Withdrawal and Expulsion from a Limited Liability Company — Conditions and Process

The termination of the shareholder relationship in limited liability companies is one of the most sensitive issues in commercial life. The processes of withdrawal and expulsion from membership are regulated under Articles 638–640 of Law No. 6102 — the Turkish Commercial Code (Türk Ticaret Kanunu — TTK). These processes bring with them many complex issues such as the valuation of the shareholder's stake, the calculation of the exit compensation (ayrılma akçesi), and the protection of the company's continuity. In this article we examine in all its detail the processes of withdrawal and expulsion from membership.

How Is the Right to Withdraw from a Limited Liability Company Exercised?

Withdrawal from membership (ortaklıktan çıkma) is the termination by a shareholder of their own accord of the membership relationship in a limited liability company. Pursuant to Article 638 of TTK, each shareholder may request withdrawal from the company when justified reasons exist. Furthermore, if provided in the articles of association, the right to withdraw may arise upon the occurrence of certain conditions.

There are two fundamental avenues for exercising the right to withdraw from membership: The first is that the right of withdrawal has been provided for in the articles of association. The articles may stipulate that upon the occurrence of certain circumstances, the shareholder will have the right to withdraw. The second is the existence of justified reasons. Pursuant to Article 638(2) of TTK, each shareholder may apply to the court for a withdrawal request on the grounds of justified reasons.

The concept of justified reason is not defined in TTK but has been made concrete through the case law of the Court of Cassation (Yargıtay). Circumstances accepted as justified reasons include: the breakdown of the relationship of trust between shareholders, the shareholder being continuously excluded from company management, the company not distributing profits and the shareholder being disadvantaged, the shareholder's participation in the company's activities being prevented, and the company deviating from its purpose. The court evaluates each concrete case in its own circumstances and determines the existence of a justified reason.

In What Circumstances Does Expulsion from Membership Occur?

Expulsion from membership (ortaklıktan çıkarılma — ihraç) is the removal of a shareholder from company membership against their will, based on provisions in the articles of association or a court decision. Pursuant to Article 640 of TTK, reasons for which a shareholder may be expelled may be provided in the articles of association. In the presence of justified reasons, the court may order the shareholder's expulsion at the request of the company.

Pursuant to Article 640(1) of TTK, where the grounds provided in the articles of association have materialised, the shareholders' general assembly may decide to expel the shareholder. An expulsion decision is adopted by the votes of shareholders representing an absolute majority of the share capital. Service of the decision on the expelled shareholder through a notary is mandatory. The shareholder may file an annulment action within 3 months of the date of service of the expulsion decision.

Pursuant to Article 640(3) of TTK, in the presence of justified reasons, the company may apply to the court for the shareholder's expulsion. The court may order the expulsion by evaluating the existence of justified reasons. For the court to order expulsion, circumstances such as the complete breakdown of the relationship of trust between shareholders, the shareholder engaging in conduct damaging to the company, or the shareholder seriously breaching obligations arising from the articles of association must be proven.

How Is Separation from Membership Through Share Transfer Effected?

Share transfer (pay devri) is the transfer by a shareholder of their share capital stake to another person, thereby departing from the company. Pursuant to Article 595 of TTK, the transfer of a share capital stake and transactions creating an obligation to transfer must be made in writing and the parties' signatures must be notarially certified. Furthermore, unless otherwise provided in the articles of association, general assembly approval is required for the share transfer to be valid.

The share transfer process consists of the following steps: The transfer agreement is prepared in writing and the parties' signatures are notarially certified. An application is made to the company's general assembly to approve the share transfer. The general assembly approves the transfer by the votes of shareholders representing an absolute majority of the share capital. Following the approval decision, the share transfer is registered with the trade registry and announced in the Trade Registry Gazette.

Pursuant to Article 595(7) of TTK, the articles of association may provide that the transfer of a share capital stake is not subject to general assembly approval. In this case, the share transfer becomes valid with the execution of the notarially certified transfer agreement, and registration with the trade registry is merely declaratory. However, even if general assembly approval has been removed, the requirement to execute the transfer in writing and with notarial certification continues.

Rejection of a share transfer is also possible. The general assembly may reject the share transfer without giving a justified reason. In this case, the shareholder wishing to transfer their stake may, pursuant to Article 595(6) of TTK, file a withdrawal action on the grounds of justified reason. However, the articles of association may also provide as an alternative that the company may purchase the shares itself instead of approving the transfer.

How Is Exit Compensation Calculated and When Is It Paid?

