Corporate Governance and Directors' Duties in Turkey 2024 - Part 2

Directors' Duties and Liabilities

16. What is the scope of a director's general duties and liability to the company, shareholders and third parties?

The principal duties of directors are:

• To act prudently and diligently when conducting business and performing their duties and the business of the company.

• To monitor and supervise the management and the business of the company to ensure that it complies with the

principles of good faith and the interests of the company and its shareholders.

• To keep confidential information obtained during and after the term of duty.

• To refrain from attending board meetings regarding their own interests or the interests of certain close relatives.

• Not to engage in transactions with the company unless authorised by the GaM, which can be for a maximum period of five years in relation to the repurchase of shares.

In general, for a director to be personally liable, the following conditions must be met:

• The director must have:

• breached their duties under the legislation or the articles of association;

• acted with fault (including negligence).

• The company, shareholders or creditors must have suffered a loss/damage as a result of the breach,

• There must be a causal link between the loss/damage and the director's breaches.

(Article 553, CC.)

Directors who have assigned their duties (to the extent legally possible) arising from the law or the articles of association do not bear any liability for the acts and decisions of the assignee director (unless it is established that they failed to show reasonable care in the selection of the assignee officers).

In relation to directors' negligence, the required standard of care is that given by a prudent director, who acts cautiously and considering the interests of the company in good faith.

A judicial fine can be imposed for a breach of duty under the CC. In certain cases, a prison term can be imposed on the director or they must indemnify the company against the losses that resulted from their acts.

17. Can a director's liability be restricted or limited? Can the company indemnify a director against liabilities?

Directors can delegate their duties (see Question 16 and Question 17). Therefore, their liability can also be restricted in the same degree as the delegation. However, the delegation of duties does not absolve the director of liability if the director has failed to show reasonable care in the selection of the assignee officers. Also, a restriction does not eliminate liability towards third parties acting in good faith, unless both of the following apply:

• The power of representation is restricted to the affairs of the company headquarters or branch or is restricted to joint signatures of members of the BoD.

• This restriction is duly registered and published.

A company can indemnify a director against liabilities. The GaM can also decide to release directors from liability. The approval of the balance sheet results in the release of the members of BoD, unless indicated otherwise in the GaM decision. However, if the balance sheet is not properly provided or intentionally obscures the company's real conditions, the approval does not result in a release (Article 42, CC).

18. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

It is possible to obtain insurance against directors' personal liability arising from the performance of their duties. The company can pay the insurance premium.

In public companies, if the damage is insured at a price exceeding 25% of the company's capital and the company is secured, this must be announced in the Capital Markets Board Bulletin. In addition, if the shares of the company are listed on a stock exchange, this must also be announced in the stock exchange bulletin (Article 361, CC).

19. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (eventhough they have not been formally appointed as a director)?

The CC sets out a special liability for companies controlling other companies in its group:

• Shareholders and creditors of an affiliated company can initiate a compensation action against a dominant company and/or its directors where there is an abuse of dominance by the controlling company that:

• damages the affiliated company, for example, directing the affiliated company to engage in transactions that reduce or transfer its profits, assets or receivables, and so on; and

• fails to compensate losses of the affiliated company or grant a right equivalent to the losses to the affiliated company within the same fiscal year.

• If a merger, demerger, acquisition or issuance of securities takes place in the affiliated company, with the use of dominance and without a justified reason, shareholders who voted against the relevant GaM decision or who objected to the relevant resolution of the BoD can:

• initiate an action against the controlling company for indemnification of their losses; and

• request the controlling company to purchase their shares.

Transactions with Directors and Conflicts of Interest

20. Are there general rules relating to conflicts of interest between a director and the company?

Article 369 of the CC sets out a duty of care and duty of loyalty for members of the BoD. The CC requires the members of the BoD to act as cautious directors while performing their duties and to protect the interests of the company in accordance with the principle of good faith.

The CC provides certain restrictions concerning the relations of the members of the BoD with the company in light of the duty of care and duty of loyalty:

• Directors are prohibited from participating in the relevant BoD' meeting in cases of conflict of interest between the company and the directors or their relatives by blood or marriage (Article 393, CC). This prohibition also applies in circumstances where the director must not participate in the discussions due to the principle of good faith.

• Directors cannot conclude any transaction with the company on behalf of themselves or a third party without the GaM's approval (Article 395, CC). If they do so, the company can claim the transaction to be invalid. In addition, directors who are not shareholders, and certain relatives of theirs, cannot incur any cash debt to the company.

• In parallel with the CC provisions, the CG Principles also set out certain requirements in relation to related-party transactions, and require a BoD' resolution and GaM approval under certain circumstances.

Directors cannot conclude a transaction falling in the company's scope of activity on behalf of themselves or a third party without the GaM's approval or cannot become unlimited partners in a company that has similar scope of activity (Article 396, CC).

21. Are there restrictions on particular transactions between a company and its directors?

There is a general prohibition on transactions between directors and the company (see Question 28). This restriction applies to all types of transactions.

22. Are there restrictions on the purchase or sale by a company director of the shares and other securities of the company?

There is no restriction in the CC on the purchase or sale by a director of the shares and other securities of the company of which they are a director. However, Article 106 of the Capital Markets Law restricts the purchase or sale of such shares and other securities by a director. Directors can be subject to a prison term of between three and five years, or a judicial fine, if they:

• Give, change or cancel purchase or sale orders for capital market instruments.

• Provide a benefit to themselves or someone else.

• Do either of the above based on information that can affect the prices of the capital market instruments, or the decisions of investors, and that has not been declared to the public.

