Turkish Law Blog

Regulating of Internal Directive about the Transfer of the Management and Representation Authorities and Its Effects on Joint Stock Companies

17 April, 2019

Regulating of Internal directive concept about the transferring of management and representation authorities is a new institution in Turkish law which was transferred to Turkish Commercial Law from the Swiss Code of Obligations.

By regulating an internal directive based on Article 367 of Turkish Commercial Code, it provides an order for management organization, clarify duties and responsibilities of the persons who are being in management organization, transfer management and representation powers to other third parties and most importantly transfer of the responsibilities.

There is no doubt that, transfer of the management  and representation powers is an exception concept therefore if there is not a transfer of the duties and authorities in companies, as a rule companies are directed by board of the directors. This rule is written on the second clause of article 367 of Turkish Commercial Code. However, the law permits transfer of the authorities if necessary conditions are provided.

These basic conditions are;

  • Adding an article of association clause which provides transfer of the authorities.
  • Regulating an internal directive.

After having these conditions, the authorized body of the joint stock company which is the board of the directors shall approve the internal directive. There are several disputes about the preparation type of the internal directive. Preamble of the article 367 of Turkish Commercial Code states that ‘‘The possiblity of if the preparation authority of the internal directive can be transfered to the general assembly by adding a clause to articles of association to the company is a jurisprudence problem.’’ [1] In my opinion it is clear that, this authority shall only be used by the board of the directors because it is in the scope of untransferable duties of board of the directors provided by the law. Also in practice this duty is used by board of the directors, trade registries accept to make registration after the approval of the internal directive by the decision of board of directors.

On the other hand, Turkish Commercial Code the powers of management and representation are separated. It is possible to transfer all the management powers to third parties however all the representation powers can not be delivered to third parties. In this regard, there is a limitation in terms of transferring representation authorities. The law require that at least one member of the board of directors should have the representation power.

Internal directives arrange the management of the company's business, define the duties of the managers and executives and also regulate the reporting system. By doing this, every manager and executive know their duties and responsibilities. Every company shall regulate this system according to their management requirements and structure. This can be more complex at the open joint stock companies because these type of companies employ lots of managers and executives. Separation of the duties and responsibilities between every manager and executive is an important concept which can prevent conflict of authority and provide to take the decisions in a short span of time. Reporting system is a key instrument in terms of providing communication between the managers and executives hierarchically.

Forming committees in board of the directors is an important issue in terms of distributing the duties in the company. In order to set up committees in the board of the directors, there is no need of adding a clause to article of association of the company which provides transfer of the authorities and there is no need in terms of regulating an internal directive. The concept of forming committees is under the discretion of the board of the directors. However, optionally in order to provide management integrity these committees and their functions can be regulated in the internal directive.

As a result of the companies are commonly being in a continuous structure, internal directives of the companies shall be regulated according to new circumstances. For instance; if the economic level of the company increase there is more need to make more transfer of the authorities, in such a case internal directive shall be adapted to current structure of the company. As a result of this, in the course of time internal directives shall be reviewed and adapted to these new circumstances. This can be realized by cancelment of the current one and accepting new internal directive or amendment of the current internal directive.

Which Type of Companies Prefer to Prepare Internal Directive About the Transfer of the Management and Representation Powers ?

Commonly, joint stock companies which are managed by institutional rules prefere this concept. Also open joint stock companies and the companies inwhich the majority of their shares are owned by foreign capital practising this concept. In this companies the concepts of ownership and administration are separated. The rules are not changed according to different persons or circumstances. These type of companies generally have crowded managers and also there are independent and professional board members. In order to clarify the duties and responsibilities, these type of companies generally have internal directives. This concept prevent the conflict of authority and also support executives performance positively. Every executive know their duties and practise according to internal directive. It creates positive effects for the board members of the joint stock companies because board members transfer some of their management and representation authorities to other managers, as a result of this board members can provide extra time for focusing on their essential duties. Arrangment of reporting system is an important concept in terms of internal directives because it provides communication between authorised signatories, managers and board members. Another type of the company is family Corporation. The concepts of ownership and administration are not separated in family corporations. The family members who hold majority shares of the company also have the management authorities as a board members. Frequently, this structuring of management prevent work specialization and practising of institutional rules. These type of companies generally do not practise internal directives.

Effects of Transfer of the Management and Representation Powers to the Responsibilities of the Board Members

One of the most important results of transferring of management and representation authorities to third parties is; it provides transfer of the responsibilities. As a rule if there is a transfer of management and representation authorities by preparing an internal directive, it provides transfer of the responsibilities. However according to legislation; if there is a transfer of management and representation auhorities to third parties, the board of directors will be responsible for the duties which results from untransferable duties provided by the law and providing necessary duty of care in terms of nominating of the persons who deliver the management and respresentation authorities. In any case, board of the directors shall continue to use their untransferable duties resulted from the legislation and also their task of duty of care within reasonable level will continue. According to third clause of Article 553 of Turkish Commercial Code; nobody can be liable for the breach of the law or articles of association or unlawful acts which are not scope of their control, this situation can not accepted as invalid due to the reason of duty of care and duty of supervision. This clause aims to protect the board of the directors, when we look at the Preamble of the article 553/3 of Turkish Commercial Code, the Preamble state that ‘‘In practice in many case board members are held responsible in a superhuman manner and they are held responsible for every type of breach of the law or breach of the articles of association. ’’ [2]

[1] Preamble of Turkish Commercial Code

[2] Preamble of Turkish Commercial Code


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