Termination of Partnership Relationship in Limited Liability Companies
Pursuant to the Turkish Commercial Code No. 6102 (“TTK”), a partnership relationship in limited liability companies may be terminated (1) by voluntary withdrawal (2) by expulsion upon other shareholders’ request and (3) upon dissolution of the company.
1. In General
Withdrawal is the termination of the legal relationship between a shareholder and the company upon the shareholder’s request. Apart from this, a shareholder may also leave the company through transfer of shares. However, for this, the articles of association of the company should not have prohibited the transfer of shares.
2. Grounds for Withdrawal
Under articles 638 and 639 of the TTK, a shareholder of a limited liability company may withdraw from the partnership in two cases: (1) Provision of a right to withdraw from the company in the articles of association (2) Existence of just cause (statutory withdrawal). Thus, shareholders may either invoke their right to withdraw or apply to the court to terminate the partnership relationship based on reasonable grounds. In some cases, the possibility of withdrawal on the grounds specified in the articles of association or due to just cause that has arisen for one partner may also be applicable to other partners. In this case, in accordance with the principles of procedural economy and equal treatment, the other partners are given the opportunity to participate in the withdrawal.
2.1. Withdrawal Based on the Grounds Provided in the Articles of Association
Article 638 of TTK sets forth that “The right to withdraw from a company can be granted to the partners; exercise of such rights can be subjected to certain conditions by the articles of association.” These conditions may for instance be the expiration of a certain period of time, completion of a particular task, or the company making or failing to make the minimum specified profit. If a cause for withdrawal exists, the motivated partner may withdraw from the company without raising any other reason. However, these conditions should not be contrary to the mandatory provisions of the law. In addition, the right to withdraw from the company stipulated in the articles of association must be objective and in accordance with the principle of equality. Compliance with the principle of equality means that all partners shall be considered equal and have the same rights. This equality does not mean that the conditions of every partner in every circumstance shall be the same. The important thing is to find the balance between the partners in terms of company rights.
In order for the right to withdraw specified in the articles of association to be exercised, a withdrawal notice is required and sufficient.
2.2. Withdrawal by Just Cause
According to article 638/2 of TTK, “Each partner, in the presence of just cause, may apply to the court to obtain a judgment for his/her withdrawal from the company. The court, upon request, may order suspension of some or all of the rights and debts of the plaintiff arising from his/her partnership, or other measures to secure the plaintiff partner’s position.” Withdrawal by just cause is a right granted to each partner and the prevention of such right is deemed to be inequitable and prohibited.
TTK does not provide any explicit definition for just cause. In this regard, the issues that may be deemed as just cause must be carefully assessed and objectively stated by the partner. The partner for which maintaining the partnership relationship becomes unbearable because of inefficient management detrimental to the company, immoral conduct of a partner by which he/she fraudulently deceives the other partners (e.g., false statements regarding the company accounts), the emergence of difference of opinions amongst the directors of the company that makes working together for the continuity of the company impossible, etc. may apply to court to request his/her withdrawal from the company. In principle, application to court is prescribed by law, however in practice, the partner motivated for withdrawal may inform his/her request and the just cause to the other partners first. In this case, if the other partners do not accept the request of withdrawal, the requesting partner shall apply to court for withdrawal. It should be noted that the fact that the requesting partner is at fault does not prevent the partner from raising his/her withdrawal request.
The rights and obligations of the partner as such continue until the finalization of the court decision for withdrawal. In addition to the withdrawal, the court may decide for the appraisal of the company assets from which the withdrawing partner’s share is to be determined and paid.
In the event of existence of just cause, in addition to withdrawal, the partner also has a right to request for the dissolution of the company. However, this shall be considered as a last resort when withdrawal is not possible. This matter will be examined below in detail.
3. Participation in the Withdrawal
The right to participate in the withdrawal is regulated in the article 639 of TTK. The purpose for this regulation is to provide an opportunity for the partners to be speedily informed of a situation that may affect the partners jointly or of the conditions for the right for withdrawal stipulated in the articles of association. In this way, when a situation that may affect all the partners arises, the other partners may request withdrawal without delay.
In the event that a partner request withdrawal based on the grounds provided in the articles of association or applies to court to request for withdrawal by just cause, the director or directors should inform the other partners of this without delay. Within one month from the date of the notice, each of the other partners has the right to notify the directors that he/she will participate in the withdrawal by applying to court based on the just cause if the said cause is also applicable for him/her. All withdrawing partners shall be subjected to equitable procedures in accordance with their shares. However, it must be noted that it is not possible to participate in “expulsion.”
