The practice of inserting identical provisions into a company's articles of association and a shareholders' agreement is common in Turkey. Ensuring that a dispute arising from both documents is resolvable through the same dispute resolution mechanism is necessary to avoid two, potential conflicting, parallel proceedings. This is why lawyers try to make sure the dispute is resolved either through arbitration or litigation to avoid separate proceedings before two separate tribunals. Otherwise, companies run the risk of spending unnecessary time and expense -- and contradictory outcomes.
In a welcomed development, the Turkish Court of Appeal has provided some much-needed guidance.
The dispute and the legal issue
The issue before the court was whether disputes arising from a company's articles of association are arbitrable. The case concerned a shareholder's attempt to cancel a general assembly resolution adopted in his absence because he had not been properly invited to the meeting, the meeting was not held at the place stated in the invitation, and he had not been adequately informed of the company's affairs. The trial court dismissed the claimant's lawsuit, stating that the dispute must be referred to arbitration, citing the arbitration clause in the company's articles of association. The claimant appealed, asserting the non‑arbitrability of the dispute.
The issue before the court was whether a dispute arising from a provision in a Turkish company's articles of association may be arbitrated.
The Court's decision
The appellate court reversed the trial court's decision, concluding that, “arbitration is valid only with respect to disputes that are subject to the will of both parties; in other words, to disputes capable of being settled between the claimant and respondent without a court decision.” The court then held that disputes relating to the cancellation of general assembly resolutions are not disputes subject to the will of both parties and must, therefore, be resolved by the courts.
The question now is whether all disputes arising out of a company's articles of association are non-arbitrable, to be resolved only by national courts. While the court's ruling only applies to specific disputes on cancellation of general assembly resolutions, a broader interpretation is possible. Turkish shareholders should, therefore, carefully consider whether to include an arbitration clause in a company's articles of association.
Given the court's decision and that corporate disputes are generally better suited to arbitration, when executing corporate documents, such as a shareholders' agreement alongside the articles of association, the parties should consider that:
- Since a risk exists that the courts may invalidate an arbitration clause, arbitration clauses in a Turkish company's articles of association should be avoided where possible. Inclusion may delay litigation or result in a favorable arbitral award being set aside.
- If an arbitration clause is used, it should "carve out" disputes relating to general assembly meetings and resolutions, so that such disputes are resolved through Turkish courts.
- In any event, articles of association should be drafted to avoid addressing the same matters contained in related documents, such as a shareholders' agreement.
Ismail Esin, Dogan Gultutan