When the Majority Refuses to Pay Dividends: The Minority Shareholder's Right to Profits in Türkiye (TCC 408, 507–509, 519, 523)

Turkish law does not give a shareholder a right to a dividend every year, but it does limit what the majority may retain and it gives the minority three concrete remedies.

The complaint arrives in the same form almost every time. A foreign investor holds twenty or thirty per cent of a Turkish company that has been profitable for years. The accounts are approved at each annual general assembly, the profit is transferred to “extraordinary reserves” by the majority’s votes, and no dividend is paid. Meanwhile the majority shareholder is the chairman and general manager, draws a salary and an attendance fee, leases premises to the company, and sometimes trades with it through another entity. The minority’s shares are worth a great deal on paper and yield nothing in practice.

Turkish law does not give a shareholder a right to be paid a dividend every year, and the first thing a minority investor needs to understand is why. The second is that the majority’s freedom to retain profit is not unlimited, and that the Commercial Code (Türk Ticaret Kanunu, TCC No. 6102) supplies a specific test for what may be kept and three distinct remedies when that test is failed. This article sets out the rules on who decides, what must and may be retained, how a retention resolution is attacked, and what a minority can do when the pattern has hardened into a policy.

1. Who Decides: Distribution Is a Non-Transferable Power of the General Assembly

Article 408(2)(d) of the TCC lists among the powers that the general assembly cannot delegate the taking of decisions on the financial statements, on the board’s annual report, on the disposal of the annual profit, on the determination of dividends and bonus shares, and on the use of reserves, including their conversion into capital or their addition to the profit to be distributed. The board of directors prepares the accounts and proposes a distribution; it cannot decide one. Nor can the articles of association or a shareholders’ agreement move the decision to the board, to a committee or to a single shareholder.

The consequence for a minority is double-edged. On the one hand, the majority cannot avoid the annual vote: every year there is a resolution on the profit, taken in a meeting the minority is entitled to attend, and that resolution is the act which the minority can challenge. On the other hand, because the decision is the assembly’s, a minority that lacks the votes cannot compel a distribution directly; it can only attack the resolution the majority has passed, or use the other tools the Code provides.

Article 507(1) defines the dividend right accordingly. Each shareholder has the right to participate, in proportion to their shares, in the net profit for the period that has been resolved to be distributed to shareholders in accordance with the law and the articles of association. Article 508(1) adds that, unless the articles provide otherwise, dividends and liquidation shares are calculated in proportion to the payments the shareholder has made towards their capital share. The right is real and proportional, but it attaches to the distributed profit, not to the profit earned. Preferential rights attached to certain classes of shares under the articles are reserved (Article 507(2)), and for publicly held companies the Capital Markets Law and its secondary legislation, which contain their own distribution rules, are reserved by Article 507(3).

Two further limits in Article 509 frame what can be paid at all. No interest may be paid on capital (Article 509(1)), and dividends may be distributed only out of the net profit for the period and out of free reserves (Article 509(2)). A company that has accumulated losses cannot pay a dividend simply because it is cash-rich, and a company that has profits cannot pay them out until the reserves the law and the articles require have been set aside. Advance dividends in companies outside the Capital Markets Law are regulated by a communiqué of the Ministry (Article 509(3)).

2. What the Law Takes First: The General Legal Reserve Under Article 519

Before the question of what the majority chooses to retain arises, the Code itself withholds part of the profit. Article 519(1) requires five per cent of the annual profit to be allocated to the general legal reserve until that reserve reaches twenty per cent of the paid-up capital. This is the first-tier reserve, and it is not a matter of choice.

Article 519(2) adds three further items to the general legal reserve even after the twenty per cent ceiling has been reached: the part of the premium on new shares that has not been used for issue expenses, redemption provisions and charitable payments; the amount paid on share certificates cancelled for non-payment, net of the issue expenses of the replacement certificates; and, under sub-paragraph (c), ten per cent of the total amount to be distributed to persons entitled to a share in profit, after a dividend of five per cent has been paid to the shareholders. Sub-paragraph (c) is the second-tier reserve that practitioners call the ikinci tertip, and it is calculated on the amount actually distributed, so it grows with the dividend rather than with the profit.

Article 519(3) explains why these reserves are protected: as long as the general legal reserve does not exceed half of the share capital or issued capital, it may be used only to cover losses, to keep the enterprise going in times when business is not going well, or to take measures to prevent unemployment and mitigate its consequences. A minority cannot demand distribution of that reserve, and a majority that tried to release it for another purpose would be acting against the law. Holding companies whose main purpose is participation in other enterprises are exempt from sub-paragraph (c) and from paragraph (3) (Article 519(4)).

