Liabilities of Board Members - 2:
Release: Discharge of a Board Member from Legal Liability

Liabilities of Board Members - 2:

Release: Discharge of a Board Member from Legal Liability

Release is one of the primary resolutions the shareholders can adopt regarding board of directors [“Board”] members. With release, the general assembly approves the transactions carried out by the Board members during the relevant fiscal year in terms of their economic and legal consequences. Hence, the corporation loses the right of action upon release. As such, the release resolution is considered to be a “negative acknowledgement of debt” and therefore removes any debt.

Nevertheless, release does not cover all actions taken and transactions performed by Board members. In this respect, Board members’ liability persists in matters outside the scope of the release. Moreover, a valid release resolution may affect the person’s capacity to sue, and it may also alter the statute of limitations. Therefore, practitioners frequently experience hesitations regarding the plaintiff's capacity to sue or the applicable statute of limitations when filing a liability lawsuit.

In this article, we discuss the procedures, consequences, and nullification of a release resolution as well as its effects on a possible liability case.

I. Release Procedures

A. Adoption of a Resolution in the General Assembly: Explicit Release

According to the Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Corporations and the Ministry Representatives Attending These Meetings, release of the Board members is a mandatory agenda item in ordinary meetings of the general assembly of shareholders. Board members can also be released in an extraordinary meeting of the general assembly.

When the general assembly adopts a resolution to release the Board members, each Board members is individually released, rather than the Board itself as an institution. While most general assembly agendas contain “release of the Board” as an item, in fact, the Board members are being released individually. Therefore, the general assembly may choose to release some Board members while excluding others from the release resolution, and also may decide on a partial release, either in terms of a specific time period or particular transactions. However, general release resolutions are most common in practice.

There is no special statutory quorum for release resolutions. Hence, unless the articles of association necessitates an aggravated quorum, a resolution for release can be adopted by simple majority in a general assembly where shareholders holding at least one fourth of the total shares are present or represented through proxy.

B. Approval of the Balance Sheet: Implicit Release

While Board members may be explicitly released as explained above, they may also implicitly be released [TCC Art. 424]. Accordingly, Board members are indirectly released when the general assembly approves the balance sheet for the respective fiscal year. However, the general assembly may also approve the balance sheet without releasing the Board members.  

C. Board Members’ Voting Prohibition in Release Resolution

Board members that are also shareholders cannot participate in voting regarding release [TCC Art. 436/2]. In these cases, shareholder’s voting right is suspended due to the conflict of interest. Likewise, Board members also cannot participate in voting of release of other Board members as they have a shared interest. This may sometimes render the adoption of a release resolution impossible. For example, in a corporation with a sole shareholder, if the shareholder is also a Board member, they cannot be released since they cannot partake in the voting regarding the release of the Board members.

Given that it also implicitly releases the Board members, they also cannot vote in the voting regarding the approval of balance sheets. However, if release and approval of balance sheets are separately voted or if the general assembly explicitly decides that the approval of balance sheets would not constitute an implicit release, the Board members may vote on the approval of balance sheets since it is no longer directly related to the release of Board members.

II. Scope of the Release Resolution

Whether explicit or implicit, release is limited only to matters and transactions that the general assembly is aware of. Matters either unknown or that could not possibly be known by the general assembly are out of the scope of release resolutions.[1] Once again, in implicit release, if the balance sheets contain records that obstruct the exposure of the current state of the company, or if some records are missing or absent, the approval of the balance sheets do not result in the release of the Board members [TCC Art. 424]. However, in such case, the balance sheets should have been faultily prepared on purpose.

III. Can a Resolution for the Release of Board Members be Adopted Without  Discussing the Financial Statements

There are two differing opinions on the issue. Some scholars argue that since the law does not impose such a requirement, there is no connection between the discussion of the financial statements and the release resolution, while others assert the opposite––they state that there is a strong relationship between the financial statements and the release resolution, and the financial statements form the basis of this decision. In this context, financial statements must be discussed for a valid release decision.

