Turkey: Company Formation Under The New Turkish Commercial Code (Updated January 2013)

Last Updated: 29 January 2013
Article by Gözde Esen Sakar

Limited Liability Companies (LLC) and Joint Stock Companies (JSC) remain the common choices for setting up a business in Turkey. The new Turkish Commercial Code (NTCC) came into force on 1st July 2012, bringing with it sweeping changes to the way these companies are governed.

Major amendments were made to the enacted code on 30th June 2012 and 12th July 2012. Since then, regular secondary legislations continue to be issued as the market engages in the new ways of working. You will note from the updates within this article that the two types of entity now share a great deal of common ground with differences becoming more subtle.

We have set out some of the important considerations for both company types below with the benefit of exclusive Of Counsel from Prof. Dr. Veliye Yanlı, who headed the parliamentary commission during enactment of this NTCC.

TURKISH LIMITED LIABILITY COMPANIES (LLC)

One Shareholder In LLCs

The number of shareholders in LLCs can be decreased to one. If the number of shareholders is decreased to one it must be notified in writing to the manager(s) of the company. Within 7 days from receipt of such notification the manager(s) must apply to the trade registry for the registration and announcement of the company's new structure; indicating the name, residence and nationality of the single shareholder. The company management will be liable for non-compliance with this application requirement.

Increase of Share Capital

With the NTCC, minimum share capital of LLCs was increased from 5,000TL to 10,000TL. If the share capital of the LLC is below this threshold, the share capital must be increased to at least 10,000TL within 3 years of the publication of the NTCC (published 14th February 2011).

Payment of Share Capital

If the shares are subscribed in cash at least 25% of the share capital must be paid up before registration and the remaining share capital needs to be paid within 24 months following the registration. Full payment of share premium will be regulated; when shares are subscribed via share premium, such share premium must be fully paid in during the subscription.

Owing Debt to the LLC

Shareholders may borrow from the company, but only where they have fulfilled their capital liabilities and when the profit and free reserve funds of the company are sufficient to cover the losses of the previous year (i.e. they cannot borrow if the company has a negative position).

Prohibition of Managers Owing to the LLC

Company managers and their relatives who are not shareholders in the company are prohibited from owing cash to the LLC. With this in mind, whilst it was previously allowed in kind, the possibility of the LLC to grant securities, assume obligations for such persons and/or to take over their debts is now blocked under the secondary amendments.

Amendment of the Articles of Association

The LLC must ensure that its Articles of Association are in compliance with the requirements of the NTCC by 1st July 2013 (i.e. within 12 months of the effective date of the NTCC).

Committee for Early Detection and Management of Risks

The LLC must establish a committee for early detection and management of risks. This committee shall be assembled from the manager(s) of the company. If, however, the company is determined to be a small limited company, as per the calculation criteria determined by the Ministry of Customs and Trade, then such a committee will not be compulsory. At time of writing these calculation criteria are still being formulated by the Ministry.

Domicile of the LLC Manager

Following the amendments, there is no longer a requirement for at least one of the LLC managers to be domiciled in Turkey with sole authority to represent the company. There are however certain milestones and events where physical presence is needed for signatures, petitions and similar, so practical considerations should be made.

Appointment of a Chairman of the Board

If the LLC has more than one manager, one of them must be appointed chairman of its board of managers by the general assembly. The chairman no longer needs to be a shareholder in the company. At least one shareholder should have the authority to manage and represent the LLC however, so in practice this means that if the chairman is not a shareholder, one of the other managers must be.

Keeping the Share Ledger

The LLC must keep a share ledger. The share ledger shall reflect the following; names/titles and addresses of the shareholders, number of shares held by each shareholder, share transfer details, nominal value of shares, class of shares, encumbrances over the shares and the names/titles and addresses of beneficiaries of such encumbrances created over the shares.

Keeping the Commercial Books

The LLC is obliged to keep commercial books indicating the commercial transactions and asset structure, borrower and lending relations of the company and results obtained in each fiscal year.

Whilst the books are to be kept in line with Tax Law and certain provisions of the NTCC, there is no longer the obligation to apply Turkish Accounting Standards. The opening and closing of hard copy books must be certified by a Notary Public, but this is not currently required for electronic versions. Our interpretation is that the company can choose to keep its books in either physical or electronic format, although the law is not explicit on this point. The company has an obligation to keep its books for a minimum of 10 years in either case.

Financial Statements and Activity Reports

The manager(s) of an LLC must prepare and submit to the attention of the general assembly the financial charts, appendices and the activity report of the company for the preceding accounting period. This must be done in accordance with the Turkish Accounting Standards and within the first three months of the relevant accounting period (fiscal year) following the balance sheet date.

The relevant Turkish Accounting Standards have been applicable from 1st January 2013 and adopt international standards as planned.

Independent Audit

The Council of Ministers has determined and defined the criteria for companies that will be subject to independent auditing. These eligible companies appear on the authority listings. The auditor should be an independent auditing firm whose auditors are either chartered or certified public accountants.

Transactional Audit – Under the original version of the NTCC it was necessary for LLCs to go through an auditing procedure as part of transactions such as mergers, spin-offs and conversions. This is no longer necessary as the amendments have abolished the requirement.

