Turkey: Innovations In The Board Of Directors Of Joint Stock Companies

Last Updated: 9 June 2011

Provisions of the New Turkish Commercial Code ("New TCC") concerning the Board of Directors ("BoD") are found among the provisions that have been significantly modified.
The corporate body that is the most influenced by corporate governance rules within the scope of the New TCC is the BoD. The BoD has been regulated through new structural and functional provisions. Provisions aimed at guaranteeing professional management and transparency were adopted. In addition, the rules that will facilitate the operation of the BoD have been included in the New TCC.

Formation of the Board of Directors

The first innovation set forth by the New TCC concerning the formation of the BoD is the abrogation of the obligation of a minimum of three directors regulated under the current Turkish Commercial Code ("TCC"). In accordance with the possibility of incorporation of corporation sole, it is possible to form a BoD composed of only one director, pursuant to Article 359/1 of the New TCC. Additionally, the condition of being a Turkish citizen and having a place of residence in Turkey for at least one of the directors was adopted. The obligation of being a shareholder for the directors has been abolished.

The New TCC sets forth the condition of having a graduate degree for at least one fourth of the directors in order to guarantee formation of the BoD with more qualified members. On the other hand, this condition will not apply to the BoDs which are composed of one director.

Another innovation set forth by the New TCC is the right of representation for determined shares, shareholder groups, and minority shareholders. In accordance with the new provisions, it is possible for shareholder groups which have a preferential right in terms of profits, votes, liquidation shares, and certain rights in rem to be represented on the BoD. The aforesaid possibility was not regulated under the TCC, but recognized by the precedents of the Court of Appeal. As the ongoing precedents of the Court of Appeal recognize "the preferential right of groups", the New TCC has included these precedents within the scope of the new code.

The possibility for legal entities to be directors

According to the TCC, only real persons are entitled to be directors. As the legal entities could not be directors, real persons were chosen to represent legal entities, and these persons held the director title. Pursuant to the New TCC, legal entities are entitled to be directors themselves. Therefore, it will be possible to hold legal entities responsible. According to the TCC, as the director title belongs to the representative of the legal entity, the legal entities could not be held responsible as directors. This fact leads to an unjust practice which does not permit financially strong legal entities to be held responsible. In accordance with the new provisions, as the director title is bestowed upon the legal entity, responsibility will also be imposed upon the legal entity. On the other hand, as the legal entity is not able to attend BoD meetings itself, a real person designated by the legal entity will attend the meetings.

Board of Directors meetings

The meeting and resolution quorums of the BoD are set forth in Article 330 of the TCC. The aforesaid article caused misinterpretations as it used the expression of "at least one more than half the number of members". These misinterpretations are eliminated by Article 390 of the New TCC. The aforesaid article prefers the expression, "the majority of the members" instead of the expression "at least one more than half the number of members". Therefore, confusions that can arise concerning the BoDs consisting of an odd number of directors are prevented.

The ambiguity concerning the decisions taken by circulation and signature of a resolution text among the directors has been eliminated. Provisions of the TCC remained silent about whether the signatures of the directors were required to be on the same paper or not. The New TCC clarifies that the signatures do not need to be on the same paper, but all of the papers signed by the directors need to be glued into the resolution book of the company.

The New TCC's intention of keeping up with technological developments has been concretized by the possibility for the BoD to hold on-line meetings. Pursuant to Article 1527 of the New TCC, it is possible to hold on-line BoD meetings or to hold meetings in which some of the directors participate on-line, while the others are physically present. Therefore, inconveniences concerning the joint stock companies whose directors are not physically in the same environment are prevented. It is only possible to hold on-line meetings if there is a relevant provision in the articles of association. In the aforesaid meetings, the statutory meeting and resolution quorums, or the articles of association need to be fulfilled.

Obligations and competences of the Board of Directors

The New TCC has made a distinction between the management right and authority of representation. According to the New TCC, the management right can only be delegated in case there is a relevant provision in the articles of association, and the necessary regulations need to be adopted by an internal directive. Thus, the directors can be regrouped as executive and non-executive members. A flexible regime in which all the directors can be non-executive members is permitted with the New TCC.

Pursuant to the New TCC, the BoD is entitled to establish committees and commissions in order to keep up with the operations, to draft reports concerning the subjects that are presented, to execute its resolutions, or for internal auditing. Therefore, the BoD will be able to operate on a more professional basis.

The non-assignable rights and competences of the BoD have been clearly stated by Article 375 of the New TCC. The aforesaid article clearly stipulates the requirement of being exercised directly by the BoD concerning the authorities which are in the scope of this article. Thus, the authorities in the scope of this article cannot be assigned to commissions.

A new institution called "committee for the early determination and management of risk" is stipulated under the provisions concerning the committees. This committee will be established for the determination of the causes that jeopardize the existence, development and continuance of the company, the implementation of necessary measures and solutions, and for risk management. This committee is a requirement for companies whose shares are traded on the stock exchange. As for other companies, the committee can be established if the auditor deems it necessary. The aforesaid committee will draft reports every two months and present them to the BoD. A copy of the report is to be submitted to the auditors.

Liability of the directors

In accordance with the amendment of the "ultra vires" principle, provisions concerning the liability of the directors have been widely modified. Pursuant to Article 371/2 of the New TCC, operations concluded by and between the authorized representatives and third parties beyond the purpose and scope of the company are binding for the company. On the other hand, if the third party is aware or should be aware of the fact that the operation is beyond the purpose and scope of the company, the company is not bound by the operation in question. Additionally, the publication of the articles of association of the company is not by itself enough to prove this fact. The possibility of recourse for the company against the director who concluded the operation is stipulated with the New TCC. Therefore, the article concerning the purpose and scope of the company will set the limits of recourse.

The duty of care of directors has been concretized and the degree of care of "fulfilling his duties with the care of a cautious director" has been adopted. The duty of loyalty has been regulated clearly, by establishing the duty of protecting the interests of the company in accordance with the rule of good faith.

The solidarity system that was applied for the liability of the directors has been modified, and the "differentiated solidarity" system was adopted. According to the new system, if more than one director is liable for compensation of damages, the directors will be held liable in proportion to their degree of fault and to the circumstances of the case. The damages caused by the directors will be regrouped into two categories: Damages caused collectively by the directors and personal damages caused individually by the director in question. Therefore, the distinction between collective damage and individual damage will be made, and different liability groups may be formed.

Lastly, directors' liability insurance has been included in the New TCC within the scope of the provisions concerning the liability of directors. Hence, the possibility for directors to be insured against damages resulting from their duties as a director has been regulated by law. Pursuant to Article 361 of the New TCC, if the damage that might be caused by the directors while fulfilling their duties as directors is insured for an amount exceeding 25% of the company's capital, this fact must be announced in the bulletins of the Capital Markets Board for publicly-held companies in the bulletins of the stock exchange if the shares are traded on the stock exchange, and it will be taken into consideration for the assessment of compatibility with corporate governance principles.

Conclusion

The provisions of the New TCC concerning the BoD provide major modifications. The provisions concerning the obligation of holding a graduate degree and the possibility of working with committees were adopted for the professionalization of the BoD. The liability system of directors has been reformed by the modifications in the liability provisions and by directors' liability insurance. With provisions such as the provision that clarifies the meeting quorum and the non-assignable rights of the BoD, important steps are taken for the prevention of problems that are faced in practice. All these innovations will, without any doubt, facilitate the operation of the BoD, ensure a more professional and transparent management, and help to overcome the problems that used to arise in the implementation of the TCC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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