1. Introduction and Scope
According to Article 573 of the Turkish Commercial Code (TCC) No. 6102, a limited liability company is a type of capital company with a legal personality that can be established by one or more natural or legal persons under a trade name for any economic purpose not prohibited by law. Partners of the company are generally liable only to the company and only up to the amount of their capital commitment. As the law emphasizes, limited liability companies are founded for “economic purposes,” and the primary objective of a shareholder in such a company is to generate profit.
Given this:
This article does not address cases where the company has not generated profit or the method for calculating dividends. Instead, it focuses on the question: “If a profitable limited liability company does not distribute dividends, what legal remedies are available to a shareholder deprived of their rightful return on their capital and effort?”
2. The Legal Basis for Dividends in a Limited Liability Company
The rights of a shareholder in a limited liability company can be categorized as financial rights, management rights, and protective rights. Financial rights include the right to receive dividends, pre-emptive rights, interest during the preparatory period, liquidation shares, and separation payments.
Regarding the legal basis of the right to dividends, Article 608 of the TCC, titled “Dividends and Reserves” states:
“Article 608:
1. Dividends can only be distributed from net period profit and reserves set aside for this purpose. A decision on dividend distribution can only be made after the statutory and contractually stipulated reserves have been allocated.
2. Unless otherwise provided in the company’s articles of association, dividends are calculated in proportion to the nominal value of the share capital, with additional payment obligations also considered in the calculation.
3. The general assembly may decide to allocate reserves beyond statutory or contractual obligations only if:
a) It is necessary to cover losses,
b) A serious investment need arises for the company’s development, justified in the interests of all shareholders, and
c) This is explicitly stipulated in the company’s articles of association.”
The authority to decide on dividend distribution lies with the general assembly, and under Article 616/1-e of the TCC, this authority is non-transferable. No special quorum is required for decisions on dividend distribution unless otherwise stated in the articles of association. Therefore, the general assembly can decide on dividends by a simple majority of the votes represented at the meeting, as per Article 620 of the TCC.
When calculating dividends for limited liability companies, the provisions of Articles 514 to 527 of the TCC, which concern financial statements and reserves for joint-stock companies, apply (TCC Art. 610).
Under Article 608 of the TCC, dividends payable to shareholders must be derived from “net period profits and reserves set aside for this purpose.” The right to dividends is a relative acquired right and may be restricted but cannot be entirely eliminated. This right is also non-waivable. Upon the general assembly’s decision to distribute dividends, the shareholder’s right to claim these becomes a receivable. Even if the shareholder withdraws, they retain the right to claim dividends decided upon before their withdrawal.
The third paragraph of Article 608 emphasizes that allocating reserves beyond statutory or contractual obligations is an exception rather than the rule. Although the law grants the general assembly discretion in dividend distribution, the primary presumption is to distribute dividends, with non-distribution being the exception.
According to both legal doctrine and the established precedents of the Court of Cassation, as a rule, individuals become shareholders in a limited liability company, which is a type of capital company, with the aim of benefiting from the profits it generates. As a principle, in such companies, a shareholder’s claim for dividends becomes due and payable with the decision of the shareholders’ assembly (general assembly) to distribute profits.
However, unless otherwise stipulated in the company’s articles of association, the shareholders’ assembly is bound by the relevant provisions of the Turkish Commercial Code (TCC) and does not have arbitrary discretion over the accrued profits. The shareholders’ assembly cannot arbitrarily refrain from distributing profits determined in the balance sheet. Decisions that violate the provisions of the TCC can be annulled. Additionally, if the company unjustifiably persists in not distributing profits, shareholders may demand and file a lawsuit for the determination and distribution of profits in accordance with the provisions of the law.
In the following precedent we have cited, the first-instance court deemed it unlawful for the general assembly of a limited liability company to refrain from distributing profits without justification. It ruled to annul the decision to add part of the company profits to the reserves without distribution:
“As with any commercial partnership, the ultimate goal of a limited liability company is to generate and distribute profits (Poroy/Tekinalp/Çamoğlu, Corporate and Cooperative Law, Istanbul 2010, p. 464). This goal does not appear in the articles of association but stems from the common goal criterion and the concept of partnership, which differentiate personal unions from various legal statutes (Poroy/Tekinalp/Çamoğlu, ibid, p. 464). All organs of the partnership, including the board of directors, must strive to achieve this objective, and the general assembly must make decisions consistent with this ultimate goal (Poroy/Tekinalp/Çamoğlu, ibid, p. 465). Consequently, the right to profit-sharing, arising from the company’s goal of generating and distributing profits, is an indispensable right (Poroy/Tekinalp/Çamoğlu, ibid, p. 465).
