Corporate Governance in Turkey 2023 - 2

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Under Turkish law, controlling shareholders do not have any specific duties to the company or to non-controlling shareholders. However, all controlling shareholders must exercise their rights by complying with good faith principles. Further, there are special provisions for minority shareholders.

Additionally, the TCC regulates provisions with regard to group companies, and article 202 of the TCC specifically stipulates that the dominant (controlling) company cannot exercise its dominance in a way that may give rise to a financial loss of a subsidiary (eg, instruct the subsidiary to be the guarantor of a loan), unless this loss is compensated within the same financial year or a right to claim compensation is granted to the subsidiary within the same financial year by providing details on when and how the loss will be compensated. The loss concept herein covers causing a potential risk to the company’s financial assets or future profitability as well as value depreciation on them. Therefore, not only the actual losses sustained, but also potential risks that may arise thereof, fall within the definition of ‘loss’.

Both the shareholders of the subsidiaries and their creditors may claim the indemnification of the loss of the subsidiary company from the dominant company by filing a lawsuit.

Can shareholders ever be held responsible for the acts or omissions of the company?

According to the TCC, the shareholders’ liability is normally limited to their subscribed capital contribution. This rule is applicable for both joint-stock companies and limited liability companies. There is an exception for limited liability companies concerning government debts. Accordingly, shareholders of a limited liability company are personally liable for government debts and this responsibility should be calculated over the shareholding ratio in the company capital.

Regarding tax debts, the Council of State’s General Assembly on Unification of Judgments decided that tax debts that are due and cannot be collected from a limited liability company (in whole or in part, or that are understood to be uncollectible from the company itself) can be collected from its shareholders directly in proportion to their share capitals. In such a case, there is no need to collect the debts in question from the legal representatives first.

Other than the foregoing, the shareholders are not responsible for the acts or omissions of the company, unless such an act or omission results from the shareholders’ own acts and has criminal elements.

What role do employees have in corporate governance?

According to the TCC, employees do not have a specific duty in terms of corporate governance, unless they have been provided with the responsibility to represent the company as commercial representatives under an internal directive to be issued by the board members. However, under the Corporate Governance Principles, employees are also listed as stakeholders, and companies must ensure that the rights and benefits of the stakeholders are protected (CGP, article 3.1.1).

Are anti-takeover devices permitted?

At present, share transfer restrictions are not permitted except on legal grounds determined under the Turkish Commercial Code (TCC). However, the TCC introduces specific provisions regarding the restriction of share transfers through the articles of association separately for limited liability companies and joint-stock companies. Unless otherwise is stipulated by law or the articles of association, registered shares may be transferred without any restriction (TCC, article 490/1). Article 492 of the TCC stipulates that the registered shares can be transferred only with the approval of the company and requires that joint-stock companies include the specific reasons why share transfers may be rejected in their articles of association. Article 493 of the TCC stipulates the reasons why share transfers may be rejected. Reasons related to the nature of the shareholders’ composition or the scope of the company’s activities or the economic independence of the company are deemed as important grounds for rejection under the TCC. This is not an exhaustive list, therefore, shareholders must select predetermined grounds for rejecting share transfers, and be very specific if they want this protection to be reflected in the articles of association. Otherwise, limitations on share transfer will continue as a contractual obligation pursuant to the shareholders’ agreement.

Article 493/1 of the TCC provides an escape clause for joint-stock companies through the option to reject a share transfer, without basing its decision on the grounds explained above, by offering to acquire, at real value, the transfer shares itself or on behalf of its shareholders or a third party.

For shareholders to resolve on the transfer restrictions of registered shares, an affirmative vote of 75 per cent of the shareholders or their representatives is required (TCC, article 421/3).

In contrast to the joint-stock companies, the TCC explicitly allows limited liability companies to limit share transfers based on pre-emptive purchase rights, call options or other ancillary or additional obligations by providing for them in their articles of association. These limitations may also be subsequently included in the articles of association by a decision of the general assembly. In this regard, a positive vote of two-thirds of the general assembly is required (TCC, article 621).

In limited liability companies, share transfers are subject to the approval of the general assembly and may be rejected without a just reason, unless otherwise stipulated in the articles of association (TCC, article 577).

Given the differences between limited liability companies and joint-stock companies, investors aiming to reflect the provisions of the shareholders’ agreement to the articles of association may prefer to incorporate a limited liability company, provided that the regulations in their field of activity allow this.

Any agreement between the joint-stock company and a third party regarding the third party acquiring the joint-stock company’s shares in lieu of the joint-stock company, its affiliate or parent company must comply with the terms set forth under articles 379 and 380 of the TCC. An agreement or obligation to this effect in violation of the terms of article 379 of the TCC will be invalid.