Exit compensation (ayrılma akçesi) is the amount paid to a shareholder who withdraws or is expelled from membership, in exchange for the actual value of their stake. Pursuant to Article 641 of TTK, unless otherwise provided in the articles of association, exit compensation is calculated based on the actual value of the share capital stake. The actual value is determined on the basis of the company's net asset value.

The determination of the company's actual value is of great importance in calculating exit compensation. The following methods are generally used in determining the actual value: the balance-sheet-based net asset value method, the income approach (discounted cash flow method), the comparable transactions method, and the liquidation value method. In practice, courts generally have an expert examination carried out to determine the company's actual value.

Elements taken into account in calculating exit compensation include: the market value of immovable property in the company's assets, the value of the company's brand and customer portfolio (goodwill), the company's current debts and receivables, the market value of goods in stocks, and the company's future earnings potential. There may be significant differences between the balance sheet value and the actual value.

For the timing of payment of exit compensation, Article 642 of TTK applies. Accordingly, exit compensation becomes due immediately upon the shareholder's departure. However, payment of exit compensation must not be contrary to the principle of preservation of share capital. If payment would seriously jeopardise the company's financial situation, payment may be deferred. In practice, courts may also order payment in instalments.

What Legal Avenues Are Available Against an Expulsion Decision?

Against an expulsion decision, an annulment action may be filed before the commercial court of first instance (asliye ticaret mahkemesi) within 3 months of service of the decision. Pursuant to Article 640(2) of TTK, the expelled shareholder may request annulment of the general assembly decision. During the proceedings, the shareholder's membership rights are temporarily suspended.

If an annulment action is filed, the court examines whether the expulsion decision complies with TTK, the articles of association, and the rule of good faith. Whether the grounds for expulsion have materialised, whether the decision quorum was achieved, and whether the expulsion decision was duly served are reviewed.

A suspension of execution (ihtiyati tedbir — interim injunction) request may also be made against an expulsion decision. Pursuant to Article 389 of the Code of Civil Procedure (HMK), the expelled shareholder may request that the implementation of the expulsion decision be suspended. The court may grant an injunction by assessing the likelihood of success in the dispute and whether the expulsion may give rise to damage that would be difficult to reverse.

An objection to the amount of exit compensation is also possible. If the shareholder finds the exit compensation offered by the company too low, they may file an action before the commercial court of first instance for determination of the exit compensation. The court has an expert examination carried out to determine the actual value of the company and the stake, and determines the exit compensation.

How Should Withdrawal and Expulsion Provisions in the Articles of Association Be Drafted?

Withdrawal and expulsion provisions in the articles of association must be drafted in a clear, understandable, and workable manner. The articles must set out the circumstances that give rise to the right of withdrawal, the grounds for expulsion, the method of calculating exit compensation, and the conditions of payment. These provisions must not be contrary to the mandatory provisions of TTK.

Circumstances that may be regulated in the articles of association as giving rise to the right of withdrawal include: the shareholder reaching a certain age, the shareholder retiring, the shareholder engaging in an activity within the scope of a non-competition clause, the shareholder failing to participate in company activities for a specified period, and the shareholder experiencing financial difficulties.

Provisions that may be included in the articles of association as grounds for expulsion include: the shareholder competing with the company, the shareholder disclosing the company's trade secrets, the shareholder breaching the duty of loyalty toward the company, the shareholder receiving a prison sentence or heavy punishment, and the shareholder failing to fulfil their capital commitment.

The method of calculating exit compensation may also be agreed in the articles of association. However, pursuant to Article 641(2) of TTK, if the provisions relating to exit compensation in the articles of association provide for an amount significantly below the actual value, the court may declare such provision invalid. For this reason, it is important that the exit compensation provision in the articles of association is equitable.

What Is the Difference Between a Liquidation Share and Exit Compensation?

A liquidation share (tasfiye payı) is the distribution among shareholders of the remaining liquidation surplus upon the dissolution (liquidation) of the company. Exit compensation (ayrılma akçesi), on the other hand, is the amount paid to a shareholder who departs while the company continues in operation. The two concepts are different from each other and their methods of calculation and statutory bases are also different.

Pursuant to Article 643 of TTK, a liquidation share is the distribution of the remaining net assets among shareholders in proportion to their share capital upon the company's liquidation. In liquidation, the company's debts are first paid, and the remaining amount is then distributed to the shareholders. Since all the company's assets are converted to cash in liquidation, the actual value can be more clearly determined.

In exit compensation, since the company continues its activities, determining the company's value is more complex. Factors such as the going concern value, future earnings expectations, and the value of the company's brand must also be taken into account. For this reason, more than one valuation method is generally used in calculating exit compensation, and courts rely on expert reports.

Final note: This content is for general informational purposes only and does not constitute legal advice.