The “right to profit-sharing” of a shareholder has two aspects and thus carries two meanings. In the first sense, it refers to the shareholder’s right derived from the company’s obligation to pursue the goal of generating and distributing profits (Poroy/Tekinalp/Çamoğlu, ibid, p. 464). This right, stemming from the said obligation, is inalienable and cannot be overridden (Poroy/Tekinalp/Çamoğlu, ibid, p. 464). In its second meaning, the “right to profit-sharing” represents the shareholder’s entitlement to participate in the annual profits allocated for distribution or the reserved funds earmarked for distribution according to the law, the articles of association, or general assembly decisions (Poroy/Tekinalp/Çamoğlu, ibid, p. 464). In this sense, the right to profit-sharing is a relative vested right because not all net profits are distributed to shareholders. There is no obligation to do so; some of the net profits must be set aside as reserves or to pay certain liabilities, creating a contrary obligation (Poroy/Tekinalp/Çamoğlu, ibid, p. 467).
The court needs to determine whether the decision to add profits to the company’s reserves without distribution contravenes the law, the articles of association, or the principles of good faith. It should also assess whether profit distribution would result in a reduction of the company’s capital, whether allocating part of the profit to reserves rather than distribution is reasonable and beneficial for the company’s sustainable development and the regular distribution of profits, and whether such allocation complies with the principles of objective good faith. A report has been obtained on these issues.
(…) It has been concluded that the decision to allocate the 2015 net profit amounting to (…) entirely to the company’s reserves without any distribution cannot solely be characterized as aimed at the company’s continuous development and the regular distribution of profits to shareholders. Considering that the defendant company had not distributed profits for approximately eight years and decided to allocate the 2015 profits to the reserves as well, this decision contradicts the law, the articles of association, and objective principles of good faith. Furthermore, the legal requirements specified in Article 608/3-b of the Turkish Commercial Code (TCC) — such as demonstrating the genuine necessity for investment to promote the company’s growth, ensuring that such allocation of reserves serves the interests of all partners, and explicitly stating these matters in the company’s articles of association — were not met. Given that the defendant company’s net operating capital was ¨1,915,344.34 and the company had been profitable for eight years without any profit distribution, it was determined that profit distribution would not lead to a reduction in the company’s capital. Moreover, the allocation of the remaining portion to reserves was deemed neither appropriate nor beneficial for ensuring the company’s sustainable development and regular profit distribution. As such, the allocation of the 2015 profits amounting to ¨1,064,596.63 to the reserves was found to be in violation of objective good faith principles, necessitating the annulment of this decision.”
3. Legal Remedies Available to Shareholders in Case of Non-Distribution of Profits
Shareholders in a limited liability company have protective rights, which include the right to information and inspection, the right to file a liability lawsuit, the right to file annulment and nullity lawsuits, the right to request special audits, the right to request the dissolution of the company for just cause, and the right to file and participate in lawsuits for withdrawal.
If a shareholder is prevented from exercising their rights arising from the partnership, they may invoke these rights and/or request the court to impose various measures.
It should be noted that dispute resolution in commercial law often allows for the application of various strategies. It may be possible to interpret situations differently and take different actions based on the specific circumstances of a case and its requirements. Therefore, attempting to provide formulas that cover all potential cases under the heading “legal remedies in case of non-distribution of profits” poses a risk. This section will narrow the scope of the article by illustrating legal remedies through some examples. Similarly, it should be remembered that the solutions presented here are not exhaustive and that alternative remedies may need to be considered for each specific case.
a) If a Limited Liability Company Fails to Distribute Profits After Starting to Make a Profit, What Can a Shareholder Do?
In cases where a limited liability company has distributable profits as per Article 608 of the Turkish Commercial Code (TCC) but unjustifiably refrains from distributing dividends, what options are available to a shareholder who cannot access their entitled profits?