Audit of Financial Charts and Activity Report – Financial charts and activity reports for the managers of the LLC (and group of companies, if applicable) must be independently audited in accordance with the Turkish Auditing Standards which will also be compliant with international auditing standards. This auditor must be appointed by the general assembly of the LLC. The auditor must be re-elected for each fiscal year activity period, but the same auditor can only be elected seven times in each ten year period as a safeguard, effectively meaning that two auditors are needed each ten years. This election must take place within the first four months of each activity period. The auditor so elected shall be registered with the trade registry and their details must be published on the LLC's web-site. This requirement to audit the financial charts and activity reports came into effect on 1st January 2013.

LLC Web-Site

Limited companies that are determined by the Council of Ministers to be subject to independent auditing must have and maintain a web-site. If there is already a web-site in place, it must be brought into conformity with the content requirements of the new code. The minimum required content of the web-site is stated in the regulations but it does not limit addition of other information that the company may wish to convey. An important amendment to the original enacted NTCC is that there is no longer a requirement to post financial statements and resolutions on the website.

TURKISH JOINT STOCK COMPANIES (JSC)

One Shareholder ın JSCs

One shareholder is sufficient for the establishment of a joint stock company, replacing the previous need for a minimum of five, with no limit to the maximum number of shareholders.

Minimum Amount of Share Capital

The required amount of share capital of JSCs with principal share capital remains the same and shall not be less than 50,000TL. A deviation however is that JSCs now have the right to incorporate registered share capital with an increased minimum of 100,000TL initial share capital whether or not publicly traded.

Payment of Share Capital

If the shares are subscribed in cash at least 25% of the share capital must be paid up before registration and the remaining share capital needs to be paid within 24 months following the registration. Full payment of share premium will be regulated; when shares are subscribed via share premium, such share premium must be fully paid in during the subscription.

Owing Debt to the JSC

Shareholders may borrow from the company, but only where they have fulfilled their capital liabilities and when the profit and free reserve funds of the company are sufficient to cover the losses of the previous year (i.e. they cannot borrow if the company has a negative position).

Prohibition of Board Members Owing to the JSC

Board members and their relatives who are not shareholders in the company are prohibited from owing cash to the JSC. With this in mind, whilst it was previously allowed in kind, the possibility of the JSC to grant securities, assume obligations for such persons and/or to take over their debts is now blocked under the secondary amendments.

Establishment of the Risk Committee

The NTCC stipulates that JSCs whose share certificates are traded on the stock exchange shall establish a risk committee. This committee shall identify potential factors that could endanger the existence, progress and continuation of the company and shall endeavor to take necessary precautions and ensure the risks are effectively managed.

Board of Directors

It is sufficient for the board of directors to consist of just one member. Under the amendments to the NTCC it is no longer necessary for at least one of the board members to be a Turkish citizen residing in Turkey. There are however certain milestones and events where physical presence is needed for signatures, petitions and similar, so practical considerations should be made.

A legal entity can be a board member; however in this case a real person must be designated to represent the legal entity. It should also be noted that it is not possible to place more than one real person on the board of directors on behalf of a single legal entity.

Board members are no longer required to be shareholders in the JSC.

Representation Authority of the Board of Directors

The NTCC abolishes the rule restricting the rights and obligations of a JSC to within context of the field of activity stipulated in its articles of association (ultra vires); the board of directors may also execute transactions outside the scoped field of activity of the company.

Duties and Authority Delegation of the Board of Directors

The NTCC clearly dictates that certain duties and authority levels of the board of directors cannot be assigned and shall only be affected by the board of directors.

Keeping the Share Ledger

The JSC must keep a share ledger. The share ledger shall reflect the following; names/titles and addresses of the shareholders, number of shares held by each shareholder, share transfer details, nominal value of shares, class of shares, encumbrances over the shares and the names/titles and addresses of beneficiaries of such encumbrances created over the shares.

Keeping the Commercial Books

The JSC is obliged to keep the commercial books indicating the commercial transactions and asset structure, borrower and lending relations of the company and results obtained in each fiscal year. Whilst the books are to be kept in line with Tax Law and certain provisions of the NTCC, there is no longer the obligation to apply Turkish Accounting Standards. The opening and closing of hard copy books must be certified by a Notary Public, whereas electronic versions do not currently require this.

The law is not explicit, but our interpretation is that the company can choose to keep its books in either physical or electronic format. The company has an obligation to keep its books for a minimum of 10 years in either case.

Financial Statements

The financial tables of a JSC are to be prepared in accordance with the financial reporting standards determined by the Public Oversight, Accounting and Auditing Standards Authority, which also comply with international standards.

JSC Website

Joint Stock Companies that are determined by the Council of Ministers to be subject to independent auditing must have and maintain a web-site whether publicly traded or not. If there is already a web-site in place, it must be brought into conformity with the content requirements of the new code. The minimum required content of the web-site is stated in the regulations but it does not limit addition of other information that the company may wish to convey. An important amendment to the original enacted NTCC is that there is no longer a requirement to post financial statements and resolutions on the website.

Board of Directors in an Electronic Environment

The NTCC enables the board members to attend and to vote in meetings via transfer of image and voice according to the provisions of the Articles of Association of the company.

Provisions regarding the meeting and decision quorum of the board of directors shall also be applicable if the meetings of the board of directors are held in an electronic environment.

General Assembly in an Electronic Environment

The NTCC stipulates the rights of shareholders to attend, give proposals, declare opinions and vote at the general assembly of JSCs via electronic means; and sets out the obligation to apply such a system within those companies whose shares are floated on the stock exchange.

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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