Article 523(1) then draws the line between the mandatory and the discretionary: no dividend to be distributed to shareholders may be determined until the statutory reserves and the optional reserves provided for in the articles of association have been set aside. The articles of a Turkish company frequently provide for an additional reserve, and a minority investor entering a company should read that clause as carefully as any pre-emption or transfer restriction, because it is part of what the majority can lawfully retain every year without any special justification.

3. What the Majority May Choose to Retain: The Two Grounds in Article 523(2)

The provision that decides most dividend disputes is Article 523(2). The general assembly may resolve to set aside reserves other than those provided for in the law and the articles of association only:

• if this is necessary for the replacement of assets (aktiflerin yeniden sağlanabilmesi), or
• if, taking into account the interests of all shareholders, it is justified from the point of view of the sustained development of the company and the distribution of as stable a dividend as possible.

Article 523(3) adds a narrow third category: even without a provision in the articles, the assembly may set aside reserves from the balance-sheet profit to establish or maintain welfare funds and other welfare organisations for the company’s employees or to serve other welfare and charitable purposes.

Three features of Article 523(2) matter in a dispute. First, the grounds are exhaustive. A resolution transferring the whole of the year’s profit to extraordinary reserves is lawful only if one of the two grounds applies; “the majority prefers it” is not a ground. Second, the second ground is qualified twice: the retention must be justified by sustained development and by as stable a dividend as possible, and the assessment must take into account the interests of all shareholders. A policy of retaining everything is the opposite of a stable dividend policy, and a retention that serves only the majority’s interest, for instance because the majority is compensated through management fees while the minority is not, fails the “all shareholders” test on its face. Third, the ground must exist at the time of the resolution and it must be capable of being shown. A company that has retained profit for “investment” for six years without investing, or whose reserves sit in bank deposits while it pays no dividend, will struggle to justify a seventh retention.

None of this means a court substitutes its own dividend policy for the assembly’s. The assembly has a margin of business judgement on how much to invest and how much to distribute; what the Code removes is the freedom to retain without a business reason, and the freedom to use retention as an instrument against a group of shareholders. The evidence that decides these cases is the company’s own: its investment plans and whether they were executed, its liquidity and borrowing, its distribution history, and the flows of value to the majority through channels other than dividends.

4. The First Remedy: Annulment of the Retention Resolution Within Three Months

The direct attack on a profit-retention resolution is the action for annulment under Article 445. The persons listed in Article 446 may bring an action, before the commercial court of first instance at the place of the company’s registered office, to annul a general assembly resolution that is contrary to the law, to the articles of association and in particular to the rule of good faith, within three months of the date of the resolution.

The reference to good faith is what makes the annulment action effective against a resolution that is formally within the assembly’s power. A resolution to retain profit is not unlawful because it retains profit; it becomes unlawful when it falls outside the grounds of Article 523(2) or when, even if a nominal ground is recited, its actual purpose or effect is to deprive a group of shareholders of the return on their investment while others are compensated in a different way. The court examines the resolution against the company’s real situation, not against the wording of the agenda item.

Standing is where minorities most often lose the action before it starts. Under Article 446(1)(a), a shareholder who was present at the meeting may sue only if they voted against the resolution and had their dissent recorded in the minutes. A shareholder who attended, abstained, or objected orally without insisting on the entry in the minutes has no standing under sub-paragraph (a). Sub-paragraph (b) gives standing, whether the shareholder attended or not and however they voted, to shareholders who assert that the meeting was not properly convened, that the agenda was not duly announced, that persons or representatives not entitled to participate took part and voted, that they were wrongly refused participation or the right to vote, and that these irregularities affected the resolution. The board of directors, and each director whose personal liability would result from the execution of the resolution, may also sue (sub-paragraphs (c) and (d)).

For a foreign minority the practical rules are therefore simple and unforgiving: attend every general assembly, in person or by a duly authorised representative; vote against the retention resolution; have the objection written into the minutes in terms that identify the resolution; and instruct counsel before the three-month period expires. A minority that has let several years pass without objecting has not lost the right to object in the future, but each year’s resolution that was not challenged in time stands.

An annulment judgment removes the resolution; it does not itself order a distribution. Its practical effect is that the profit of that year remains undistributed profit which the assembly must decide on again, now under the shadow of the judgment, and that the majority’s conduct is on the record for the purposes of the heavier remedies described below.

5. The Second Remedy: Information, Inspection and the Special Audit

Dividend disputes are usually also information disputes. The minority suspects that the retained profit is being consumed by salaries, rents, consultancy fees or purchases from entities connected with the majority, but it cannot prove it from the published accounts. The Code provides an escalating set of tools.

