The newly enacted Turkish Commercial Code1 (the "New TCC") was ratified by Parliament in January 2011. It will enter into force on 1 July 2012 by replacing the current Turkish Commercial Code2 (the "current TCC"). Among others, the New TCC introduces innovations to the issue of the liabilities of members of the board of directors (the "BoD") of joint stock companies ("JSC").
Liability under the Current TCC
Subject to discussions over whether the BoD members of a JSC are – contractually or through a delegation relationship – bound to their companies, BoD members who fail to perform their duties as assigned under the current TCC and articles of association (the "AoA") will be in breach of their obligations toward the JSC. The liability system is based on fault.
Pursuant to the current TCC, BoD members are not – in principle – held liable for actions taken on behalf of their company. However, under circumstances indicated in Article 336 of the current TCC, BoD members are held liable unless they prove that they were not negligent. In principle, the current TCC adopts absolute joint liability, which means all BoD members are liable for all damages if found liable.
Liability under the New TCC
The New TCC rules regarding BoD members' liability are clearer, and this will ease the process of determining the scope of liability. The liability system of the New TCC is also contractual in nature and based on negligence, such as the liability system of the current TCC.
Duty of Care
The current TCC requires that directors act as prudent company executives while performing their duties, and that BoD members must perform their duties in accordance with the standards of a prudent director. The level of care is determined by consecutive references to several articles of the Code of Obligations,3 which creates ambiguity. However, the New TCC will require BoD members to act as cautious executives and protect the interests of the company while performing their duties in accordance with the principle of good faith. A cautious executive must make business judgment rules in accordance with the principles of corporate governance. No liability will be stipulated with regard to the BoD members in the event of occurrence of damage or loss if the BoD members acted as cautious executives in good faith.
Delegation of Management and Powers of Representation and Binding
The new TCC clearly enables delegation of management, provided that the AoA of the company include a relevant article and the BoD has an internal directive (iç yönerge) on delegation of management, which in particular determines duties, positions and reporting chain.4 Therefore, the BoD may delegate management to certain BoD members or to third parties.
The representation and binding power of a company will be used by two BoD members, unless the BoD is comprised of one member, or another representation and binding structure is designated by the AoA. The BoD may delegate its powers to represent and bind the company to certain BoD members or third parties. However, at least one BoD member must always hold the power of representation.
The BoD members and the managers will be held liable if they breach obligations established by laws or the AoA, unless they prove that they were not negligent. In the event of delegation of powers, those who delegated powers may not be held liable, unless breach of the obligation to choose appropriate persons to delegate powers is proven. It should be highlighted that if a power is delegated, and this power may not be so delegated according to law or the AoA, such delegation is illegal, and the BoD member(s) will still be held liable.
Powers of the BoD that Cannot Be Delegated
The New TCC clearly indicates the powers of the BoD that cannot be delegated as follows5:
- High-level management of the company and the power to give orders for high level management;
- Determining the management organization of the company;
- Establishing the organization for the accounting, financial auditing and financial planning (at the level required for the specific company according to the size of the company);
- Appointment and dismissal of managers and other managerial-level personnel, and persons who hold representation and binding power;
- High-level auditing of persons engaged in management in compliance with the law, the AoA, internal directives and written orders of the BoD;
- Maintaining share, board resolution and general assembly meeting ledgers; organizing and serving the general assembly the annual activity report, and declaration regarding compliance with corporate governance rules; preparing for general assembly meetings; and realizing general assembly meeting resolutions;
- Notifying the court if the capital of the company is in debt.
Limits of Liability
The New TCC introduces a new rule that is remarkably different from the current TCC. As per Article 553/3 of the New TCC, no one6 person may be held liable for illegal acts, which have occurred out of his/her control, and neither the obligation of supervision, nor the duty of care may be used as grounds for holding such person liable. The ultimate liability system of the current TCC will be reduced to a level that is within the scope of human control.
Moreover, the New TCC introduces an exception for the BoD members of groups of companies in the situation where the parent company holds absolute power over the company. Since the BoD members of the company must follow orders received from the parent company in such situation, the BoD members of that company will not be held liable for actions taken as result of the orders received from the parent company.
Filing a Lawsuit against the BoD Members
The shareholders of the company – inter alia – have the right to file a lawsuit against the BoD members. A BoD member who proves that s/he is not negligent shall not be held liable. Especially in instances of duly delegated powers, board members shall not be held liable. If the BoD members are released by a general assembly resolution once, the release may not be cancelled by another general assembly resolution. However, the shareholders who object to such resolution have the right to file a lawsuit against the BoD members within six months. A resolution to release BoD members from their liability for incorporation and capital increases may not be adopted by a general assembly without an affirmative vote of the minority. Lawsuits related to the liability of BoD members may be filed within two years starting from the time such liability-bearing action is discovered. But in any event, a lawsuit may be filed within five years starting from the occurrence of such liability-bearing action. The lawsuit must be filed with the court where the headquarters of the JSC are located.
