increase

According to Article 559 of the TCC, one of the groups that may be discharged is the founders. Having the title of founder is also important in terms of liability. The liability of the founders arising from the incorporation and capital increase is subject to two limitations. The first limitation is the inability of the minority to cast a negative vote, while the other limitation is the duration.¹² In the first limitation, if the shareholders representing one tenth of the share capital and one twentieth of the share capital in publicly held companies vote negatively against the settlement agreement or the release resolution, the general assembly cannot adopt a settlement agreement or a release resolution.¹³.

1.Time Limitation

The time limitation is that the liability of the persons concerned for the activities in the establishment of the company cannot be removed until four years have elapsed. The starting date of this four-year period is the date of registration of the company. However, starting from the date of registration of the company is valid for the liability arising from the establishment. Within the scope of the liability arising from the capital increase, a specific starting date is not clearly stated in the law. This incompleteness should be completed as of the date of registration of the capital increase¹⁴.

With Article 559 of the TCC, the legislator has introduced a time limitation in order to prevent the founders from easily discharging their liabilities through settlement and release in the event that they may maintain their superiority during the establishment phase and in the years following the establishment.¹⁵ Thus, the legislator has aimed to protect the trust-based relationship between the shareholders and the founders by aggravating the responsibility of the founders in the face of the importance it attaches to the establishment procedures.¹⁶If the general assembly accepts a settlement or resolves to release the shareholders within this four-year period, these resolutions cannot be valid.¹⁷

2.Sanctions for breach of the time limit

There are different opinions in the doctrine regarding the type of invalidity of the release decision made within the four-year period. According to İmregün, the release decision made within the four-year period results in the sanction of nullity, but if the release decision is made within the minority objection after the expiration of four years, the result of this decision is cancellability¹⁸.

According to Atan, it is possible to release the founders from liability for the incorporation and capital increase after the expiry of the four-year period. However, the minority must vote in favour against the approval of the general assembly. To put it clearly, regardless of the number of votes in favour of the release decision, the release decision cannot be taken in the face of the negative votes cast by those representing ten percent of the capital ¹⁹.

In our opinion, the release decisions taken within the four-year prohibition period are invalid with absolute nullity. If the release decision is subject to the sanction of annulability, a three-month period of forfeiture of rights arises against the release decision to be annulled. If no lawsuit is filed at the end of the statute of limitation, the release decision of the general assembly is valid. With the validity of the release decision, the joint stock company will lose its right to sue. As a result, the existence of a three-month suspensive period against the resolutions to be cancelled and the approval of the release resolution, which is invalid if a lawsuit is not filed within this period, contradicts the purpose of the law.

C. Legal Nature of Release

The TCC does not contain a sufficient number of regulations on the release of the founders of joint stock companies. However, there are opinions on the legal nature of the release decision in the doctrine ²⁰. In the doctrine and practice of Turkish law, there is an overwhelming consensus that a release is a "negative acknowledgement of debt" ²¹. In the formal sense, release is recognised as a legal transaction ²². In joint stock companies, release is the approval of the activities of the relevant persons by the general assembly.

D. Types of Release

The general assembly of a joint stock company is free to decide on release of liability. The general assembly may adopt an explicit or implicit release resolution. In addition to this, it is also possible to distinguish the explicit release resolution as general release and special release²³. Explicit and implicit releases are the decisions taken by the general assembly of the joint stock company provided that the meeting and decision quorums are complied with.

1. Open Release

The release resolutions taken in the ordinary and extraordinary general assembly meetings regarding the activities of the members of the board of directors, founders and auditors are open discharge resolutions. ²⁴. An open release decision may be given as a general and special release decision. Decisions made by the general assembly of a joint stock company without any limitation are general release resolutions. On the other hand, a special release resolution is a resolution made by limiting the subject matter.