The TCC bans any joint-stock company, a third party, a joint-stock company’s subsidiary acting for their parent or a joint-stock company’s subsidiary promising shares in its parent, from selling treasury shares (TCC, article 380/2).

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Under the TCC, new shares are issued upon capital increases, and this requires a shareholders’ resolution. In public joint-stock companies that adopt a registered capital system, capital can be increased without the approval of the shareholders; thus new shares can be issued accordingly, within the registered share capital (TCC, articles 459 and 460). In addition, according to article 461 of the TCC, existing shareholders have pre-emptive rights to acquire newly issued shares in proportion to their shareholding. Pre-emptive rights of shareholders may be restricted by a decision of the general assembly meeting, in the presence of just cause and with the positive vote of shareholders representing at least 60 per cent of the capital (TCC, article 461).

The TCC has introduced two new systems regarding capital. First, there is the new registered capital system for private joint-stock companies, which was previously available only for public companies. A private joint-stock company can adopt the registered share capital system by a provision to this effect in its articles of association. The articles of association must indicate the aggregate ceiling of the capital and the time limit for the board of directors’ authority to increase capital within that set limit, which cannot be longer than five years. The company may then increase its capital without going through the burdensome procedures of holding a general assembly meeting up to a predetermined ceiling (TCC, articles 459 and 460). The minimum capital requirement for a joint-stock company adopting the registered capital system is 100,000 Turkish lira (TCC, article 332).

Second, as a financing method for joint-stock companies, the TCC introduced a conditional capital increase system, through which the company’s creditors (eg, holders of bonds or other debt securities) and employees may partake in its equity. The conditional capital increase is not triggered by new capital commitments of the shareholders but through the exercise of exchange (conversion option) and pre-emptive rights by creditors and employees (TCC, article 463).

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The Capital Markets Board prohibits restrictions on the transferability of shares of a public company. Accordingly, the transfer of shares must not be limited and other restrictions must not be imposed on shareholders to prevent them from going public. Further, pursuant to article 8(ç) of the Listing Directive issued by Borsa İstanbul, a company is prohibited from including any share transfer restrictions in its articles of association regarding securities to be listed on Borsa İstanbul. Article 490 of the TCC stipulates that fully paid, registered shares can be transferred without any restriction unless otherwise provided by law or by the articles of association. The transfers of bearer shares are subject to the transfer of possession.

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

A share buy-back system that was already available for listed companies under capital markets legislation has been introduced by the TCC for joint-stock companies in exceptional cases. The conditions for the buy-back are as follows (TCC, article 379):

• authorisation of the board of directors by a general assembly is required;
• the acquisition and pledge may be accepted on the condition that the shares it will acquire in the future and the shares held by its subsidiary companies do not exceed 10 per cent of the company’s authorised or issued capital;
• the general assembly can only delegate this authority for a maximum of five years;
• the board of directors is required to state in the authorisation that these legal requirements have been fulfilled;
• the nominal value of the shares that will be accepted as an acquisition or pledge by the authority must be stated;
• the minimum and maximum limits of the consideration that will be paid for the shares must also be stated; and acquired shares must be fully paid up (these shares so issued are stripped of any voting rights).

Further, article 385 of the TCC stipulates that shares acquired or accepted as a pledge in a way that is contrary to the principles set forth under the TCC shall be disposed of, or the pledge on them shall be released, within six months of the date of their acquisition or acceptance as a pledge. Any specific procedure regarding selling off or disposing of the pledge has not been provided. The authority to sell off these shares is held by the board of directors, which shall perform its duty according to the principles of equality and public disclosure.

Similar principles apply to share buy-backs in limited liability companies as well. A limited liability company may acquire its own capital shares under two conditions (TCC, article 612): it must have the necessary equity that may be freely used to purchase these shares, and the nominal value of the shares to be purchased must not exceed 10 per cent of the total share capital.

Capital shares acquired in excess of this amount must be disposed of or redeemed through a capital reduction within a maximum period of two years (TCC, article 612/2).

The Communiqué on Share Repurchase (the Communiqué) issued by the Capital Markets Board entered into force on 3 January 2014. According to the Communiqué, the board of directors must be authorised by a general assembly for a publicly held company to repurchase its own shares (Communiqué, article 5/1). There is an exception to this rule where listed companies are allowed to repurchase the shares without the necessity of a general assembly authorisation if the repurchase is necessary to avoid a probable and serious loss. A ‘probable and serious loss’ is deemed to exist where the daily average price of shares is below the nominal value or has fallen by more than 20 per cent. Unless these circumstances are present, the only way for a listed company to repurchase its shares without a general assembly’s authorisation is to obtain the approval of the Capital Markets Board (Communiqué, article 5, subparagraphs 4 and 5).

