The concept of a group of companies is set forth under Articles 195-209 of the New Turkish Commercial Code (the "New TCC"). The principles of "dominance" and "abuse of dominance" are also regulated under the same provisions1.
Concept of Group of Companies and Relation of Dominance
In accordance with Article 195, paragraphs 4-5 of the New TCC, a group of companies is composed of a parent company (dominant company) and subsidiary company(ies) under the exercise of its dominance. In other words, the existence of a group of companies depends on the existence of dominance among the group members. Such relation of dominance may be direct or indirect (through shareholdings of the dominant company in other companies at different levels).
The New TCC does not specify the definition of "dominance." The doctrine defines dominance as the power to determine and control decisions of a company concerning its finances and operations, and also covers decisions relating to its budget, investments and all other financial matters, dividend policy, production, marketing, sales and HR2. The New TCC lists the sources of dominant power in Article 195, paragraph 1 as: (i) dominance through voting rights, (ii) dominance through agreements and (iii) dominance through other sources. The first classification covers three different circumstances: the dominant company directly holding the majority of voting rights of the subsidiary company; the dominant company holding the power to elect the majority of the members in the management body; and the dominant company holding the majority of the voting rights through corporate bylaws3.
The second classification covers operational agreements, not seen in Turkish practice, relating to management/domination agreements (hâkimiyet sözleşmesi) or the transfer of dividends. Finally, the last classification covers situations of de facto dominance.
Article 195, paragraph 2 of the New TCC provides for a presumption of dominance. The provision underlines that a company owning the majority of the shares of another company, or which owns the shares of another company that procures control in the management and financial decisions of the other company, dominates the latter.
According to Article 195, paragraph 1 of the New TCC, the rules of the New TCC regarding a group of companies will apply if one of the dominant or subsidiary companies' headquarters is located within the boundaries of the Turkish Republic. The New TCC sets forth certain rules prohibiting abuse in the exercise of dominance in a group of companies under certain conditions.
Prohibition of Abuse of Dominance in Group of Companies
Article 202 of the New TCC underlines two situations of abuse of dominance: (i) abuse of dominance through transactions within the scope of authority of the board of directors (the "BoD") and (ii) abuse of dominance through transactions within the scope of authority of the general assembly (the "GA"). In addition to these, the legislator foresees a third situation of abuse in Article 209 of the New TCC that relates to (iii) the abuse of public trust in the goodwill of the group of companies.
This prohibition is a projection of the obligation of the dominant company not to cause losses to its subsidiary through the exercise of its dominance.
(i) Abuse of dominance through transactions exercised by the BoD
This first situation of abuse relates to financial losses faced by the subsidiary company as a result of transactions/decisions exercised by the BoD of the dominant company that are considered to be violations of the BoD's duty of care. Article 202, paragraph 1 provides a sample list of transactions that may result in fi nancial loss to the subsidiary4: (i) transfer of business, assets, funds, personnel, receivables and debts, (ii) reduction or transfer of profi ts, (iii) restricting rights on assets by granting real or contractual rights to third parties, (iv) undertaking liabilities such as securities or guarantees; (v) resolutions or prohibitions such as the restriction or interruption of investments that may negatively affect productivity or activities, or prevent the progress of the subsidiary. The New TCC prohibits these transactions unless, during the same activity year, any losses that are realized are compensated, or the subsidiary is granted a right of claim that firmly determines the date and the method of compensation in an amount that is strictly equal to the losses which have occurred.
The financial losses stated in the provision cover not only actual financial losses, but also potential losses, such as potential losses relating to the assets or the profitability of the subsidiary.
If the losses that have occurred are not compensated during the same activity year, or if the subsidiary is not granted an equal right of claim, each shareholder of the subsidiary may seek compensation from the dominant company or from the BoD members of the dominant company who are responsible for the realized losses5. A similar right of claim is also accepted for the creditors of the subsidiary under Article 202, paragraph 1(c).
According to paragraph 1(d) of Article 202, board members will not be held liable for any losses that may have occurred if they demonstrate that the same decisions would have been made (or would have been avoided), under the same or similar circumstances by the board of a hypothetical independent company, acting prudently and in good faith, exercising due care and loyalty.
The lawsuit must be filed with the commercial court of the city where the dominant enterprise's head office is located. If the dominant company is registered outside of Turkey, then the lawsuit may be filed with the commercial court of the city where the subsidiary company's head office is located.
(ii) Abuse of dominance through important decisions adopted in the GA.
The second situation of abuse relates to financial losses resulting from important structural decisions adopted in the GA, such as a merger, spin-off, change of type or dissolution; the issuance of stocks or securities, or amendments to the articles of association. Shareholders who vote against such a decision and have their objections recorded in the minutes of the meeting (or who object to the relevant decisions of the board of directors in writing) have the right to sue the dominant company for indemnification of their losses.
The shareholders may also request that the dominant company purchase their shares at their stock exchange value or, if this value is unfair, at their real value, or at a value to be determined through a generally acceptable method6. The Court may also adopt another equitable decision, such as payment of the dividend that the shareholder is deprived of due to any loss incurred by the dominant company7. It must be underlined that the statute of limitations for such a lawsuit is two years, commencing from the date of adoption of the general assembly decision or publication of the board resolution.
(iii) Abuse of confidence or trust
According to Article 209 of the New TCC, the dominant company is responsible for abuses in wielding the reputation of the group of companies if the group's reputation is such that it projects an air of confidence and reliability to the public at large. In fact, the dominant company is held responsible for the confidence or trust that it has foreseeably raised in consumers. An example of this is a comfort letter delivered by the dominant company in favor of its subsidiary.
Exception to Prohibition
In accordance with Article 203 of the New TCC, if a dominant company holds, directly or indirectly, 100% of the shares and voting rights of a capital stock company (subsidiary), the board of directors of the dominant company has the authority to instruct the subsidiary to follow its group policies, even if these instructions cause financial loss to the subsidiary. In such a case, the board of directors of the subsidiary must comply with the instructions of the dominant company and will be exonerated from liability8. However, the dominant company may not give instructions that would cause losses in excess of the value of the assets of the subsidiary, thereby compromising its existence and causing loss to its important assets.
Footnotes
1 The New TCC sets forth notification, registration and reporting obligations with regard to group companies.
2 Please see Gül Okutan Nilsson, Türk Ticaret Kanunu Tasarısı'na göre Şirketler Topluluğu Hukuku, Istanbul, 2009, p. 98.
3 According to the New TCC, in cross-shareholding (a subsidiary company holding at least 25% shares of the dominant company), the dominant company will also be considered as a subsidiary.
4 The list is not numerus clausus; more examples exist.
5 If a lawsuit is filed by the shareholders of the subsidiary, the court may decide on acquisition of the shares of such shareholders by the dominant company or on another adequate remedy rather than indemnification. The right granted to the shareholders of the subsidiary company to demand the purchase of the shares before the court is an important exit right under the group of companies' provisions.
6 The Court may, ex officio, decide on such compensation, if equity necessitates such a solution.
7 For more details please see Nilsson, pp. 385-386.
8 See Article 205 of the New TCC.
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