It is noteworthy that, in its ruling in recent years, the Court of Cassation considers the discussion of the financial statements as a prerequisite for the validity of the release. [23rd Legal Division Judgment no. 2016/3941 E. 2019/183 K. dated 28.01.2019]

Indeed, financial statements including balance sheets and release are closely connected. Therefore, if the minority shareholders request for a one-month delay for the discussion of the financial statements and related topics [TCC Art. 420/1], the discussion on the release resolution should also be delayed. Otherwise, the following voting and therefore the release decision will have been taken in contempt of the law.

IV. Can a Resolution for Release be Reversed?

TCC explicitly states that a resolution adopted for the release of the Board members cannot be reversed [TCC Art. 558/1]. As a formative right upon Board members, release resolutions come into effect when they are received by the other party and cannot be posthumously reversed. However, there is no regulation preventing a lawsuit for the nullification of the general assembly meeting in which the release resolution was adopted. Therefore, those who can file a lawsuit for the nullification of the general assembly pursuant to Art. 446 of the TCC can do so in cases where a release resolution was adopted against the law, articles of association and in particular, against goodwill within 3 [three] months following the resolution.

V. Effects of Release on Liability Lawsuits

A. Effects on the Shareholders and Creditors’ Right of Action

If Board members do not fulfil their obligations arising from the law or the articles of association, their personal liability may arise. In such cases, the Board members face the risk of liability lawsuits from the corporation, shareholders and [in case of bankruptcy] creditors. For detailed information on the legal liability of Board members and the liability lawsuit, you can refer to our article "Legal Liability of Board of Directors Members".

Release, as a form of debt exoneration, eliminates the right of action of the joint stock corporation regarding the respective fiscal year. However, in liability lawsuits, shareholders and creditors retain their right of action -within statutory limitations- due to direct or indirect damages. This is because of the fact that the shareholders and creditors’ rights of action are entirely independent of and does not derive from the corporation’s right of action. There is especially no doubt that the creditors’ rights of action will be retained following release.

The shareholders' right of action, on the other hand, is not affected in terms of direct damages since there is no connection between release within the framework of corporate activities and the damage directly incurred by the shareholder. In terms of indirect damages, the release resolution removes the right of action of the shareholders who voted for the release and who acquired the share knowing the release resolution [TCC Art. 558/2]. Undoubtedly, a shareholder who votes in favour of release and proceeds to file a liability lawsuit against the Board members will have acted in bad faith. However, in cases where the shareholder is unable to manifest their will, they can exercise their right of action upon proving this inability. To sum up, the rights of action for shareholders who vote against the release resolution or do not attend the meeting are retained. That being said, in these cases, attention should be paid to the statute of limitations explained below.

B. Effects on the Statute of Limitations

Board members face the risk of liability lawsuits if they violate their obligations arising from the law and the articles of association. For such cases, the statute of limitations is 2 [two] years following the day the plaintiff becomes aware about the damage and the responsible person, and 5 [five] years in any case from the date of the act causing the damage [TCC Art. 560]. In cases where there is a valid release resolution, the statute of limitations for liability lawsuits is different: the right of action of the shareholders who do not vote in favour of the release resolution ceases after 6 [six] months following the release date [TCC Art. 558/2]. Therefore, shareholders who plan to file a liability lawsuit against Board members should pay attention to whether there is a release resolution, and if there is, the shorter statute of limitations will be applicable.

VI. Assessment

All in all, release resolutions adopted in compliance with the regulations and after discussing the financial statements discharge Board members from legal liability. However, the scope of the release can only be limited to transactions and actions known by the general assembly. Release resolutions adopted in contempt of the law, articles of association and the principle of goodwill face the risk of nullification.

 

[1] AKDAĞ GÜNEY, Necla, “Anonim Şirket Yönetim Kurulu” [Board of Directors in Joint Stock Companies], Vedat Kitapçılık, İstanbul, 2010, s. 421