Firstly, the shareholder has the right to request the annulment of the general assembly decision not to distribute dividends or to request a court decision declaring such a resolution null and void.
Pursuant to Article 622 of the TCC, the provisions of Articles 445 and onward—regarding the annulment and nullity of general assembly resolutions in joint-stock companies—also apply to limited liability companies:
“G) Annulment of General Assembly Resolutions – ARTICLE 445
Persons specified in Article 446 may file a lawsuit for the annulment of general assembly resolutions that are contrary to the law or the articles of association, particularly those violating the principle of good faith, within three months from the date of the resolution, in the commercial court of first instance where the company is headquartered. (…)
H) Nullity – ARTICLE 447
(1) General assembly resolutions, particularly those that:
(…)
b) Limit the shareholder’s rights to access information, review, and audit beyond what is legally permitted, or
c) Violate provisions essential to the fundamental structure of the company or the preservation of capital,
are null and void.”
A shareholder can file a lawsuit against a general assembly resolution that unjustifiably and unfairly prevents the distribution of dividends.
As another option, under Article 635 of the TCC, referencing Article 438, a shareholder in a limited liability company may exercise their right to request a special audit. This would involve an examination to determine the profits available for distribution.
If other protective shareholder rights fail to secure the dividends and if the general assembly of the limited liability company systematically and maliciously continues to refrain from distributing profits, the shareholder may seek to exit the company on just grounds, provided the conditions are met. In such cases, the shareholder can present their justifications to the court and request:
According to Article 638/2 of the TCC:
“Every shareholder may file a lawsuit for a court decision to exit the company on just grounds. Upon request, the court may decide during the litigation process to freeze some or all of the rights and obligations arising from the shareholder’s participation or to take other measures to secure the shareholder’s position.”
When a limited liability company continues operating with other shareholders, terminating the relationship between a shareholder and the company is defined as “separation”. Separation refers to the termination of the relationship between a shareholder and the company, which may arise from either contractual or legal grounds, resulting in the shareholder’s status as a partner coming to an end. Consequently, the separating shareholder assumes the status of any third party in relation to the company.
Exit refers to a shareholder’s voluntary decision to leave the company. This intent to exit, which leads to the termination of the shareholder status, can manifest as a unilateral declaration of will or a mutual agreement. Cases where a shareholder may terminate their partnership status by their own will are governed under Articles 638-639 of the Turkish Commercial Code (TCC) for limited liability companies, as well as general provisions in Articles 141/1 and 202/1-2 of the TCC.
b) What Can a Shareholder Do If a Limited Liability Company Continues Allocating Reserves Instead of Distributing Dividends, Despite No Need?
As cited above, the second sentence of Article 608/1 of the TCC states:
“A decision to distribute profits can only be made after the allocation of statutory reserves required by law and any reserves stipulated in the company’s articles of association.”
As indicated, a limited liability company can begin distributing profits only after allocating the necessary reserves. But what constitutes the statutory reserve? For an answer, we must examine
Article 519 of the TCC, as it applies to limited liability companies per the reference in Article 610:
“ARTICLE 519
(1) Five percent of the annual profit is allocated to the general statutory reserve until it reaches twenty percent of the paid-in capital.
(2) After the limit in the first paragraph is reached:
a) The unused portion of the premium obtained from the issuance of new shares, after deducting issuance costs, amortization, and donations made for charitable purposes,
b) The remaining amount after deducting issuance costs for new shares issued in place of canceled ones due to withdrawal,
c) Ten percent of the total amount to be distributed to those entitled to share in the profits after shareholders receive a dividend of five percent, is added to the general statutory reserve.
(3) As long as the general statutory reserve does not exceed half of the capital or issued capital, it may only be used to offset losses, sustain operations during unfavorable periods, or implement measures to prevent or mitigate unemployment and its consequences. (…)”
This definition of the “statutory reserve” cited in Article 519 is referenced in Article 608.
Additionally, a limited liability company may stipulate an increased reserve amount in its articles of association. This second category constitutes the “reserves stipulated in the company’s articles of association” mentioned in Article 608.
Returning to the question in the section title: what happens if the general assembly of a limited liability company, after allocating the reserves described in Article 608 and explained above, decides to allocate additional reserves instead of distributing profits, without a justified reason under Article 608/3?