Pursuant to Article 409/1 of the TCC, the ordinary general assembly meeting of the joint stock company shall be held within three months following the end of the annual activity of the joint stock company. At the ordinary general assembly meeting, the issue of the discharge of the members of the board of directors is also included (Art. 409 TCC). In the ordinary general assembly meeting, a single vote is usually taken and a resolution of discharge is adopted for the founders, members of the board of directors and auditors.

Unless the articles of association stipulates a higher quorum for voting, the meeting shall be held in the presence of persons representing at least one fourth of the capital of the joint stock company, and the resolution shall be adopted by a majority of the votes of those present at the meeting (TCC Art. 418). Regardless of the number of votes cast at the meeting in favour of a resolution of release, a resolution of release cannot be adopted if the persons representing ten percent of the share capital cast negative votes.²⁵ In making the release decision, a release decision is made for the transactions carried out by the relevant persons during the activity period within the scope of the information presented to the general assembly. If the general assembly decides to release the relevant persons in line with the matters that are not within the knowledge of the general assembly, the interests of the shareholders and creditors will be harmed ²⁶.

2. Implicit Release

Another type of release is the implied release. In the implied release, which is explicitly regulated under Article 424 of the TCC, the legislator has stated that the decision of the general assembly to approve the balance sheet shall result in the release of the relevant parties²⁷. Article 424 of the TCC stipulates that "If some issues are not stated in the balance sheet at all or as required, or if the balance sheet contains some issues that will prevent the real situation of the company from being seen, and if this issue is acted consciously, the approval shall not have the effect of release." Considering the wording of the law, in the event of a deliberate action, the release is not considered valid and the liability of those concerned continues²⁸. The issue of whether the balance sheet is incomplete or inaccurate, or whether there is a conscious behaviour is evaluated according to the characteristics of the concrete case.

The reason for the acceptance of the implied release under the TCC is to ensure continuity within the scope of the administrative and management processes of the joint stock company. Since the responsibilities of the relevant persons against the company will cease with the implicit release, efficiency is ensured in the management processes of the company²⁹.

E. Effect of Release on Liability Litigation

If the general assembly decides to release the relevant persons, a liability lawsuit cannot be filed against these persons. The reason for this situation stems from the fact that the release is a negative debt repudiation by its nature ³⁰. However, there is a time limit for the liability arising from the establishment of a joint stock company, and the release decision cannot be revoked until four years have elapsed within the time limit. It cannot be said that the release decision taken within this period has no effect on the liability case³¹.

There are two types of actions to be brought by shareholders and creditors in terms of direct and indirect damages. The lawsuits filed as a result of direct damages are independent of the damage of the joint stock company. Even if the joint stock company is not damaged due to the activities of the relevant persons, damage may occur in the personal assets of the shareholders and creditors. The liability lawsuit to be filed regarding the liability of the founders may be filed by the shareholders and creditors of the partnership. The judgement given as a result of this lawsuit is compensation. It can be said that the partnership also has the right to sue, since the compensation judged in the liability lawsuit to be filed by third parties will be paid to the partnership³². For this reason, both shareholders and creditors have the right to sue for personal damages.

The right of action to be filed due to indirect damages is secondary. The compensation awarded in the liability lawsuit filed as a result of this lawsuit shall be paid against the company. The plaintiff party cannot demand that this compensation be paid to itself (TCC Art. 558/1)³³. According to İmregün, the liability lawsuit to be filed by the creditors without any distinction between indirect or direct damages is not affected by the release decision taken by the general assembly ³⁴. In our opinion, the release decision has no effect on the liability lawsuits to be filed by the creditors due to indirect damages. The creditors are in the status of third parties and the release decision has no effect on the creditors.

CONCLUSION

The provisions on the liability of the founders for their transactions are regulated under Articles 549-552 of the TCC. In Article 559 of the TCC, the effect of the concepts of settlement and release on the founders is emphasised. However, when the title of the article is analysed, the omission of the concept of settlement appears as a deficiency. In our opinion, it would be appropriate for the legislator to add the term "settlement" to the title of Article 559 of the TCC together with the term "release".

