Corporate Governance in Türkiye 2024 - Part 3

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The TCC allows a board of directors to consist of just one member (a real person or a legal entity) assigned by the articles of association or elected by the general assembly. The requirement that a member of the board of directors must be a shareholder in joint stock companies has been abolished. If a legal entity is elected as a member of the board of directors, a real person should be determined by the legal entity on its behalf and such a decision needs to be registered and announced with the trade registry (TCC, article 359).

In both the TCC and the Capital Markets Law, there is no ceiling stipulated for the size of the board of directors. For listed companies, it is stated that the number of members of the board of directors – provided that the number is not less than five in any case – shall be determined to ensure that the board members conduct productive and constructive activities, make rapid and rational decisions, and efficiently organise the formation and activities of the committees (CGP, article 4.3.1). At least one of the board members shall be a woman (CGP, article 4.3.10).

In limited liability companies, the management and representation of the company may be left to a shareholder or non-shareholder that has been elected as the manager. However, at least one shareholder must possess the right to manage and represent the company. If there is more than one manager of the company, one of these managers must be elected as the chair of the management board by the general assembly.

Article 363 of the TCC stipulates that in the case of a vacancy on the board, the board of directors shall temporarily choose someone who satisfies the legal conditions and present it for the approval of the general assembly. The member chosen this way carries out their duties until the general assembly meeting and, if he or she is approved, he or she continues working until the end of the mandate of their predecessor.

In listed companies, if there is a vacancy on the board and it is not possible to satisfy the board meeting quorum, or it is not possible for the shareholders to convene a meeting to appoint a new board member within 30 days of the vacancy, the Capital Markets Board is entitled to appoint an independent board member (Capital Markets Law, article 128/1(k)).

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Under Turkish law, it is possible for the same board member to hold both the titles of chair and chief executive. According to the CGP, the duties and authorities of the CEO and the chair of the board must be specifically distinguished from each other and stipulated under the articles of association. In addition, if it is decided that the CEO and the chair of the board are one person instead of two separate persons, then this decision and the reasons for it must be included in the annual report (CGP, articles 4.2.5 and 4.2.6).

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

According to article 25 of the Capital Markets Board Communiqué, serial X, No. 22 regarding the standards of independent audits in capital markets (as updated by Communiqué serial X, No. 28, published in the Official Gazette on 28 June 2013), it is required that, within the framework of the CGP, the board appoints an audit committee constituting a minimum of two members of the board. In enterprises where it is not obligatory to establish an audit committee, the duties of the audit committee are fulfilled by the board of directors.

According to the CGP, the following committees must be formed:

• — an audit committee;

• — a corporate governance committee;

• — an early detection of risk committee;

• — a nomination committee; and

• — a price committee.

Banks are only required to form corporate governance committees.

If a nomination committee and a price committee cannot be formed, then the corporate governance committee will supersede the duties of these committees (CGP, article 4.5.1).

Pursuant to the TCC, listed companies are under the obligation to constitute a committee that will be in charge of detecting and managing risks in advance. Risk committees submit evaluation reports to their company’s board every two months and inform the board of the problems and solutions. These reports are also sent to the company’s auditor (TCC, article 378). If their auditors deem it necessary, non-listed companies must also form risk committees.

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The frequency of board meetings is regulated under article 390 of the TCC. Accordingly, the law does not require a minimum number of board meetings per year; therefore boards convene meetings when it is deemed necessary unless their company’s articles of association require a minimum number of board meetings.

The CGP states that a board of directors must convene meetings on a regular basis to fulfil their duties effectively (CGP, article 4.4.1).

Is disclosure of board practices required by law, regulation or listing requirement?

The structure, members of the board, their term of office and remuneration of the members are determined in general assembly meetings, and the minutes of general assembly meetings are registered with the relevant trade registry and published in the Turkish Trade Registry Gazette. In addition to the TCC, capital stock companies subject to auditing will be required to set up and maintain a company website within three months following the incorporation of the company and must allocate part of the website to the announcements legally required to be made (TCC, article 1524). This website should also be registered with the relevant trade registry.

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

In listed companies, the board of directors shall issue its annual report in a detailed way within two months following the end of the relevant accounting period that should include, among other things:

• — information on the duties of the members of the board of directors and executives conducted in the company and declarations on the independence of the members of the board of directors;

• — information on the members of the committees formed within the structure of the board of directors, the meeting frequency of these committees and the evaluation of the board of directors regarding the working principles, including the conducted activities and the efficiency of the committees; and

• — the number of meetings of the board of directors in a year and the attendance of the members of the board of directors to these meetings.

