Turkey: How Shall The Advance Dividend Be Distributed According To New Turkish Commercial Code?

Last Updated: 9 January 2013
Article by Nilgün Serdar Simsek

In accordance with Article 509 of Turkish Commercial Code (TCC) No. 6012, which entered into force on 1 July 2012, the procedures and principles of "advance dividend distribution" were revised in the Advance Dividend Distribution Communique (ADDC) that was issued by the Ministry of Customs and Trade and entered into force following its promulgation in the Official Gazette on 9 August 2012. According to Article 2 of the ADDC, these procedures and principles shall apply to joint-stock companies, limited liability companies and limited partnerships that do not fall under the scope of the Capital Markets Law No. 2499.

Advance Dividend Distribution Procedure

As per Article 5 of the ADDC, companies shall distribute an advance dividend if the following two conditions arise: if a general assembly resolution regarding advance dividend payment is passed and if the company has already made a profit on its three-, six- or nine-month interim period statements prepared within an advance dividend distribution term.

Contents of General Assembly Resolution

According to Article 6 of the ADDC, if a company seeks to distribute advance dividends, the abovementioned subjects shall be stated in the relevant general assembly resolution. Additionally, the following conditions must be resolved during the general assembly meeting held within the advance dividend distribution period.

  1. If net profit for the relevant accounting period falls short of the advance dividend distribution for the accounting year, and if net profit in excess of the dividend has to be appropriated from the previous year's surplus reserve fund or if the surplus reserve fund is insufficient to cover the distributed advance dividend, then shareholders who received advance dividend over-payments shall be required to pay back the amount and shall receive a warning from management.
  1. In case of loss at the end of the relevant accounting period; first, if any general legal reserve and available reserve fund from the previous year's balance sheet is required to cover the loss, and if these funds are insufficient, then shareholders shall pay back any advance dividends distributed during the period and shall receive a warning from management. Second, the balance of the available reserve fund shall be reduced to within the advance dividend amount via the reduction process, and if advance dividends distributed during the period exceeded the balance of the free reserve fund, then the shareholders shall be required to pay back the portion in excess and shall receive a warning from management.

Advance dividends paid before the relevant accounting year shall be appropriated from the period's net profits. Prior to appropriation, the Board of Directors shall not distribute or pay out any dividends.

Quorums of General Assembly Meeting

According to Article 9 of the ADDC, the general assembly should be assembled with shareholders, or their representatives, who own at least ¼ of the capital.

For joint-stock companies and limited partnerships, a majority of votes represented at the meeting mustbe in favour of advance dividend distribution, while for limited liability companies, an absolute majority of votes represented at the meeting must be in favour of distribution. 

Management's Liabilities During Advance Dividend Distribution Process

According to Article 9 of the ADDC,if the company reports a profit on its interim period statements and the general assembly resolves to distribute advance dividends, the following processes shall be carried out by management.

  1. A financial report about advance dividend distribution shall be prepared. The report shall include the following: interim period statements that constitute the basis for dividend advance distribution prepared in accordance with Article 515 of the TCC as well as the amount of advance dividend that will be distributed calculated according to Article 7 of the ADDC. The reports and documents that constitute the basis for calculations and other terms shall be attached to this financial report.
  1. A report about which shareholders will receive advance dividend payment shall be prepared by management and management shall resolve to carry out the related payment procedures within six weeks. Management shall pass the necessary resolutions to approve payment of advance dividend to bearer share certificate owners. Also, management shall organise necessary processes for shareholders to pay back any overpaid advance dividend.

Along with the procedures and principles for advance dividend distribution that were issued in the ADDC, some responsibilities and assignments were also issued for the management bodies of companies. In this respect, equity firm management boards should act according to the TCC and ADDC during advance dividend distribution. According to Article 553 of the TCC, members of Boards of Directors are liable for misconduct that violates their responsibilities as derived from their organisation's Code of Conduct or their primary employment contract as well as for damages against their company, shareholders and company's beneficiaries. Thus, if members of the Board fail to comply with the legal regulations for advance dividend distribution, then they may be held responsible under the abovementioned article. Parties affected by a Board member's misconduct have the right to file a claim for compensation for two years starting from the date when they learn about the damages and the person responsible for them, but they cannot file a claim more than five years after the damages have occurred.

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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