In a paper forthcoming in the European Business Organization Law Review, I conduct an economic analysis of the buy-out remedy for oppressed minority shareholders in joint stock companies under Turkish law, compare it with Swiss and English jurisdictions, and propose solutions for its shortcomings.
Buy-out as a Tool for Minority Protection
Shareholders representing at least ten per cent of the share capital in joint stock companies, and five per cent in publicly traded companies, are granted the right to request corporate dissolution for just causes under the Turkish Commercial Code (‘TCC’) Article 531. Aside from corporate dissolutions, Turkish courts are entitled to order the buy-out of the claimant’s shares or to adopt a different solution. As signalled by the Turkish Court of Appeal’s decisions to date, the buy-out is expected to be the most commonly adopted remedy. The threat of an order for the purchase of the claimant’s shares at ‘real’ value is expected to operate as a put option conditional upon serious oppression. Hence the remedy is supposed to ex ante incentivize the majority towards respecting the minority’s interests. However, I argue that TCC Article 531 - in parallel with the Swiss Code of Obligations (‘SCO’) Article 736/4 - is not designed so as to provide the expected incentives. In this regard, referring to the solutions that have developed in English law can be helpful for both Turkish and Swiss judges.
Problems and Proposals
First, the same standard of ‘just cause’ is adopted in Turkish and Swiss laws, since corporate dissolution is included in the same provision along with other remedies. Therefore it is widely accepted that the court may order a remedy only if the facts justifying the dissolution of the company are proven. However requiring an equal level of ‘just causes’ for different remedies may distort the incentives on both sides. In my view, the gravity of ‘just cause’ to be proven should not be equal for each remedy, and thus the courts should be able to give a buy-out order even if the facts do not justify corporate dissolution.
Second, the court’s wide remedial discretion means that the minority does not have a ‘right’ to leave the company. Accordingly, the threat value of the mechanism is affected by uncertainty of outcome. Hence, I argue that the relief sought by the claimant should be taken into account. And de lege ferenda, the court should be bound by the claimant’s explicit will to stay in the company. It must be also noted that dissolution seems to be inefficient in cases where there is a going concern to be protected, even if there are ‘just causes’ in the sense meant by the provision.
I then point to the weakness of the mechanism under Turkish and Swiss laws, since the oppressive controller cannot be obliged to purchase the claimant’s shares, and thus is not directly liable for the implicit price of her unfair conduct. While the UK Companies Act 2006 s 996(2)(e) explicitly permits the court to oblige the controller to purchase the claimant’s shares, the TCC and SCO lack such an express wording. I propose that the purchaser of the claimant’s shares should be the controller, rather than the company in question, and suggest certain solutions towards this goal.
Finally, I suggest that the valuation of the claimant’s shares should be made, in principle, on a going concern and pro rata basis, and any depreciation of the claimant’s shares due to the controller’s abusive conduct should be taken into account.
Cem Veziroğlu is Research Assistant at the Koç University Law School.