The annual report shall be published so that the public can access this complete and accurate information with respect to the activities of the corporation. Additionally, the nomination committee that is mandatory in listed companies regularly evaluates the structure and productivity of the board of directors and submits its advice regarding possible amendments in this respect to the board of directors.

In non-listed companies, a similar annual activity report and affiliation report (necessary for group companies) are also annually prepared by the board, including information on management, activities of the company and related important developments, financial status and risk assessment, and submitted to the general assembly meeting.

The shareholders discuss the activities of the board and decide on the release of the board members’ liabilities in the annual general meeting. This is one of the non-transferable duties of the general assembly (TCC, article 408).

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Remuneration

According to the Turkish Commercial Code (TCC), provided that the amount is determined by the articles of association or the general assembly resolution, directors can be paid a remuneration (TCC, article 394).

The Corporate Governance Principles (CGP) stipulate that the remuneration of independent board members cannot be determined by taking into account the profit share, share options or the company’s performance-related payment schedules (CGP, article 4.6.3). Pursuant to the same principle, the remuneration to be paid to independent board members shall be satisfactory so as to protect their independence (CGP, article 4.6.4). The remuneration to be paid to board members and all managers having administrative responsibilities shall be made available to the public in the annual activity report (CGP, article 4.6.6).

Length

There is no requirement as to the length of the service contract of the board members under the TCC. According to the TCC, board members can be appointed for a maximum term of three years, unless otherwise specified in the articles of association of the companies, board members may be re-elected (TCC, article 362). The CGP also sets forth that the term for independent members is three years and that they may be re-elected (CGP, article 4.3.5).

Transactions between the company and board members

In strengthening the arm’s-length principle, the TCC prohibits a joint stock company from financing its shareholders and directors, aiming to preserve the company assets and protect the creditors of the joint stock company. In this regard, a board member cannot conduct any transaction with the company in his or her or any other person’s name without permission from the general assembly and the company can claim such transactions as null and void. The counterparty cannot make such a claim (TCC, article 395).

In addition, in the case of a board member who is not a shareholder, his or her relatives, including spouses, descendants, lineal ancestors and relatives by blood or marriage to (and including) the third degree, cannot be indebted in cash to the company. The prohibition provided for board members includes guarantees as well. In other words, the company cannot provide surety, guarantee or security for the persons listed above, undertake their liability or take over their debts. Otherwise, the creditors of the company are entitled to start execution proceedings directly against these people for the debt of the company in the amount for which the company is liable (TCC, articles 393 and 395).

If the related-party transaction principle is violated, a judicial fine will be imposed on the shareholder or board members (TCC, article 562).

In addition, shareholders cannot become indebted to the company unless the debt arises from their due capital commitments and the company’s profit, together with the legal reserves, do not meet the company’s losses for the previous years (TCC, article 358). In limited liability companies, the same principles only apply to partners of the company (TCC, article 644).

In addition, according to article 1.3.7 of the CGP, majority shareholders, members of the board, managers with administrative responsibilities and their relatives (spouse, direct offspring or relatives up to the second degree by blood or by marriage) must provide information in the general assembly about the transactions that may conflict with the interests of the company or its affiliates. Furthermore, according to article 1.3.10 of the previous CGP, the approval of a general assembly meeting was required for significant transactions (namely transferring or renting out all or a significant portion of company assets, establishing rights in rem on all or significant amounts of company assets, granting concessions to third parties or changing the scope and subject of already provided concessions, acquiring or renting significant amount of assets, and delisting from Borsa İstanbul). If the decision of a general assembly meeting is not required by the relevant board for the execution of such transactions, affirmative votes from most independent directors are required. If this is not achieved, the transaction is submitted to a general assembly meeting for approval. In such cases, the reasoning of the independent directors must be disclosed to the public and the Capital Markets Board and explained to shareholders at a general meeting.

Article 1.3.10 of the current CGP exemplifies ‘significant transactions’ as transferring all or a substantial part of a company’s assets or establishing real rights on them or leasing them, taking over or leasing a significant asset, granting privileges or changing the scope or the subject of the available privileges, and delisting.

If the above transactions fall under the category of related-party transactions, those parties shall not vote in the relevant general assembly meeting. Accordingly, there is no minimum meeting quorum requirement for the approval of the above transactions (Capital Markets Law, article 29/6).