A matter to be considered regarding “participation in the withdrawal” is whether it is possible to participate in the withdrawal when the cause for withdrawal is different for each partner. This is not explicitly regulated in the law; according to the preamble of the law, the discussions on this matter are left to court decisions and the doctrine. However, it can be said that in certain circumstances in which the difference of causes for withdrawal is contrary to the purview of law, participation in withdrawal shall not be possible. Conversely, participation in withdrawal may also be possible in some situations where the causes for withdrawal arise from different circumstances.
1. In General
Expulsion is the termination of the partnership relationship by other partners in the company against the will of the related partner.
2. Grounds for Expulsion
Grounds for expulsion can be examined under two categories: (1) Expulsion by the resolution of the general assembly based on the grounds provided in the articles of association or (2) expulsion by court decision based on just cause.
2.1. Expulsion Based on the Grounds Provided in the Articles of Association
Articles of association may stipulate the grounds for expulsion. Such grounds for withdrawal should be objectively foreseeable and should not be contrary to the principle of equality.
Grounds for withdrawal stipulated in the articles of association may not be general. In this way, unfair and unfounded reasons cannot constitute grounds for the expulsion of a partner who is desired to be removed from the company. If the specific conditions stipulated in the articles of association exist, the general assembly may decide for the expulsion of the related partner. As per article 221 of TTK, the general assembly may adopt a resolution for expulsion with at least two-thirds of represented votes together with the absolute majority of the total of the capital shares with voting right.
The expelled partner has the right to apply to court for the cancellation of the resolution of the general assembly. The partner may request the cancellation of the resolution from the commercial court where the headquarters of the company is located.
2.2. Expulsion by Just Cause
According to article 640/3 of TTK the company may request the expulsion of a partner based on just cause. For this, there must be a just cause for the expulsion of the partner different than the grounds set forth in the articles of association. The just cause for expulsion must be caused by the partner whose expulsion is requested. Furthermore, the said partner’s involvement in the company must have become unbearable for the other partners due to the just cause. Examples of just cause include fraudulent or immoral conduct of the partner, conflict of interest between the partner and the company, which gives rise to dispute and embezzlement.
The company may apply to court thorough a resolution of the general assembly. The resolution of the general assembly to “start legal proceedings for the expulsion of a partner for just cause” may be adopted with at least two-thirds of the represented votes together with the absolute majority of the total of the capital shares with voting right.
III. DISSOLUTION OF THE COMPANY
1. In General
Unlike the withdrawal and expulsion, in the event of the dissolution of the company, the partnership relationship shall not be terminated for only one or more partners, but abolished completely.
Since the dissolution of a commercial partnership in such a way may be detrimental to commercial life, the lawmaker intended to reduce such dissolutions to a minimum. For this reason, conditions for dissolution are subjected to heavier regulations as opposed to withdrawal and expulsion.
2. Some Grounds for Dissolution
The dissolution of the company is regulated under the termination of the company in article 636 of TTK. Some of the reasons for the dissolution of the company may be arising from various grounds for termination stipulated in the law or the articles of association, or from the absence of one of the mandatory organs of the company for a long time. Dissolution by just cause in limited liability companies is one of the trickier procedures of termination.
2.1. Dissolution of Limited Liability Companies by Just Cause
If there is a just cause for the dissolution of the company, each partner may request from the court to dissolve the company. In joint stock companies, this is regulated as a minority right. However, in limited liability companies this is a general right and a reflection of the fact that the partners have closer ties with the company. The case shall be filed against the legal entity of the company.
Just causes are also not explicitly stated in the law. The fact that the company can no longer function, that there is no expectation that the company will continue to operate with the existing partners and similar situations can be considered as just cause. It is important to note that the court is not obliged to decide for dissolution. Instead, the court may decide for the payment of the actual price of his/her share to the plaintiff partner and for his/her expulsion from company or any other appropriate solution; if the other partners are not responsible for the occurrence of the just cause, the court may act with the idea that the other partners should be protected against the dissolution request. Article 636/3 of TTK accords the court a wide margin of discretion for the continuation of the partnership. This wide margin of discretion arises from the necessity to ensure the continuity of the company and to exercise dissolution as a last resort.
The competent court to examine the request for dissolution is the commercial court of first instance where the company headquarters are located.
In accordance with the law, withdrawal or expulsion from company is only possible if there are relevant provisions in the articles of association or if just causes exist. In practice and in terms of risk management, taking the negative situations that may arise in the future into account should provide a great advantage in maintaining the company in operation.
Even if no such provision exists, when the partners fail to come to an agreement, it is possible to apply to court for withdrawal or expulsion based on just cause.
On the other hand, the dissolution of the company is an institution for which every partner may apply to court based on just cause, but about which the court has a wide margin of discretion in order to maintain the balance of interests within the company by ruling for a solution other than dissolution.
In addition to all these, in two-person limited liability companies, since the main principle is the continuation of the commercial life and the companies, the dissolution of the company is considered to be a last resort. However, despite being a complicated process, the institution of expulsion may also be exercised in these companies as well.