The starting point is the shareholder’s right to information and inspection at the general assembly (Article 437), which is a precondition for the special audit. Under Article 438(1), any shareholder may request the general assembly, even if the matter is not on the agenda, to have specific events clarified by a special audit, provided this is necessary for the exercise of shareholder rights and the right to information or inspection has already been used. If the assembly approves the request, the company or any shareholder may ask the commercial court at the company’s registered office within thirty days to appoint a special auditor (Article 438(2)).

If the assembly refuses, Article 439(1) gives the minority a direct route to the court: shareholders holding at least one tenth of the capital, one twentieth in publicly held companies, or shares with a total nominal value of at least one million Turkish lira, may ask the court within three months to appoint a special auditor. The court appoints one if the applicants show convincingly that the founders or the company organs have damaged the company or the shareholders by violating the law or the articles (Article 439(2)).

The special audit is a powerful instrument in a dividend dispute for two reasons. It replaces suspicion with an independent report on specific transactions, which is exactly the evidence that a good-faith challenge under Article 445 and a just-cause claim under Article 531 require. And the request itself changes the dynamics of the general assembly: a majority that refuses a special audit into related-party dealings, and is then ordered by a court to submit to one, has usually lost the argument about why the profit could not be distributed.

6. The Third Remedy: Dissolution for Just Cause and the Court-Ordered Buy-Out

Where the retention of profit is one element of a broader pattern — exclusion from management, related-party extraction, refusal of information, a general assembly that functions as a formality — the Code offers the minority its heaviest tool. Under Article 531, where just causes exist, shareholders representing at least one tenth of the capital, and one twentieth in publicly held companies, may ask the commercial court of first instance at the company’s registered office to order the company’s dissolution.

The provision’s second sentence is what matters to most minorities. The court may, instead of dissolution, order that the claimant shareholders be paid the real value of their shares as at the date closest to the judgment and be removed from the company, or may decide on another appropriate and acceptable solution suited to the circumstances. In practice, a minority that has been starved of dividends does not want the company wound up; it wants out at a fair price, and Article 531 is the statutory route to a court-ordered buy-out when the majority will neither distribute nor purchase.

The threshold is set at the capital, not at the votes, and the “just cause” is assessed on the totality of the relationship. A single year’s retention with a stated investment reason will not qualify. A sustained policy of retention without investment, combined with the majority receiving value through salaries and transactions with connected parties and with the minority’s information requests being refused, is the fact pattern in which the claim is credible. The special audit report, the annulment judgments and the minuted objections of earlier years are the building blocks of such a case, which is one reason the cheaper remedies should be used consistently even when their immediate effect seems modest.

7. Practical Guidance for a Foreign Minority Investor

The rules above translate into a short set of practices for a foreign shareholder in a Turkish company that earns but does not distribute.

1. Read the articles for the reserve clause and any preferential dividend rights. What the articles allow the assembly to retain each year without justification is the baseline; what they grant to preferred classes reduces what is left for the ordinary shares (Article 507(2)).
2. Treat every annual general assembly as a litigation event. Attend or be represented, vote against the retention, and have the dissent recorded in the minutes in terms that identify the resolution. Without that entry there is no standing under Article 446(1)(a), and the three-month period under Article 445 runs from the resolution regardless.
3. Use the information right at the meeting and follow it with a special audit request. The special audit under Articles 438 and 439 requires prior use of the information or inspection right; ask the questions first, in writing where possible, and put the audit request on the record.
4. Build the file on the two Article 523(2) grounds. Ask the board to state which ground supports the retention and to document it. Investment plans that never materialise, cash held on deposit and a majority paid through other channels are the facts a court will weigh.
5. Calibrate the remedy to the objective. Annulment restores the question to the assembly; the special audit produces evidence; Article 531 produces an exit at real value or a court-designed solution. A minority whose objective is a fair exit should be building towards Article 531 from the first objection, not discovering it after the fifth undistributed year.
6. Consider the shareholders’ agreement. A contractual dividend policy, a put option at a formula price or a deadlock mechanism is enforceable between the parties and avoids the need to prove bad faith. Investors entering a Turkish company with a strong majority partner should negotiate these terms before subscribing, because the statutory remedies, while real, are slower and require a record built over years.

The statutory position can be summarised in one sentence: the majority decides on distribution, but it may retain profit beyond the legal and articles-based reserves only to replace assets or to pursue sustained development and a stable dividend in the interests of all shareholders, and a minority that objects on the record has three months to challenge the resolution, a route to an independent audit, and, when the pattern persists, a claim for a court-ordered exit at real value.