As per article 21(1) of the Capital Markets Law, in the case of transactions with another enterprise or individual with whom there is a direct or indirect management, administrative, supervisory or ownership relationship, publicly held joint stock companies, collective investment undertakings and their subsidiaries shall not damage their profits or assets by engaging in deceitful transactions by applying a price, fee or value clearly inconsistent with similar transactions with unrelated third parties, market practices or principles of commercial prudence and honesty.

Compensatory arrangements between the company and board members

Under the TCC, the board members are under an obligation to act with care and in compliance with the rules of good faith (TCC, article 369). If they fail to do so and the company incurs damages as a result, shareholders and creditors of the company may initiate actions against the board members and request indemnification (TCC, article 553). In this context, there is no regulation regarding compensatory arrangements between the company and board members, but it is possible to lay down a clause in the agreement between the company and the board member stipulating how these damages shall be compensated. Accordingly, damages that were incurred owing to the fault of board members can be compensated by the relevant board members.

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

According to the TCC, the board shall review the remuneration of the key executives and include the information in the activity report of the board of directors. However, there is no regulation that affects the remuneration of senior managers (TCC, article 516/2).

According to the CGP, remuneration of the senior management must be prepared in a written form and submitted for the approval of the shareholders. The remuneration paid to the board members and the key executives who have administrative duties, and all other benefits to be provided to them, are disclosed to the public through the activity reports. It is essential to disclose the remuneration for each of them. If a specific disclosure is not made, at the very least a separation must be made between the key executives and board members. The remuneration policies of the company must be published on the company’s website (CGP, article 4.6.2). There is no regulation regarding compensatory arrangements between the company and senior managers. However, similarly to the board members, the managers are under an obligation to act with care, and according to article 553 of the TCC, they can be held liable if they fail to do so. In this context, it is possible to lay down a clause in the agreement between the company and the manager stipulating that the damages incurred owing to the fault of the manager shall be compensated by the relevant manager.

Do shareholders have an advisory or other vote regarding remuneration of directors and senior management? How frequently may they vote?

According to the CGP, a written remuneration policy should be submitted to the shareholders during a general assembly meeting and discussed as a separate agenda article to give them the opportunity to air their views and suggestions in relation to the remuneration policy that applies to members of the board of directors and key executives (ie, senior management). The remuneration policies of public companies are announced on their websites (CGP, article 4.6.2).

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

A voluntary insurance system for the damage incurred by the company through the fault of board members while performing their duties has been introduced by the Turkish Commercial Code (TCC). If the damage is insured at a price exceeding 25 per cent of the company capital and the company is secured, in the case of public companies, this matter shall be announced in the bulletin of the Capital Markets Board, and if the shares are listed on a stock exchange this shall also be announced in the stock exchange bulletin, and this matter shall be taken into account in the assessment of compliance with the principles of corporate governance (TCC, article 361).

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There is no regulation preventing a company from indemnifying a director or officer against liabilities, but it should be noted that these indemnification claims are not common.

To what extent may companies advance expenses to directors and officers in connection with litigation or other proceedings against them or in which they will be a witness?

There are no mandatory provisions as to the advancement of expenses to directors and officers, and there is no practice regarding this either. The companies may prefer to take these precautionary measures; however, these precautionary measures may not be included in the articles of association of the companies. Even so, the company may execute an internal protocol with the members of the board of directors where they agree on these measures.

For the damage incurred by the company through the fault of board members while performing their duties, the companies may voluntarily execute insurance policies.

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

As stated under the Delegation of Board Responsibilities, the liabilities of board members can be restricted by delegating their duties to other board members or managers. This limitation can be realised through issuing an internal directive in accordance with article 367 of the TCC, and this internal directive must be registered and announced with the trade registry. However, the board members have a continuing duty to observe the acts and actions of the third parties to whom liabilities are delegated. The restriction on authority of representation is not effective against third parties in good faith; however, the restrictions that are registered and announced in relation to limiting the authority of representation solely to the business of the headquarters or to the exercising thereof jointly are valid. In addition, they still have the duty to prudently and diligently delegate the responsibilities to persons who are qualified enough and supervise them (TCC, article 371).

As per the addition to article 371 of the TCC, explained under the Delegation of Board Responsibilities, limiting the liability of the board members or managers is only effective in the company and does not relieve them from responsibility against third persons. In this regard, the board of directors shall be liable jointly and severally towards the company or third persons for any damage caused by the commercial representatives with limited authority or other commercial assistants appointed pursuant to an internal directive.

Are the corporate charter and by-laws of companies publicly available? If so, where?

The articles of association of a company and any amendments thereto must be registered in the relevant trade registry and announced in the Turkish Trade Registry Gazette as of its incorporation (Turkish Commercial Code (TCC), article 354). Further, the articles of association of a company that is obliged to launch a website are also announced on the company website. According to article 2.2.2 of the Corporate Governance Principles, articles of association must also be published on the company’s website.

