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A. Introduction
The Turkish Commercial Code ("TCC") No. 6102 and the Capital Markets Law ("CML") No. 6362 regulate the right of a dominant shareholder to remove minority shareholders from a company.
In foreign legal systems, this process is often referred to as a "squeeze-out" or "freeze-out." The TCC addresses this under Article 208 as the "right to purchase," while the CML refers to it in Article 27 as the "right to remove from the partnership." Additionally, Article 141 of the TCC provides justification for this mechanism as the "removal of a partner through a merger."
The squeeze-out mechanism grants dominant shareholders, holding a qualified majority, the right to purchase the shares of minority shareholders at a fair price, thereby expelling them from the company. The primary aim is to prevent decision-making deadlocks caused by minority shareholders and enhance the company’s operational efficiency. This mechanism is particularly critical for ensuring agility and effectiveness in large-scale corporate structures.
The right of the dominant shareholder to remove minority shareholders is anchored in corporate group law and merger and acquisition frameworks. In group company law, this right ensures effective coordination among affiliated companies and facilitates centralized management. Within mergers and acquisitions, it streamlines public tender offers and accelerates acquisition processes by reducing resistance from minority shareholders. These frameworks share a common focus on overcoming obstacles caused by minority shareholders, enhancing strategic alignment, and enabling swift execution of corporate decisions.
B. Legal Assessment of the Squeeze-Out Concept
The squeeze-out mechanism under Turkish law is grounded in the concept of "dominance," setting it apart from traditional expulsion mechanisms. Unlike international systems where squeeze-outs often lack this requirement, TCC Article 208 necessitates just cause to justify expulsion. In contrast, CML Article 27, applicable to publicly traded companies, omits this requirement, enabling a more flexible approach focused on corporate efficiency. This distinction highlights the differing policy objectives between the two regulations: while the TCC emphasizes shareholder rights and fairness, the CML prioritizes governance and operational efficiency.
C. Conditions for Exercising the Dominant Shareholder’s Right
- Conditions Under TCC Article 208
The right to expel, regulated under TCC Article 208, applies to capital companies and is a provision related to group company law. This regulation grants the dominant company the right to expel minority shareholders by purchasing their shares under certain conditions.
According to TCC Article 208, in order for the right to be exercised, the dominant company must:
- Hold at least 90% of the company’s capital and voting rights, either directly or indirectly.
- Demonstrate just cause for the expulsion, such as obstruction of operations, violations of good faith, or actions that disrupt company management.
The 11th Civil Chamber of the Court of Cassation, in decision 2019/915 E. and 2019/7720 K., confirmed that this right is exclusive to group companies and cannot be invoked by individual shareholders. Similarly, in decision 2021/4719 E. and 2022/9173 K., the court ruled that the right is available only to corporate shareholders.
- Just Cause in Turkish Law
TCC Article 208 introduces the concept of just cause as a unique condition. Just causes include:
- Actions violating good faith principles.
- Obstruction of the company’s basic operations.
- Harmful or reckless behavior disrupting corporate sustainability (Harun Keskin, Hakim Pay Sahibinin Azınlığı Şirketten Çıkarma Hakkı (Squeeze-Out), 2022).
In this context, just causes include situations where minority shareholders engage in conduct that endangers the sustainability of the company’s operations or violate the principles of honesty and trust. Minority shareholders obstructing the company’s basic functions, harming its commercial activities, or excessively disrupting management may be expelled. This just cause condition ensures stability in intra-company relations and preserves managerial peace. Therefore, the right to expel can only be exercised against minority shareholders whose behavior disrupts the company’s operations, violates principles of good faith, and harms sustainability.
- Scope and Conditions Under CML Article 27
CML Article 27 grants the dominant shareholder of a publicly traded joint-stock company the right to expel minority shareholders if they reach a qualified majority through a public tender offer or other means. Unlike TCC Article 208, CML Article 27 does not require just cause, making it more flexible.
Under CML, expulsion occurs by canceling minority shareholders’ shares, with the dominant shareholder purchasing them through newly issued shares. A key distinction is that under CML Article 27, the expulsion right does not require a public tender offer. The dominant shareholder may acquire the necessary stake through a tender offer or acting in concert with others.
According to the Communiqué on Squeeze-Out and Sell-Out Rights II-27.3 (“Communiqué”) Article 3/(c), the dominant shareholder can be a natural person or a legal entity, offering flexibility. Article 4 requires holding at least 98% of voting rights to exercise the expulsion right. The threshold must be met before exercising this right, and shares based on usufruct or call options are excluded from this calculation.
If the 98% threshold is reached, the dominant shareholder must:
- Make a public announcement.
- Prepare an appraisal report within one month and disclose a summary.
- Complete the expulsion process within two months, paying the share price in compliance with the Communiqué’s provisions.
D. Exercise of the Right and Determination of the Expulsion Price
TCC Article 208 provides two methods for determining minority shares' value:
- Stock Market Value: If available, market price applies.
- Actual Value: If no market price exists, shares are valued based on net asset value.
Unlike TCC Article 208, which requires a court decision, CML Article 27 requires a Capital Markets Board-determined period for share cancellation and issuance of new shares.
E. Minority Shareholder’s Right to Exit
TCC Article 202/1(b) protects minority shareholders by ensuring an exit if the dominant shareholder misuses control and causes financial harm. Minority shareholders can:
- File a compensation lawsuit.
- Request the court to compel the dominant shareholder to purchase their shares.
F. Expulsion from the Company in Cases of Termination for Just Cause
TCC Article 531 allows minority shareholders to seek company termination for just cause. If termination is not feasible due to economic or social factors, the court may expel minority shareholders and compensate them at actual value.
Just causes include:
- Poor management.
- Systematic denial of shareholder rights.
- Misuse or waste of company assets (Prof. Dr. Reha Poroy et al., Ortaklıklar Hukuku Cilt II, 2017).
G. Conclusion
The squeeze-out mechanism in Turkish law balances corporate efficiency and minority shareholder rights.
- TCC requires a 90% majority, just cause, and judicial approval, prioritizing fairness.
- CML allows expulsion with a 98% majority, streamlining governance.
- TCC Article 531 provides an alternative expulsion remedy in termination cases.
Both frameworks ensure predictability and sustainability in corporate governance while protecting minority rights.