Long lasting rules of determining representation powers and bank mandates in corporations i.e joint stock companies (AS), for third party transactions are being re-shaped.
An amendment to the Turkish Commercial Code, numbered 6102 effective as of 01.07.2012 ("TCC") was issued on 19.09.2014 in relation to regulating the possible limitations, monetary or scope wise, to the representation powers to be assigned to especially company representatives.
Nevertheless, the new rules brought many discussions with them.
WHAT ARE THE HISTORIC AND CURRENT MAJOR ISSUES RELATING TO REPRESENTATION POWERS ORIGINALLY ASSUMED BY THE BOARD OF DIRECTORS OF AN AS?
- What has been the long lasting rule? The management and representation of a an AS has always been with the board of directors (BoD) and it has been legally possible for the BoD to delegate its management power (decision making) and representation power (binding the corporation against 3rd parties) in part or in full to (i) one or more members of the BoD or (ii) to third persons, for instance to a full-time professional management i.e CEO, CFO, COO, provided that at least one member of the BoD still had the representation power.
- Could such delegated representation powers be limited? While delegating others as signature authorities for representation of the AS, in principle for such to be valid against third persons, the BoD could only limit the powers (i) for scheme of signing i.e joint or sole signature or (ii) appointing different persons to head office and different branches of the AS.
- As this principle in practice did not allow the corporations to do effective and timely day-to-day operations, in practice it was widely applied and accepted, by especially foreign invested companies who are very much used to limited bank mandates outside of Turkey, such that the BoD appoints representatives of the Group companies of the AS or employees of the AS as limited signature authorities both in transaction and monetary limitations. However, this did not provide a protection for the companies against third parties whose good faith only was subject to limitations that were registered (i) for scheme of signing i.e joint or sole signature or (ii) different persons appointed to different branches of the AS.
- What has changed now? With the enforcement of the TCC, the above stated principle started to be strictly applied by the Commercial Registries thus created a big hassle for the AS companies in Turkey, especially in the big cities, since the companies could not perform day-to-day operations as they did not wish to give unlimited powers to lower level managements of the companies.
- Seeing this, the law maker on 19.09.2014 issued an amendment to the TCC and governed that the BoD could appoint those board members who had not been authorized to represent the company (i.e who are not Managing Directors) and those who are bound to the company under an employment relationship (which is widely interpreted currently to include those employed by other Group companies), as signature authorities with limited powers and include such in the internal directive the BoD would issue to allocate the management (if it wishes) and representations powers to others.
- What is the upside of the new change?With this new development, though it has all kinds of different application problems with the Commercial Registries due to the wording of the TCC being so vague and untargeted, we see it as a big chance for the ASs in Turkey to be able to register the limited powers for representations their BoDs would allocate among the management of the their companies and representatives of Group companies and this time such registration would be legally valid and effective against all third persons as registration brings validity to such transactional and monetary limitations.
- What might be creating hesitations? Despite the upside of the new regulation as stated above, one of the important questions to be answered now by the performers of the TCC both on the regulator's side and on the AS side, is that how "the important transactions" generally required by the shareholders, especially of the JV companies controlled by two or more groups with equal powers and/or equity, to be discussed and agreed to by the BoD (where they are equally represented) before being performed out as a transaction with third parties by unlimited or limited signature authorities of the company shall be handled and/or interpreted.
- According to some regulators, such a requirement of a separate BoD decision for a specific transaction to bind the company is a limitation of representation authority and the TCC avoids for further limitations except for as examined above. Whereas, it may as well be interpreted such that the BoD decision for a specific "important transaction" to be taken prior to execution of it, shall not be an issue of limiting the representation authority outside the scope of the TCC but shall be treated as a legal validity condition of such a transaction
We are keen on closely watching out for the evolvement of this important issue especially for Turkish JV companies and updating you on such.Originally published on 01 March 2015
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