What information must companies publicly disclose? How often must disclosure be made?

In accordance with the TCC, each company subject to independent audit must maintain a company website within three months following the incorporation and must allocate a specific part of the website to making the announcements legally required (TCC, article 1524). This website should also be registered with the trade registry. 

The Presidential Decision No. 6434 on Determination of Companies subject to Independent Auditing (Decision), published in the Official Gazette on 30 November 2022, lists the companies subject to independent auditing. However, even if the company is not listed in the Decision specifically but exceeds the following thresholds for two consecutive accounting periods, this company will also be subject to independent auditing.

• — assets worth over 75 million Turkish lira (previously 35 million Turkish lira);

• — net annual sales over 150 million Turkish lira (previously 70 million Turkish lira); and

• — number of employees more than 150 (previously 175).

In addition to the above, Law No. 6335 amending the TCC has narrowed the scope of the announcements to be made by the companies on their websites and has regulated that the announcements legally required to be made must be announced on the website, as well as having introduced certain time periods for publishing the commercial papers and documents that are required to be published on the website of a company.

Companies that do not launch a website within three months of the date the TCC entered into force will be subject to a judicial fine for between 100 and 300 days, and authorised bodies of companies that do not allocate part of the website to public information within the same period of time will be subject to a judicial fine for up to 100 days (TCC, article 562/12). Article 1524 /2 of the TCC stipulates that if the resolutions required to be published are not published on the company’s website, the relevant resolutions may be annulled and the managers and members of the board of directors at fault will be held liable.

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

As per the Turkish Commercial Code (TCC), shareholders may appoint directors provided that it is explicitly stipulated under the company’s articles of association. This ability can be granted to specific share groups, shareholders of a specific nature (eg, the founding family shareholders) or minority shareholders. Unless there is a just cause, the nominated director must be appointed as a member of the board of directors. In listed companies, the nominated directors of a corporation must be mentioned in the mandatory information form required to be published by proxy solicitors.

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

The shareholders exercise their rights during the general assembly meetings; companies engage with shareholders mainly within the scope of the general assembly.

Under article 408 of the TCC, the management of a company is generally conducted by the board of directors, but the general assembly is also an essential organ of the company and has fundamental duties, including:

• — the amendment of articles of association;

• — the appointment and removal of board members;

• — the appointment of an auditor; and

• — the passing of decisions concerning:

•      — financial tables;
•      — the preparation of the annual report of the board of directors;
•      — determining annual income, profit shares and revenues; and
•      — the inclusion of reserve funds to the capital and profit to be distributed to the shareholders.

An ordinary general assembly shall be convened within three months of the end of each activity period (TCC, article 409). An extraordinary general assembly can be convened whenever it is required. The board of directors invites the shareholders to general assemblies. This invitation shall be made in the form provided in the articles of association.

The invitation to the general assembly shall also be published in the Turkish Trade Registry Gazette. For non-listed companies, the invitation shall be issued at least two weeks prior to the date of the general assembly meeting (excluding the dates of announcement and meeting) (TCC, article 414). All shareholders whose names appear on the attendance list prepared by the board of directors have the right to attend the meeting.

The Ministry of Trade issued the Regulation on General Assembly Meetings of Joint Stock Companies Held Electronically (Regulation), regarding the procedures of online general assembly meetings, published in Official Gazette No. 28395 of 28 August 2012. The companies must integrate the sample article stating that general assembly meetings can be held electronically into the company’s articles of association. This article can be found in the article 5 of the Regulation published by the Ministry of Trade. It is not possible to amend the article while adopting it, so it must be integrated as is.

Electronic meetings are mandatory for publicly listed companies.

Shareholders who state in the Electronic General Assembly System that they will attend the meeting electronically may participate in a meeting that is held electronically.

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Pursuant to article 11-h of the Regulation on the Minimum Contents of the Annual Activity Reports of Companies issued by the Ministry of Trade, the annual activity report should include the information on expenses for donation, philanthropy and social responsibility projects. Within this context, if the company held any social responsibility projects, it is required to disclose the information on expenses in the annual activity report.

Further, article 2.3.2-i of the Corporate Governance Principles (CGP) also stipulates the general content of the annual report by explicitly stating each clause that shall be in the report. Accordingly, in the listed companies, the board of directors shall issue its annual report in a detailed way that should include, among other things: ‘Information on the corporate social responsibility projects conducted with respect to the corporate activities result in the social rights and technical training of employees and other social and environmental consequences’.