The New TCC regulates both the legal and criminal liabilities of the BoD members. Most penalties and prison sentences are regulated under the New TCC without reference to the Turkish Criminal Code.7 In principle, the crimes set forth under the New TCC are prosecuted without the need for complaint. The company may be assured of recourse for the damages that may arise from the negligence of the BoD members.
Keeping Company Books
The BoD members are under an obligation to maintain a document ledger, general ledger, inventory ledger, and other books that will be determined by the Turkish Accounting Standards Board in compliance with the rules of the New TCC. The ledgers must be in Turkish. Furthermore, the documents that constitute the grounds for the entries in the ledgers must also be kept. A certain amount of monetary penalty corresponding to at least 200 days of imprisonment will be imposed if this record-keeping obligation is not fulfilled. If the records are not maintained in line with the Turkish Accounting Standards, a monetary penalty corresponding to imprisonment from 100 to 300 days8 will be imposed. The auditors of a JSC enjoy the right to have access to the books of the Company. BoD members breaching this rule are subject to imprisonment from three months to two years.
Announcement of Financial Tables of a JSC
The BoD is under the obligation to prepare the company's financial tables. Furthermore, the BoD must announce these financial tables in the Turkish Trade Registry Gazette and on the website of the JSC. Upon breach of such obligation, the BoD members will be subjected to a certain amount of monetary penalty corresponding to at least 200 days of imprisonment.
Duty of Confidentiality
If BoD members who have access to the secrets of a JSC by virtue of their duties disclose such secrets, they will be sentenced to imprisonment from one to three years, and will be subject to a monetary penalty corresponding to a maximum of 5,000 days of imprisonment.
Pursuant to the New TCC, all JSCs must have a website in which certain content must be announced. If such website is not established within three months starting from the entry into force of the New TCC, the Board members shall be sentenced to six months' imprisonment and will be subject to a certain monetary fine corresponding to 300 days of imprisonment. If the content that has been determined by law is not announced on such website, the BoD members shall be sentenced to three months of imprisonment, and will be subject to a certain monetary fine corresponding to 100 days of imprisonment.
Documents and Declarations Contradicting the Law
In the event that documents that are related to incorporation, increase and decrease in capital, merger, spin-off, change in type, issuance of bonds and other similar documents have content that is contrary to the truth, the persons who have prepared such documents are held liable and will be punished by imprisonment from one to three years. Since BoD members are obliged to prepare the said documents, this rule constitutes part of their liability.
Misleading Declarations regarding Capital
If the capital of the company is shown as paid off when in fact it is not, the persons who have created this illusion, together with the authorities of the company, are liable for the unpaid amounts, provided that they are in fact negligent. They are also subject to imprisonment from three months to two years.
Irregularity in Determination of In-kind Capital Value
Those who determine a value for any in-kind capital that is higher than actual fact are liable for the loss incurred from such value determination. This rule is similar to the rule regulated under the current TCC. Unlike the current rule, committing fraud is not necessary for liability.
Collection of Capital from the Public
Pursuant to the Capital Markets Law,9 no capital may be collected from the public without the permission of the Capital Markets Board (the "CMB") in the guise of establishing companies, increasing capital or other such activities. In the event of collecting capital or attempting to collect capital, the CMB may apply to the Commercial Court of First Instance in Ankara to prevent such activities or such attempts. Those who collect funds and the BoD members of such company will be jointly liable for depositing the collected funds into the bank account determined by the CMB, provided that the BoD members are aware of the collection of the funds. Even though a permit is obtained to collect capital, the money received from the public must be used in line with the aim of the collection within six months, which period may be extended by a court decision. Otherwise, the rule regarding collection of capital from the public without a permit will be applicable. Persons breaching this rule shall be sentenced to six months' imprisonment.
More Detail, Greater Clarity
The New TCC will introduce greater precision to the process of determining liability, by replacing the principle of absolute liability with one based on the damages attributable to each individual BoD member. Moreover, the general adoption of corporate governance rules also has an effect on the liability system of the BoD members that request a high but humanly realizable scope of liability. Since the New TCC clearly sets forth the duties that may not be delegated, the scope of liability of BoD members is more clear-cut. However, the approach of the courts and practitioners to these new rules will also be essential for adapting the new rules to reality.
1. Law No. 6102, published in the Official Gazette dated 14 February 2011 and numbered 27846.
2. Law No. 6762, published in the Official Gazette dated 9 July 1956 and numbered 9353.
3. Law No. 818, published in the Official Gazette dated 8 May 1926 and numbered 336.
4. Article 367 of the New TCC.
5. Article 375 of the New TCC clearly sets forth the duties of BoD members that may not be delegated.
6. The Article in question refers to directors, managers, incorporation and liquidation officers.
7. Law No. 5237, published in the Official Gazette dated 12 October 2004 and numbered 25611.
8. The court establishes a set monetary amount appropriate to the case and multiplies this by the number of days of imprisonment.
9. Law No. 2499, published in the Official Gazette dated 30 July 1981 and numbered 17416.