23. Are there any formal requirements or guidelines relating to the internal control of business risks?

The BoD of companies with shares traded on a stock exchange must set up a committee for early detection of risks related to the existence, development and continuance of company, and for applying required measures and remedies in this regard (Article 378, CC). In other companies, this committee is set up if it is deemed necessary by the auditor.

In addition, Article 4.5.12 of the CG Principles also requires a committee to be formed for early detection of such risks.

24. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

The BoD is responsible for the preparation of balance sheets and financial reports, and their submission to the GaM for approval. Unless otherwise provided in the GaM resolution, approval results in release of directors, managers and auditors from any associated liability (Article 424, CC) (see Question 25). However, if there are missing issues in the balance sheet, or the balance sheet deliberately includes issues which conceal the real situation of the company, the approval does not result in release and the directors can be subjected to criminal liability.

25. Do a company's accounts have to be audited?

The conditions for determining the companies subject to independent audit are set out by the Decision of Council of Ministers (Article 397, CC). According to the Decision on the Determination of Companies Subject to Independent Audit, the companies in List (I) of the annex to the decision are subject to independent auditing.

From 1 January 2023, the companies whose capital market instruments are not traded on a stock exchange or other organised markets but are deemed publicly listed under the Capital Markets Board are subject to an independent audit if they have at least two of the following (either alone or together with its affiliates) in two subsequent fiscal years:

• A total assets value of at least TRY30 million.

• A net sales revenue of at least TRY40 million.

• At least 50 employees.

The companies specified in List (II) are subject to independent audit if they have at least two of the following (either alone or together with its affiliates) in two subsequent fiscal years:

• A total assets value of at least TRY60 million.

• A net sales revenue of at least TRY80 million.

• At least 100 employees.

Companies that do not meet at least two of the criteria set out in List (I) and List (II) must retain independent auditors if they have at least two of following (either alone or together with its affiliates) in two subsequent fiscal years:

• A total assets value of at least TRY75 million.

• A net sales revenue of at least TRY150 million.

• At least 150 employees.

The audit must be made according to Turkey Auditing Standards, which are established by the Public Oversight Accounting and Auditing Standards Authority.

26. How are the company's auditors appointed? Is there a limit on the length of their appointment?

The company's auditor must be appointed by the GaM. In a company group, the group auditor can be appointed by the GaM of the controlling company.

The auditor must be appointed in every fiscal year and before the end of the fiscal year. After the appointment, the BoD must register the relevant general assembly resolution with the Trade Registry and announce it on the Trade Registry Gazette and company's website immediately.

If there is a justified reason, especially in case of a doubt concerning auditor's impartiality, the court can assign another auditor at the request of BoD or minority shareholders. For a minority shareholder to request the assignment of an auditor:

• The shareholder must have opposed the appointment of that auditor during the GaM.

• That opposition must have been recorded in the appointment resolution of general assembly.

• The shareholder must have become a shareholder of the company at least three months before the auditor's appointment.

If the auditor is not appointed within the first four months of the fiscal year the BoD, directors and every shareholder can request the court to appoint an auditor.

If an auditor cannot be appointed until the fourth month of the activity period of a company for which the Savings Deposit Insurance Fund has been appointed as a guardian, the auditor will be appointed by the Minister to which the Savings Deposit Insurance Fund relates to. The Minister can delegate this authority to Fund Board.

An auditor can terminate the auditing contract only if there is a justified reason or a court action is filed for removal of the auditor (Article 399, CC).

27. Are there restrictions on who can be the company's auditors?

Company auditors must be either:

• Persons who are certified or independent public accountants that are licensed by Public Oversight Accounting and

Auditing Standards Authority.

• Corporations whose shareholders are persons who are certified or independent public accountants that are licensed by Public Oversight Accounting and Auditing Standards Authority. (Article 400, CC.)

A person cannot be appointed as an auditor if they:

• Were a director or employee of the company to be audited three years before the appointment as an auditor.

• Are:

• a shareholder, director or an employee of the company to be audited;

• a representative or legal representative, or member of the BoD of a company that is linked to the company subject to audit;

• a director or owner of a company that has a connection with the company to be audited;

• a shareholder holding more than 20% shares of that company;

• a spouse, or someone with lineal kinship with a director or manager of the company to be audited, including third degree relatives by blood or marriage;

• working in a company with a connection to the company to be audited, or in an enterprise that has more than 20% shares of the company, or that provides services to a real person who has more than 20% shares of the company to be audited;

• involved in or contributing to the keeping of commercial books and preparation of the financial statements of the company to be audited (other than providing audit services);

• a representative, legal representative, employee, director, shareholder or owner of a natural or legal person who cannot be an auditor under the above paragraph;

• working for a person who cannot be an auditor as above;

• a person who has received at least 30% of their income within the last five years by providing auditing and consultancy services to the company, or to companies which have more than 20% of the shares of the company to be audited.

In addition, an auditor who has been appointed as an auditor for seven years in a ten-year period, cannot be appointed again for at least three years (Article 400, CC).

28. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

The company's auditor or its affiliates cannot provide consultancy services to the company other than the tax consultancy and tax audit services (Article 400/3, CC).

29. What is the potential liability of auditors to the company, its shareholders, and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

If the auditors who audit the company's year-end and consolidated financial statements, reports and accounts act with fault while performing their legal duties, they are responsible to the shareholders and the company's creditors for damages caused by them (Article 554, CC).

There is no provision related to limitation or exclusion of liability.

First published by Practical Law in Jul 01, 2024.

Link: https://uk.practicallaw.thomsonreuters.com/3-502-0124Corporate Governance and Directors' Duties