The nominal value of the repurchased shares cannot exceed 10 per cent of the paid-in capital where the total value of the shares cannot exceed the total value of the resources subject to profit distribution. Repurchased shares may be kept for an indefinite period as long as they do not exceed the aforementioned limits. The shares repurchased in breach of the Communiqué must be sold within one year of the date of the repurchase or else they will be amortised by way of capital decrease (Communiqué, article 19).

The maximum duration of the repurchase programme is three years for the companies listed on the stock exchange and one year for other publicly held companies unless the repurchase programme does not foresee any specific duration (the Communiqué, article 7).

The repurchase of shares is not permitted if there is any postponed disclosure process regarding internal matters or a significant transaction that has not yet been disclosed to the public.

Do shareholders have appraisal rights?

The TCC also provides categories of important reasons that allow joint-stock companies to reject the transfer of registered shares under their respective articles of association. The company may choose not to approve the share transfer by claiming an important reason stated under the articles of association, or to acquire the shares to be transferred on its own, a shareholders’ or any third party’s behalf by offering the nominal value of the shares to the transferee (TCC, article 493).

If the company prefers to use an escape clause, the nominal value of the shares must be offered to the transferee. There is no definite basis for how the nominal value of shares will be determined, and the transferor may apply to a court for a determination of the nominal value of the shares to be transferred. If the transferee is offered a nominal value and does not reject this value within one month of its acknowledgement, the acquisition offer will be deemed accepted. If the company remains silent for a period of three months from the date of the transferee’s application for approval, it will be deemed that the company has approved the share transfer. As long as the company does not approve the share transfer, the ownership of shares will remain with the transferor, together with all monetary and management rights (TCC, articles 493 and 494).

In addition, the TCC regulates an escape fund to be paid to shareholders in the event of a merger or change in the type of company. In this regard, if the shareholders disagree with a merger or change in the type of company, they have the right to sell their shares to the company at a fair value (TCC, articles 141, 183 and 202/2).

Moreover, the Communiqué on Common Principles of Significant Transactions and Retirement Rights , issued on 27 June 2020, determines the extent of significant transactions and shapes the limits of voting rights and shareholders’ retirement rights in publicly held companies. According to this communiqué, mergers, division transactions or a change in the type of company, along with other important transactions listed in article 4, require the approval of a general assembly. This communiqué details the provision regarding the retirement right in article 24 of the Capital Markets Law and determines the circumstances where the retirement right does not arise. In this respect, shareholders who voted against a significant transaction at the general assembly meeting and had their dissenting vote recorded in the minutes of that meeting will be able to sell their shares to the subject company.

According to this communiqué, it may be possible to take the general assembly’s approval to abandon significant transactions where the total cost of the exercise of retirement rights exceeds their predetermined cost, or where certain shareholders, whose qualifications are specified beforehand, exercise their retirement right. According to article 11 of Communiqué on Tender Offer, in an acquisition of shares or voting rights of publicly held companies in a way that changes the controlling shareholders the transferee is obliged to offer to buy the shares of the other partners.

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Under Turkish law, both listed and unlisted companies use one-tier board structures.

What are the board’s primary legal responsibilities?

The principal duties of board members are:

• to act prudently and diligently when performing their duties and conducting the business of the company;
• to monitor and supervise the management and the business of the company to ensure that it complies with principles of good faith, and the interests of the company and its shareholders;
• to keep confidential the information obtained during and after the term of duty;
• to refrain from attending board meetings regarding their own interests or the interests of their certain close relatives; and
• not to engage in transactions with the company unless a general assembly meeting authorises the board to repurchase shares (the maximum period this authorisation can last is five years).

In addition to the above, the Turkish Commercial Code (TCC) sets forth the non-transferable duties of board members. The most important non-delegable and indispensable duties and powers of the board of directors are as follows (TCC, article 375):

• determining the company’s top-level management and giving instructions in this regard;
• establishing the necessary systems for financial planning, accounting and finance audits to the extent required;
• appointing and dismissing managers (and persons performing the function of a manager) and authorised signatories;
• high-level supervision of whether the persons in charge of management act in accordance with the law, the company’s articles of association, internal regulations and the board’s written instructions;
• keeping the share book, resolution book of the board and the general meeting and discussion register;
• preparing the annual report and corporate governance disclosure;
• submitting annual reports and governance disclosures to general assembly meetings;
• organising general meetings;
• enforcing resolutions of general meetings;
• and notifying courts regarding the company’s state of excess of liabilities over assets.

None of these duties and authorities can be delegated to a representative, the company’s management, a committee or managers (TCC, article 367). The general assembly meeting cannot seize or deprive these duties and authorities of the board of directors, or transfer them to the general assembly meeting or committees established under the provisions of articles of association. Similarly, the board of directors cannot waive these duties and authorities.