In addition, the listed companies are obliged to be aware of the rules of social responsibility and comply with the established regulations with respect to the environment, consumers, public health and rules of ethics. The relevant provision sets voluntary requirements for companies to support and to respect the human rights that are considered valid in accordance with international criteria.

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Pursuant to article 7/1-b of the Regulation on the Minimum Contents of the Annual Activity Reports of Companies issued by the Ministry of Trade, the financial rights provided to the board members and the key executives should be stated in the annual activity report.

On the other hand, pursuant to the CGP, the general principles of remuneration of the board members and the key executives who have administrative duties must be prepared in a written form. In listed companies, the written remuneration policy should be submitted to the shareholders during the general assembly meetings and discussed as a separate agenda article to give them the opportunity to air their views and suggestions in relation to the remuneration policy that applies to members of the board of directors and key executives. The remuneration policies of public companies are announced on their websites (CGP, article 4.6.2).

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

The law does not mandate any specific requirement to disclose gender pay gaps from a corporate governance perspective. However, the law mandates not to discriminate between employees.

Identify any new developments in corporate governance over the past year. Identify any significant trends in the issues that have been the focus of shareholder interest or activism over the past year.

Extension of the deadline regarding amendments to the Communiqué with respect to capital loss and negative equity

The Communiqué Amending the Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102, published in Official Gazette No. 32355 of 31 October 2023, extended the deadline provided under provisional article 1 of the Communiqué on the Procedures and Principles Regarding Implementation of Article 376 of the Turkish Commercial Code No. 6101 (the Implementation Communiqué). Accordingly, joint stock companies, limited liability companies and limited partnerships divided into shares will be able to exclude all the foreign exchange losses, and half of the expenses arising from leases, amortisation and personnel expenses accrued in 2020 and 2021 in the capital loss and negative equity calculation in their balance sheets until the end of fiscal year 2024.

Change in the Trade Registry’s practice regarding internal directives for representation

Istanbul Trade Registry published an announcement on its website related to the internal directives for representation of companies. According to the announcement, it is now possible to define unlimited representation authorities in internal directives by conferring on the relevant signatory group a clear and unambiguous authority to represent and bind the company in the broadest sense.

Under normal circumstances, it would not have been possible to include unlimited authorities in the internal directive. However, with this announcement, a signature group can be designated as unlimited authorised signatories, and an additional group can be created that can represent and bind the company only with the signature of the group having unlimited powers.

Increase in the minimum capital requirements of joint stock and limited liability companies

Presidential Decree No. 7887, published in Official Gazette No. 32380 of 25 November 2023, has multiplied by five the minimum capital amounts for joint stock and limited liability companies. Accordingly, as of 1 January 2024, the minimum capital amount for limited liability companies was increased from 10,000 Turkish lira to 50,000 Turkish lira; for joint stock companies was increased from 50,000 Turkish lira to 250,000 Turkish lira, and for non-public joint stock companies that adopted the registered capital system was increased from 100,000 Turkish lira to 500,000 Turkish lira.

Following this Presidential Decree, the Ministry of Trade announced that these new minimum capital amounts are valid for newly established companies as of 1 January 2024, and there is no need for existing capital companies to increase their capital. However, to ensure uniformity in the implementation of the said amendment, a circular on ‘minimum capital’ was prepared by the General Directorate of Domestic Trade of the Ministry of Trade and communicated to trade registries. The circular states that existing companies’ capital amounts should not be below the new minimum capital amounts.

• — In case of capital increase by existing companies, the new capital should not be less than the new minimum capital amounts.

• — If a capital decrease is to be made in a partial spin-off, the capital of the demerged company should not be less than the new minimum capital amounts.

• — In case of a change in the company type, the capital of the new type should not be less than the new minimum capital amounts.

• — In the calculations to be made within the scope of article 376 of the Turkish Commercial Code regarding the company’s capital and the loss of legal reserves, the registered capital of the company should be taken as a basis. However, the new minimum capital amounts should be considered in the transactions to be made in cases where remedies are required.

• — Pursuant to the provisions of the Turkish Commercial Code, a three-month period was granted for companies that had not increased their capital for any reason until 14 February 2014, and the registration records of companies that did not increase their capital within this period were deleted. In the event that these deregistered companies wish to continue their activities and wish to re-establish their registrations within this scope, it is expressly regulated that capital increase requests will not be registered unless there is an explicit court decision stating that capital increases may be made by these companies.

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  First published by GTDT in May 22, 2024.