In such cases, the shareholder may pursue the remedies outlined in Section 3-a of this article. This includes options such as challenging the general assembly resolution or requesting special audits or court interventions, as previously discussed.
c) What Can a Shareholder Do If a Limited Liability Company Does Not Provide Information About Profitability?
In sections (a) and (b), scenarios where shareholders are aware of profit distribution and situations where profits are not distributed were discussed. However, another common issue arises when the managers or general assembly of a limited liability company fail to provide shareholders with adequate and accurate information about the company’s profit-loss status. In such cases, before demanding a profit share, the shareholder must determine whether they are entitled to any profit share and therefore must acquire information about the company’s status and review the necessary documents.
A shareholder’s right to access and review information in a limited liability company is governed by Article 614 of the Turkish Commercial Code (TCC):
“Article 614 – Right to Information and Inspection
1. Every shareholder may request information from the managers about all company affairs and accounts and may conduct specific inspections.
2. If there is a risk that the shareholder might use the information obtained to the detriment of the company, managers may prevent access to the information and inspection to the extent necessary. In such cases, the shareholder may refer the matter to the general assembly.
3. If the general assembly unjustly denies access to information and inspection, the shareholder may apply to the court for a decision on the matter. The court’s decision is final.”
Based on this, a shareholder of a limited liability company should initially request information from the manager(s) to understand the company’s profit-loss situation and determine whether they are entitled to profit distribution. If the right to information and inspection is unjustly denied, the shareholder can request the court to enforce this right.
Important Note: If a shareholder directly files a lawsuit to demand profit distribution or exit the company without being informed about the company’s financial status and whether they are entitled to profit, their claim risks being dismissed for lack of legal interest.
The TCC has a systematic procedure in Article 614 for shareholders who lack sufficient information:
1. The shareholder must first request information from the manager(s).
2. If the general assembly unjustly prevents access to information, the shareholder may apply to the court for the right to information and inspection. Filing a court case without first requesting information from the manager(s) might lead to dismissal of the case.
If a court order permits the shareholder to access information, and it is determined that they are not entitled to profit distribution, filing a claim for profit share would be meaningless. However, if it is established through the court process that the shareholder is entitled to profit distribution:
d) What Can a Shareholder Do If Other Shareholders Are Unjustly Receiving Profits?
Article 611 of the TCC, titled “Recovery of Unjustly Received Profits”, provides the following:
“Article 611 – Recovery of Unjustly Received Profits
1. A shareholder or manager who has unjustly received profits is obliged to return them.
2. If the shareholder or manager acted in good faith, their obligation to return unjustly received profits is limited to the amount necessary to satisfy the claims of the company’s creditors.
3. The company’s right to recover unjustly received profits expires five years from the date the money was received or two years in cases of good faith.”
Additionally, Article 632, titled “Liability for Tort”, states:
“Article 632 – Liability for Tort
1. The company is liable for wrongful acts committed by a person authorized to manage and represent the company during the performance of their company-related duties.”
If unjust profit is granted to other shareholders and/or managers, an aggrieved shareholder may seek claims and file lawsuits within the framework of these provisions.
Furthermore, Article 630/2 states:
“Article 630/2: Every shareholder may apply to the court to have the management rights and representation powers of managers revoked or restricted in the presence of justifiable reasons.”
As an additional remedy, shareholders can request the court to revoke or limit the representation powers of managers who unjustly distribute or receive profit with malicious intent.
If the unjust profit distribution jeopardizes the company’s economic future or raises risks such as malicious shareholders or managers draining the company’s resources, affected stakeholders may request more severe measures from the court, including appointing a trustee or placing an injunction on the company’s assets.
4. Conclusion
One of the primary reasons for a shareholder to invest capital and effort in a limited liability company is to generate profit through its commercial activities. Although the Turkish Commercial Code No. 6102 grants the authority to distribute dividends to the general assembly of the company, the arbitrary obstruction of a shareholder’s legitimate right to dividends without justified reasons would not comply with the law.
A shareholder whose financial rights are obstructed can make demands from the company within the framework of the protective rights provided by law. Furthermore, if the necessary conditions are met, they may resort to court to request:
By pursuing these remedies, shareholders can protect their legitimate financial rights and interests while ensuring the company operates within the bounds of legality and fairness.
Note: For the sources and legal references of the article, please check the Turkish version.
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