There are different opinions in the doctrine on the legal nature of release from liability. In our opinion, release is a negative debt acknowledgement that terminates the liability in terms of its legal nature. A lawsuit cannot be filed against the founders against whom a release decision has been taken as a result of the damages incurred by the company. Another difference of opinion is related to the time limitation of the release decision. Article 559 of the TCC limits the liability of the founders for a period of four years and introduces a prohibition of release. In our opinion, the release decisions taken during the four-year prohibition period are invalid with absolute nullity. The prohibition of release for a limiting period is an absolute mandatory provision and the release decisions taken within the four-year period have no effect on the company. Since the prohibition of release is an obstacle to the company's capacity, it can be said that the type of invalidity is nullity.

Settlement, which is the termination of the liability of the founders, eliminates the dispute in terms of substantive law and the lawsuit in terms of procedural law. The general assembly is the organ authorised to take a release decision, and the general assembly may take an explicit release decision by deliberating on the release issue included in the mandatory agenda, or it may take an implicit release decision by deliberating on the balance sheet and approving the balance sheet. Article 559 of the TCC aims to prevent those concerned from acting against the interests of the company.

Footnotes

1.For the details of this concept, see: Oruç Hami Şener, Teorik ve Uygulamalı Ortaklıklar Hukuku Ders Kitabı, 5th Edition, Ankara, Seçkin Yayıncılık, 2022, p.337.

2. Necla Akdağ Güney, Foundation in Joint Stock Companies, 1st Edition, Istanbul, Vedat Kitapçılık, 2014, p.27.

3. Necla Akdağ Güney, Joint Stock Company Board Members' Legal Liability (Board of Directors), 2nd Edition, Istanbul, Vedat Kitapçılık, 2010, p.333.

4. Akdağ Güney, Board of Directors, p.271.

5.Gözde Sert Şahinkuşu, "Anonim Şirketlerde Kuruştantan Doğan Sorumluluk", İstanbul, (Unpublished Master's Thesis), Bahçeşehir University Institute of Social Sciences, 2013, p.67.

6. The reasoning of Article 313 of the CCP is as follows: "If the claim and demand of one of the parties that an out-of-court settlement agreement has been concluded and a decision should be made by the court in accordance with this agreement is not accepted by the other party, its existence and scope will have to be proved by the claiming party. Since the agreement between the parties on the disputed right has an effect on the judgement, only in-court settlement is regulated in the article.".

7. Akdag South, Board of Directors, p.333.

8. See TDK Grand Turkish Dictionary, (Online) https://www.tdk.gov.tr/, Last Access: 04.11.2022.

9.Haluk N. Nomer, Obligations Law General Provisions, 12th Edition, Istanbul, Beta Publications, 2012, p.300

10.Ayşegül Akkaya, " Release of the Board of Directors in Joint Stock Companies", Master's Thesis, Marmara University Institute of Social Sciences, 2019, pp.9-10.

11.Şener, ibid., p.338.

12.Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, 8.Bası, İstanbul, Adalet Yayınevi, 2022, p.645; Çağlar Manavgat, (İsmail Kırca, Feyzan Hayal Şehirali Çelik), Anonim Şirketler Hukuku Temel Kavram ve İlkeler, Kuruluş, Yönetim Kurulu (Joint Stock Company), C.1, Ankara, Bank and Commercial Law Research Institute Publication, 2013, p.47.

13. Salih Canözü, Release in Joint Stock Companies, 1st edition, Istanbul, On iki Levha Yayıncılık, 2021, p.81.

14.Abuzer Kendigelen, Turkish Commercial Code - Amendments, Innovations and First Determinations, 3rd (Same) Edition from the Updated 2nd Edition, Istanbul, On İki Levha Yayıncılık, 2016, p.468.