Whom does the board represent and to whom do directors owe legal duties?

The board is responsible for the management and representation of the company (TCC, article 365). Pursuant to article 553 of the TCC, if the board is liable owing to its own faults arising from the law and the articles of association, then the board will owe legal duties to the company, its shareholders and its company’s creditors.

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgment rule?

According to the TCC, the company, its shareholders and its creditors are entitled to file indemnification actions against board members to indemnify the damages that occurred owing to their faults. Shareholders may initiate actions against directors and request the indemnification of the damages that they directly incurred or request indemnification on behalf of the company for the damages that the company has incurred (TCC, article 553).

A voluntary insurance system for the damage incurred by the company through the fault of board members while performing their duties was introduced by the TCC.

In the case of public companies, if the damage is insured at a price exceeding 25 per cent of the company’s capital and the company is secured, this must be announced in the bulletin of the Capital Markets Board; and if the company’s shares are listed on a stock exchange, it must also be announced in the stock exchange’s bulletin. This insurance will be taken into account when assessing compliance with the principles of corporate governance (TCC, article 361).

With regard to the board members’ civil and criminal liabilities, the new TCC specifically regulates civil and criminal liabilities (TCC, article 553 and 562). If the board members do not comply with the obligations set forth under the law or articles of association, they will be subject to civil and criminal liability.

Do the duties of directors include a care or prudence element?

According to article 369 of the TCC, members of the board of directors and third parties in charge of management are obliged to act with care and in compliance with the rules of good faith.

To what extent do the duties of individual members of the board differ?

According to the TCC, it is possible for a legal person to become a member of the board of directors (TCC, article 359/2).

The TCC requires that a chair and at least one vice-chair be appointed among the board members (TCC, article 366). The board members do not have any special duties that should be performed individually, except for calling board meetings. In addition, under Turkish law, board members do not have specific duties individually assigned to them. However, by inserting a relevant provision in the articles of association or regulating an internal regulation, the board can always assign different duties to its members (TCC, article 367). Therefore, each board member can be held to be authorised and liable for different business transactions and may have different specific duties in that regard. If there is this distribution of duties, the duties and authorities of individual board members shall be disclosed in the activity report of the company (Corporate Governance Principles (CGP), article 4.2.2). If the duties are not assigned, management is performed by all board members (TCC, article 367).

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

According to the TCC, the board of directors can transfer all the management rights of the company to one or more executive members, or to a third party, who will then act as the manager. However, at least one of the board members must be entitled to represent the company (TCC, article 370). In such an instance, the transferee would have the same responsibilities as the board of directors had prior to the transfer.

The Corporate Governance Principles stipulate that if there is a delegation of authority among board members, it should be specifically disclosed under the activity report of the company (CGP, article 4.2.2).

An addition was made to article 371 of the TCC, relating to the representative authority of companies, by the Omnibus Law No. 6552 adopted on 10 September 2014. Pursuant to this addition, the board of directors may appoint non-representative members of the board of directors or persons bound to the company by a labour contract as commercial representatives with limited authority or as other commercial assistants. This act of the board of directors, and the powers and duties of the appointed persons, shall be explicitly reflected in the internal directive issued in accordance with article 367 of the TCC and this internal directive shall be registered and announced with the trade registry. This amendment has enabled companies to impose different kinds of limitations or categorisations for their representative authorities.

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Non-executive and independent membership structures are regulated mainly under the Corporate Governance Principles and in certain Capital Markets Communiqués. Pursuant to the Corporate Governance Principles, the majority of the board members should consist of non-executive members (CGP, article 4.3.2) and some of these members should be independent board members (CGP, article 4.3.3). Because all members of the audit committee must be independent board members (CGP, article 4.5.3), it only comprises of non-executive members.

Additionally, the TCC also regulates the non-executive board members. Accordingly, members of the board may solely have non-executive powers provided that it is explicitly stated in the internal guidelines.

According to the Corporate Governance Principles, the board must include the following:

• the majority of the board must consist of non-executive members;
• the total number of independent members shall not be less than one-third of the total number of members;
• in any case, the number of independent members cannot be fewer than two; and
• a person who has been acting as a board member for more than six years within the past 10 years cannot be appointed as an independent board member (CGP, article 4.3).

Pursuant to the Corporate Governance Principles, an individual not having any administrative duties within the company is defined as a non-executive member.

As per the definition of the independent member, the Corporate Governance Principles set forth specific requirements to be met by independent members (CGP, article 4.3.6).

Under Turkish law, non-executive or independent directors do not have different duties from the executive directors. As a general principle, all members of the board are jointly and severally liable to the company, its shareholders and its creditors for damage that occurs due to their fault and owing to the non-fulfilment of the duties stated in the law or the articles of association (TCC, article 553).