Corporate Governance and Directors Duties in Turkey Overview - 2

The Q&A gives a high-level overview of corporate governance trends; the main forms of corporate entity used; the corporate governance legal framework; corporate social responsibility and reporting; board composition and restrictions; directors' remuneration; management rules and authority; directors' duties and liabilities; transactions with directors and conflicts; disclosure of information; shareholders' rights, company meetings, and minority shareholder action; and internal controls, accounts and audits.

16. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' Powers

The BoD is responsible for all company business and transactions required for realisation of the company's operations, save for the non-transferable powers granted to the general assembly by law or the articles of association.

Under the CC, the following issues are non-transferrable powers of the general assembly (Article 408, CC):

• Amending the articles of association.
• Releasing the auditors and the BoD from liability or holding them liable for any wrongdoing.
• Appointing the members of the BoD, determining their fees and term of duties, and releasing and replacing them.
• Appointing and releasing the auditor (except in certain legally-defined circumstances).
• Taking decisions regarding:
• financial statements;
• annual reports of the BoD;
• savings from annual profits; or
• the determination of the dividend and gain margin, including injections of the reserve fund into capital or profit to be distributed, and deciding on the use of the reserve fund.
• Dissolving the company (except in certain legally-defined circumstances).
• Sale of a substantial part of the company.

Restrictions

Under the CC, in principle, signature authority must be exercised jointly by any two of the board members, unless otherwise stated by the articles of association or the BoD consists of only one member. However, the BoD can transfer all the management rights of the company to one or more executive members, or to a third party as the manager. In such a case the company regulates an internal directive but this internal directive does not need to be registered and announced by the trade registry.

Apart from the management rights, the BoD can transfer its representation authority to one or more executive members or a third party as the manager. In principle, a restriction on a director's power of representation has no effect against third parties acting on that representation in good faith, unless:

• 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.(Article 371, CC.)

In addition, the BoD can appoint non-representative members of the BoD or persons bound to the company by a labour contract, as commercial representatives with limited authority or as other commercial assistants. This must be explicitly reflected in an internal directive issued in accordance with Article 367; however, this time the internal directive must be registered and announced.

17. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

Although there is no requirement to do so, it is possible for BoD to delegate responsibility for specific issues under the CC (see Question 16).

Directors' Duties and Liabilities

18. 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.

19. Briefly outline the regulatory framework for theft, fraud, and bribery that can apply to directors.

There is no umbrella legislation regulating white-collar crimes. However, the general regulations relating to white-collar crimes are mainly found in the Criminal Code.

Under the Turkish Constitution and the Criminal Code, criminal liability is personal and legal entities cannot be sentenced to criminal sanctions (unlike individuals). Therefore, directors who are involved in white-collar crimes such as theft, fraud and bribery can be held individually responsible under the relevant provisions of the Criminal Code. However, if the crime is committed for the benefit of the legal entity, the entity may be subject to some measures such as the cancellation of permission to operate or confiscation of profits received due to the crime.

20. Briefly outline the potential liability for directors under securities laws.

In securitisation processes, in case of a loss caused by false, fraudulent, fake and untrue documents, statements, commitments and warranties, the director who has prepared the relevant document or made the relevant declaration is liable (Article 549, CC).

The Capital Markets Board can take any measures and request preliminary injunctions or provisional attachments against individuals who illegally issue or attempt to issue capital market tools as compensation for sold and for-sale securities (Article 91, Capital Markets Law).

After a determination of liability, the Capital Markets Board issues a written notice to the issuers within 30 days for mitigation of the consequences and refund of cash and other assets to right holders.

If the consequences resulting from this illegal issuance are not totally eliminated within one year starting from the date of the written notice, the Capital Markets Board can file a lawsuit for refund of cash and other assets to right holders or for the liquidation of the company.

21. What is the scope of a director's duties and liability under insolvency laws?

If a company becomes bankrupt due to the management failures by its directors, the shareholders or the creditors of the company can hold the directors or officers liable for their losses under the Code on Enforcement and Bankruptcy. The relevant criminal sanction is applied to the directors, liquidators or the auditors who committed the act defined in the crime.

If there are signs that the company may be insolvent, the directors must prepare an interim balance sheet (Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the CC) (Article 376 Communiqué). Signs of insolvency can be found in the annual and interim financial statements, audit reports (if any), reports of the early detection committee and the findings of the directors.

If the balance sheet indicates that the company is insolvent, the directors must apply to the court to decide the company's bankruptcy if the following are present:

• The BoD decides that the assets of the company are insufficient to cover the company's debts.
• None of the measures set out in Article 7 of the Article 376 Communiqué have been taken (that is, to continue trading with one third of the capital and making a capital decrease, or restoring or increasing the capital).

Provisional Article 1 of the Article 376 Communiqué prevents foreign exchange losses arising from the foreign currency liabilities that are not yet fulfilled and half of the total personnel expenses, depreciation and expenses arising from leases in 2020 and 2021 from being considered in the calculations regarding the loss of capital or insolvency under Article 376 of the CC until 1 January 2024.

The directors in charge of management and representation can be be subject to a prison term of up to three months on a complaint by the creditors for not requesting the bankruptcy of the company when required to do so.

In addition, under the Code on Enforcement and Bankruptcy, directors who do not pay the company's debts partially or fully with the intention of damaging creditors' rights can face a prison term of between six months and two years, and a judicial penalty of up to 5,000 days, on a complaint by the creditors.

Negligent and fraudulent bankruptcy is defined under the Code on Enforcement and Bankruptcy, which refers to the Criminal Code regarding the sanctions applied.