15. Şener, ibid., p.341; For detailed information see Hayri Domaniç, Türk Ticaret Kanunu'na Göre Anonim Şirketlerin Kuruluşundan Doğan Hukuki Sorumuliyet, İstanbul, 1964, p. 80; Oruç Hami Şener, "The Right of Minority Shareholders in Joint Stock Companies to Prevent the Termination of the Liability Arising from the Incorporation through Settlement or Release", Court of Cassation Journal, C. 1, S. 2, 1991, p. 92.

16.Tuğrul Ansay, Joint Stock Companies Law, Banking and Commercial Law Research Institute Publications, Ankara, 1982, p.90.

17. Zühtü Aytaç, Rejection of Release - Release and Liability Litigation - Opinion of the Court of Appeal, Istanbul, On İki Levha Yayıncılık, 2019, p.106; Domaniç, ibid., p.83.

18. Oğuz İmregün, "Protection of Minority in Joint Stock Companies", Ankara, 3rd Commercial and Banking Law Week Proceedings- Drafts - Discussions, 1964, p.178.

19. Turhan Atan, Legal Liability of the Members of the Board of Directors in Joint Stock Companies, Banking and Commercial Law Research Institute, Ankara, 1967, pp.68-69.

20. See: TCC Art. 300, Art. 375, Art. 310.

21. Ersin Çamoğlu, Joint Stock Company Board Members' Legal Liability (Legal Liability), Updated and Expanded 2nd Edition, 2007, p.212.; Hasan Pulaşlı, Company Law Commentary, C.1, Expanded 3rd Bası, Ankara, Adalet Yayınevi, 2018, p. 645; Gönen Eriş, Açıklamalı İçtihatlı Ticari İşletme ve Şirketler, C. 3, Seçkin Yayınevi, Updated 3rd Bası, Ankara, 2017, p. 2851; Akdağ Güney, Yönetim Kurulu, p. 298; According to Ulusoy, who argues otherwise, release is not a negative debt repudiation in terms of its legal nature, but a defence tool (şahsi defi). If the release decision taken by the general assembly is accepted as a negative acknowledgement of debt, the indemnity claim of the company shall be definitively terminated. However, according to the opinion of the author, the release decision taken by the general assembly does not prevent the shareholders and creditors from filing a lawsuit, and if a lawsuit is filed, the compensation awarded shall be paid to the company. Since the company will receive the compensation receivable through other means, the compensation receivable of the company does not terminate definitively. For this reason, the author considers the release as a defence tool that gives the right to avoid fulfilling the obligation, rather than a legal transaction that ends the obligation in the sense of substantive law. (Erol Ulusoy, "The Legal Nature of the Release in the Corporate Law", Turgut Kalpsüz'e Armağan, Ankara, 2003, p. 271); In our opinion, the release is a negative acknowledgement of debt that terminates the liability of the founders and members of the board of directors. No lawsuit may be filed against the founders and members of the board of directors against whom a release decision has been taken as a result of the damages incurred by the company. The shareholders and creditors may file a lawsuit for their own receivables independently from the release resolution passed by the general assembly. This is because the TCC does not grant shareholders and creditors the right to file a lawsuit on behalf of the company. The fact that the shareholders and creditors file a lawsuit as a result of their own indirect damages is not related to the legal nature of the release, which is a negative debt repudiation. The assertion of a right and the legal nature of that right are different things. The release is a negative debt assertion in terms of its legal nature and a legal transaction in the formal sense.

