The year closes, the accounts are drawn up, the balance sheet shows a profit. The general assembly (genel kurul) meets and, on the agenda item for the distribution of profit, resolves not to distribute it. At the third step the thing cracks: the next morning one of the siblings asks where he stands in a company that is making money. In family businesses the first serious quarrel starts right there. The generation working inside the business wants a new machine, more stock, a second warehouse. The generation outside it wants to see its shareholding turn into cash at least once a year. Both positions are coherent, which is why the dispute runs for years.
A decision not to distribute changes meaning over time. In the first year it is a financing choice, by the third a habit, and by the fifth it reads to the other side as a message: you do not belong here. When the parties finally sit down, what blocks the discussion is rarely the figures — it is that accumulated feeling. The negotiation still has to start somewhere, and the right starting point is what the right to a dividend depends on in law.
The Turkish Commercial Code is clearer here than most families expect. A shareholder holds no right reaching into the company’s bank account; the Code makes the dividend conditional on a corporate resolution, while refusing to leave that resolution to unlimited discretion. Every dividend argument in a family company turns on that calibration.
At what moment does the right to a dividend arise?
Under TTK Article 507 every shareholder is entitled to participate, in proportion to its shares, in the net profit for the period whose distribution has been resolved and in the surplus remaining on liquidation. The weight of that sentence sits on the words “whose distribution has been resolved”: the Code recognises the entitlement, but makes its conversion into cash conditional on a resolution to distribute.
Without such a resolution the shareholder holds an abstract right of participation and no definite claim against the company; once it passes, the dividend becomes a debt the shareholder may demand. The distinction dictates the channel the dispute runs through: undistributed profit is not recovered by a claim for payment, and the argument has to be fought over the general assembly resolution itself.
In family companies this has usually never been explained to anyone. A second-generation shareholder assumes his shares automatically earn him a slice of each year’s profit. He then finds himself facing a majority exercising a discretion he did not know existed. No negotiation moves until that gap is closed.
Where reserves end and hoarding begins
The general assembly does not exercise its discretion in a vacuum. TTK Article 519 provides two tiers of general statutory reserve (genel kanuni yedek akçe). The first tier is 5% of the annual profit, set aside until the reserve reaches 20% of the paid-in capital. The second bites on distribution: where a distribution exceeding 5% of the paid-in capital is resolved, 10% of the portion resolved to be distributed is added to the reserve.
That much is mechanical. The argument begins with reserves set aside beyond the statutory ones. TTK Article 523 permits the general assembly to resolve on additional reserves, but not as an unconditional power: the reserve must be justified by the company’s continuing development and by dividends that are as stable as possible.
Families overlook the second criterion. “Dividends as stable as possible” constrains a decision not to distribute. What justifies a reserve is keeping the company able to distribute tomorrow. Suspending distribution indefinitely falls outside the test. A resolution passed without a stated reason leaves the impression, years later, that the criterion was never considered.
Hence the same advice every year: record in the resolution what the retained profit is being held for — which investment, which repayment plan, which working capital requirement. One sentence of reasoning stops the resolution being read in a different light five years on.
The fracture points of a balance built on salaries
In most family companies the payroll strikes the cash balance. Those working in the business reach cash through salary, bonus, a car and expense lines. Those outside it receive nothing unless a distribution is made. Where three siblings own a manufacturing company and two draw salaries as general manager and plant manager while the third appears only at the general assembly, equal shareholdings sit on a plainly unequal arrangement.
That arrangement has three fracture points. The first is employment law: when the family relationship breaks down, terminating a contract that has run for years becomes a dispute of its own, with severance and notice claims attached. The second is tax; a salary no unrelated party would accept invites an argument about disguised distribution of profit through transfer pricing under Article 13 of the Corporate Tax Code no. 5520. The third is company law: drawing money against a current account runs into TTK Article 395 and its prohibition on a board member borrowing from the company.
Distribution carries tax consequences of its own, and the withholding dimension belongs in the planning. Tax is not, however, a reason to substitute the salary channel for the dividend one. A salary is the return on work, set on arm’s length terms; the return on capital is the dividend. Once the two blur, so does the family’s sense of what is fair.
When does a refusal to distribute become just cause?
A single year without a dividend is not just cause anywhere. But the files we see never involve a single resolution: years of non-distribution, effective exclusion from management, unanswered requests for information, and a majority still reaching cash through the payroll combine into a cumulative picture. That is where an action for dissolution for just cause (haklı sebeple fesih) under TTK Article 531 for a joint stock company, or TTK Article 636 for a limited liability company, enters the discussion.
Its function in a family company is widely misread. The claimant wants a deadlocked negotiation reopened, not the business wound up. The seriousness of the claim forces the other side to discuss what it has never put on the table. It is the heaviest and bluntest instrument a minority shareholder holds, and using it makes any return to the earlier relationship harder.
The lesson for the majority is simpler. Each unreasoned resolution not to distribute adds a page to a file that will later be used against it. What makes non-distribution defensible is the written logic behind the decision. In companies that have gone years without a distribution, the allegation that a shareholder has been unfairly prejudiced gathers force from the absence of that logic.
What a written dividend policy solves, and what it does not
The cheapest way to head off this argument is to write the dividend policy before the dispute arrives. To work, it needs three features: announcement in advance, a measurable threshold, and explicit exceptions.
- The threshold. The policy should define the financial conditions under which a distribution will be made; net debt, working capital needs and the planned investment budget are its natural components. The figures must come out of the company’s own reality rather than a comparable business.
- The duty to give reasons. Where the threshold is met and no distribution follows, the reason should be stated in the resolution. That duty makes the justification test required by TTK Article 523 visible on paper.
- Separating the channels. Salaries paid to working shareholders should be set on arm’s length terms and kept distinct from dividends; otherwise the payroll becomes a concealed distribution channel.
Where the policy is written down changes the outcome too. A family constitution (aile anayasası) is not an institution regulated by the Turkish Commercial Code and carries no enforceability of its own as a company law instrument. A shareholders’ agreement (pay sahipleri sözleşmesi) binds only those who sign it; an heir or in-law who joins later stands outside that text. Anything meant to bind the company has to be carried into the articles of association (esas sözleşme) or a properly adopted general assembly resolution.
Something the policy does not solve: a text will not reconcile a family that cannot agree on how much to distribute. What it does is move the argument off emotional ground and onto measurable ground. A corporate governance structure that manages this spares the family the same quarrel every year.
Our advice to families entering this argument runs in order. Explain the legal position first, because the right to a dividend under TTK Article 507 depends on a distribution resolution, and a party who does not know this makes the wrong demand. Then make the reserve position transparent, separating what must be set aside under TTK Article 519 from what the general assembly chooses to set aside under TTK Article 523. Next, put the reasoning behind each decision not to distribute in writing, and keep the salary and dividend channels apart. Do that, and a claim under TTK Article 531 or Article 636 largely loses its ground. Leave it undone, and the company becomes a place that earns money while nobody in it is content.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
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