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Parallel Proceedings: Fighting on Two Fronts

Parallel Proceedings: Fighting on Two Fronts

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“Parallel proceedings” are disputes between the same and/or related parties in the same or related disputes in different forums. Parallel proceedings usually arise when court and arbitration proceedings are commenced simultaneously to resolve the same case or a case that will in some way affect the other. Disputes arising out of shareholders’ agreements and articles of association, in particular, come under the spotlight in Turkey in the context of parallel proceedings.

A shareholders’ agreement is executed by the shareholders of a company to regulating the relationship between themselves and, indirectly, the company itself. It is subject to the principle of freedom of contract, and parties enjoy a fairly wide range of autonomy with regard to the contents of the agreement. Parties tend to use the same or similar content in the articles of association of a company as well. However, as the provisions of a shareholders’ agreement have a contractual nature, their breach may also have an effect at the corporate level, especially considering that shareholders’ agreements and articles of association have the same or similar provisions. This situation inevitably leads to parallel proceedings, which will, of course, complicate and aggravate the dispute and slow down its final resolution. It will also have a direct effect on the financial resources and time of the parties, because they have to contend on many different fronts. 

Furthermore, disputes arising out of cross-border deals may extend to different jurisdictions. In many cases, parallel proceedings lead to conflicting judgments/awards being given on the same set of facts, which risks rendering the whole process meaningless. In this point, arbitrators should understand the needs of the parties. Arbitrators have a duty to apply the provisions of the shareholders’ agreement and to render a “meaningful” award. If the parties have set forth in the shareholders’ agreement how they will exercise their rights arising from the law, arbitrators should respect their intention and decide that contractual provisions should prevail over the provisions of the law. Otherwise, contracts would remain pieces of paper with no effect – making the famous “creation of a new legal world” impossible. Therefore, arbitrators are in a sense “obliged” to protect what their fellow lawyers have created. In other words, even where rights are granted by law, the parties have the freedom to determine whether to exercise them or not. If the parties have agreed in the shareholders’ agreement that they will exercise rights in a certain way, arbitrators should respect their choice, as any act against the shareholders’ agreement would constitute a breach of contract. Therefore, arbitrators should not allow either party to hide behind the provisions of the law to torpedo the arbitration proceedings. 

In order to avoid such situations, parties may benefit from an “anti-suit injunction” – an interim measure that restrains a party from commencing or pursuing court proceedings. For instance, a party may argue that it is entitled to commence a lawsuit before state courts by rights arising from the Turkish Commercial Code or other applicable regulations. The arbitral tribunal may, nonetheless, grant an anti-suit injunction, if the exercise of the right being cited would breach the shareholders’ agreement in which parties have agreed to settle their disputes through arbitration. However, such injunctions are still controversial in Turkey, as in many other jurisdictions. 

In today’s legal order, it seems impossible to completely avoid parallel proceedings, especially in shareholder disputes. However, their occurrence may be prevented as early as the time the shareholders’ agreement and the articles of association of a company are drafted. The arbitration clause should also be worded in a plain and straightforward manner. Nevertheless, even lawyers with accomplished drafting skills may not be able to prevent parallel proceedings from being initiated entirely.

If the occurrence of parallel proceedings is inevitable, the next step should be to consider the options for challenges and pleas as to the jurisdiction of the unwelcome forum. Given that these challenges and pleas may still not prevent the occurrence of parallel proceedings, parties should also learn to live with them, when the occasion warrants. Just remember The Matrix, a movie in which what happens in the “virtual world” influences the “real world” – and vice versa. Parallel proceedings are no different, as the legal platforms where the battles are fought inevitably affect each other. In this regard, strong expertise across a wide range of jurisdictions, extensive knowledge both of M&A transactions and dispute resolution proceedings, and experience in the process are vital, as the parties should take care to assess carefully the results that may arise in the other forum.

By Ismail Esin, Managing Partner, Ali Selim Demirel, Senior Associate, Yigitcan Bozoglu, Associate, Esin Attorney Partnership

This Article was originally published in Issue 4.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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