22. Fatih Bilgili, Ertan Demirkapı, Company Law, 9th Edition, Bursa, Dora Publications, 2013, p.194.

23. Akdağ Güney, Board of Directors, p.307-308.

24. Canözü, ibid., p.51.

25. Sergül Balsever, "Release in Incorporation and Capital Increase (TCC. 559)", IÜHFM, C.76, S.1, 2018, p.162

26. Çamoğlu, Legal Liability, p.216.; Y. 11.HD. E 2012/10887, K 2013/9792, T.13.05.2013: "...The lawsuit is a liability lawsuit filed against the General Manager of a Joint Stock Company. The court decided to dismiss the lawsuit on the grounds that the defendant was discharged in two general assemblies held after these dates as of the date of the salary payments that led to the liability and the date of purchase of the goods purchased on behalf of the company that were not entered in the records. However, with the general assembly minutes and other evidence available in the file, no evaluation has been made that the defendant, who is also a member of the board of directors, has been discussed and discharged by bringing the alleged reasons for liability to the general assembly agenda. In order for the release decisions made by the general assembly to have legal consequences, the release must be an open release, that is, it must be decided to release those concerned by discussing and evaluating the concrete events. In this case, it was not correct to make a decision with incomplete examination, while it should be evaluated whether the release decision stated in the justification of the court is a release decision in the sense described, and a decision should be made accordingly." (Court of Cassation Decision Search, E.T. 05.11.2022).

27.Canözü, ibid., p.55.

28.When the preamble of Article 424 of the TCC is analysed, it is seen that the Article is essentially a repetition of Article 380 of Law No. 6762. Only the phrase "if the company has acted consciously in this respect" has been added to the text. The phrase "acted consciously in this regard" is only related to the phrase "if the balance sheet contains certain incorrect matters that will prevent the real situation of the company from being seen". The word "consciousness" here is specified to avoid confusion with the word "intention". In our opinion, whether consciously or unconsciously, if there is a situation that prevents the real situation of the company to be seen in the balance sheet and if the general assembly decides to approve in this case, the implied release of the relevant persons shall not be realised.

29. Canözü, ibid., p.58; Furthermore, according to the decision of Y.11.HD. E.1984/252, K.1984/594, T.07.02.1984 "... if the members of the board of directors and auditors serving in a joint stock company fulfil all their duties arising from the law and the articles of association diligently, fully and completely, the duty of the company should be to release them pursuant to Article 380 of the TCC (Article 424 of the TCC). Indeed, if the members of the board of directors and auditors serving in a joint stock company fulfil all their duties arising from the law and the articles of association diligently, fully and completely, the duty of the company will not only release them from liability pursuant to Article 380 of the TCC, but will also ensure that the managers, who should have the initiative, are in a working environment free from all kinds of doubts and concerns." Hukuki.net (Accessed on 05.11.2022).

30. Akdağ Güney, Board of Directors, p.241.

31. Fatih Aydemir, "Legal Consequences of the Release of the Members of the Board of Directors in a Joint Stock Company", IÜHFM, C.69, S.1-2, pp.1075-1103.

32. Müge Çetin, Legal Liability of Founders in Joint Stock Companies, Izmir, Bilge Publishing House, 2016, p.117.

33.The justification of Article 558 of the TCC is as follows "The second paragraph is formally a repetition of Article 380 of the Law No. 6762. The law established by the decisions of the Court of Cassation is thus preserved. The provision has two innovations. Both of them are taken from Art. 758 (1) and (2) of the Swiss Code. These are related to the rights of action of the shareholders who voted in favour of the release and the persons who acquired the shares with knowledge of the release decision. The second novelty is the provision stipulating that the rights of action of other shareholders shall lapse six months after the resolution of release. The six-month period is forfeited."; Seza Reisoğlu, "Main New and Different Regulations of the Turkish Commercial Code No. 6102 on Joint Stock Companies", Communiqué Presentation, (Online (https://www.tbb.org.tr/Dosyalar/Konferans_Sunumlari/TBB_Hukuk_Basdanismani_Prof._Dr._Seza_Reisoglu_Abant_22.10.2011.pdf), Last Access: 10.11.2022, s.25.).

34. Imregün, ibid., p.193; Çamoğlu, Liability Litigation, p.342.

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