The following actions can constitute negligent bankruptcy:

• Not being able to show reasonable grounds for the losses.
• Incurring large losses during stock exchange transactions.
• Undertaking debts or issuing bonds in case of indebtedness.
• Not complying with the bankruptcy procedures.
• Not requesting the bankruptcy where it is compulsory.

Transactions aiming to damage the creditors' rights constitute fraudulent bankruptcy. These include:

• Entering into collusive transactions before or after the bankruptcy.
• Misrepresenting the value of the assets.
• Providing favourable conditions to one of the creditors.
• Selling off the assets for an amount much less than its value.

The sanctions under the Criminal Code are:

• For negligent bankruptcy: prison term of between two months and one year.
• For fraudulent bankruptcy: prison term of between three and eight years.

22. Briefly outline the potential liability for directors under environment and health and safety laws.

Legal entities must ensure that they have taken the necessary environmental measures in respect of their commercial activities in accordance with the Environment Code (2872).

Requirements under the Environment Code include:

• Obtaining the necessary Environmental Impact Assessment Report before commencing activities that may lead to environmental problems (mostly construction projects).
• Obtaining the required licences and all other related permissions in relation to the commercial activity to be conducted.
• Notifying the relevant Ministry and administrative bodies of any material change in the business that may result in any environment issues, and so on.

The Environment Code sets out administrative fines for non-compliance with these duties by companies. The companies can claim against the liable directors and officers for those losses under the general principles of liability (see Question 18).

Both natural and legal persons, institutions and organisations without legal capacity who hire employees are considered to be employers (Law on the Occupational Health and Safety (6331)). In addition, representatives of an employer who act on behalf of the employer and take part in the governance of the work and workplace, have the responsibilities and duties of employers, including in relation to:

• Protecting employees' safety and health by preventing occupational risks.
• Providing appropriate training.
• Making risk assessments.
• Hiring occupational safety specialists or physicians.

Administrative fines can be imposed on the employer or employer representative for non-fulfilment of these responsibilities.

23. Briefly outline the potential liability for directors under anti-trust laws.

An administrative fine of up to 10% of an undertaking's annual gross revenues can be imposed for an infringement of competition law (Article 16, Law on the Protection of Competition No. 4054). In addition, an administrative fine of up to 5% of the penalty imposed on the undertaking can be imposed on managers/directors of the undertaking who are found to have a decisive influence in an infringement.

24. Briefly outline any other liability that directors can incur under other specific laws.

Liability for public debts. Liability arising out of the failure to pay the JSC's public debts lies with the company itself. Liability of the legal representatives for public debts, which are determined to be uncollectible from the company are collected from the personal assets of the legal representatives (regardless of fault) (reiterated Article 35, Law on Collection Procedure of Public Receivables No. 6183).

Liability for tax debts. There is also a special provision for the tax debts, which are included within the scope of public receivables (Article 10, Tax Procedural Law No. 213 (Tax Law)). Under Article 10, the total amount of tax and its receivables that cannot be obtained in whole or in part from the assets of the taxpayer company will be collected from the legal representatives who acted in breach of their legal duty to pay tax debts on behalf of the company.

Despite the current practice, the Council of State previously ruled that for a legal representative to be held personally liable for tax debts, they must have had an actual power of representation for tax issues and the capacity to pay the tax debts of the company (which would require having management authority). The Council of State's General Assembly on Unification of Judgments recently decided that tax debt that is due and cannot be collected (in whole or in part, or which is uncollectible from the company itself) can be collected from the shareholders of an LLC directly in proportion to their share capitals. In such a case, there is no need to collect from the legal representatives first.

Liability for Social Security Institution (SSI) Receivables. The Social Security and General Health Insurance Law No. 5510 (Law No. 5510) sets out special provisions regarding Social Security Institution (SSI) receivables to the effect that SSI receivables have priority before other public debts. If the SSI receivables are not paid without just cause, senior executives or authorised signatories of the company (including members of the BoD and its legal representatives) are jointly and severally liable together with the company itself (paragraph 20, Article 88, Law No. 5510).

The Constitutional Court recently ruled that holding members of the BoD that do not have any representation authority, jointly and severally liable with the joint stock company for the SSI debts does not violate proprietary rights of the concerned member of the BoD.

Employment-related liabilities. Directors can also have employment-related liabilities under the Labour Code. Companies can be held liable for losses if there is a breach of any of the obligations or responsibilities imposed by the Labour Code and can be punished with administrative fines if its general provisions are breached. If a company is punished with administrative fines, it has a right to claim against the relevant directors who have caused the loss under the general liability principles (see Question 18).

Criminal liability. If an employee is injured or dies due to a work accident that occurred under the supervision of an employer's representative (directors or officers), the representative can also be criminally liable under the Criminal Code.

Liability for data protection. Directors can have data protection related liabilities. Under Personal Data Protection Code No. 6698, companies can be punished with high administrative fines if they:

• Act against the information obligation.
• Breach data security obligations.
• Fail to comply with decisions of the Personal Data Protection Board.
• Fail to meet the obligation to register on the Data Controllers' Registry.

If a company is punished with administrative fines, it has a right to claim against the relevant directors who have caused the loss under the general liability principles (see Question 18).

25. Can a director's liability be restricted or limited? Is it possible for the company to 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 general assembly 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 general assembly 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 424, CC).

26. 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).

27. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has 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 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 general assembly 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

28. 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 general assembly'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 general assembly 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 general assembly's approval or cannot become unlimited partners in a company that has similar scope of activity (Article 396, CC).

29. 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 for all types of transactions.

30. Are there restrictions on the purchase or sale by directors of the shares and other securities of the company they are directors of?

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.

To read the rest of this article series, please click on Corporate Governance and Directors Duties in Turkey Overview - 3

First published by GTDT in 31.01.2023.

Tagged with: Gün + Partners, Görkem Bilgin, Commercial & Corporate