Turkey: Turkish Commercial Code In Practice: Managers In Limited Companies (September 2013)

Last Updated: 10 October 2013
Article by Gözde Esen Sakar

A Limited Liability Company ("LLC") is one of the company types regulated by the Turkish Commercial Code ("TCC"). LLCs are established by one or more real persons or legal entities as shareholders. The management and representation of a limited company is carried out by appointed managers in accordance with Article 623 to 631 of the TCC and with the Articles of Association of the company.

Appointment of Managers

The General Assembly may authorize one or more shareholders (or third persons if there will be more than one appointed) by defining them as Managers to carry out the management and representation of company. Managers selected by General Assembly then need to accept the appointment in writing to the company and are then to be registered at Trade Registry and announced via the Turkish Trade Registry Gazette as a mandatory step.

The TCC does not place any restriction on the Managers in terms of their citizenship or residency status. The TCC has established a mandatory rule regarding the election of Managers which prevents any contrary regulation to be valid in the Articles of Association. As per Article 623 of TCC at least one shareholder must be appointed as a Manager of the company with the authority designated to manage and represent company. Where the company elects to have more than one Manager, one must be a shareholder but others may be non-shareholders.

Legal Entity Manager

TCC allows a legal entity to be appointed as a Manager of an LLC. If the General Assembly selects a legal entity to become a manager it must also accept, be registered and announced as a Manager in the same way as an individual real person would be. Additionally, a real person representative must be selected and duly authorized by the legal entity Manager to act on its behalf; this real person shall also be registered in this capacity at the Trade Registry and formally announced via the Turkish Trade Registry Gazette.

Board of Managers

The management and representation of an LLC may be performed by one or more managers. Article 624 of TCC dictates that if more than one Manager is appointed then a Board of Managers is created. In this situation, one of the Managers is to be appointed by General Assembly as Chairman of the Board of Managers. The Chairman has authority to make all statements and declarations on behalf of the company.

Board of Management decisions shall be adopted by consent of the majority of the Managers. The casting vote principle is put forward in the TCC as an instrument to resolve administrative deadlock and ensure the company remains workable. According to the casting vote principle, the Chairman's vote is accepted as the casting vote in case of an equal number of votes for and against a motion arises. It is possible to regulate the decision making process of the Board of Managers with provisions added into the Articles of Association of the company by virtue of Article 624(3) of TCC.

Non-Transferable Duties of Managers

As a rule, Managers have a management right in LLCs. Managers have authority to adopt and execute all decisions related to management unless the topic was determined within the scope of authority of a General Assembly, by law or from within the Articles of Association of the company.

Although the TCC allows that Managers authority may be selectively transferred to the scope of the General Assembly through means of stipulations included in the Articles of Association; the exception to this are the nontransferable and compulsory duties of Managers set out in the TCC. Nontransferable and compulsory duties according to the TCC are as follows:

  • Management of the company and giving instructions required for that management.
  • Determination of management structure within the law and scope of Articles of Association
  • If it is necessary for the management of the company; creating accounting and financial plans and financial auditing.
  • Observation and oversight based responsibility for acts of authorized people in terms of obligations under law, Articles of Association, regulations and directions that may have been delegated within the company, for example to an appropriate department.
  • Establishment of the 'early detection and management of risk committee' required except where the company meets criteria to be deemed a 'small' LLC.
  • Preparation of financial statements, annual activity reports and, where necessary, community financial reports and related annual activity reports.
  • Organization of General Assembly and enforcement of General Assembly decisions.
  • Notifying the court if share capital of the company is insufficient to cover the company debt.

The Articles of Association can be used to regulate that decisions adopted by Managers which concern shareholders, or where there is a necessity to get the approval of shareholders, may be presented to the General Assembly for decision. This is designed to allow a defined relationship between the General Assembly and the Board of Managers to provide harmony and clarity for shareholders and further guard against deadlock scenarios. The existence of this consent mechanism (to transfer certain authorities to the General Assembly), which is not imperative, does not remove the responsibilities of Managers arising from their primary decision making authority obligations under the TCC.

Obligations of Managers

Article 626 of the TCC regulates the Manager's duty of diligence and pursuit of company benefits. Managers have a responsibility to be a careful and serious when they perform their duties on behalf of the company. Also managers have obligation not to place their own or other people's benefit above the benefits of the company.

Another article in the TCC regulates the non-competition obligation placed on Managers. Managers may not engage in activities which can be deemed to be in competition with the company interests. The non-competition obligation is not a mandatory rule and it may be superseded within the Articles of Association. Even if there is no exclusion of the non-competition obligation, Managers may engage in activities which can be seen as competition to the company interests if they have obtained written permission from all shareholders.

Managers have a duty of loyalty which includes safekeeping of company secrets and protecting company interests. This duty of loyalty is an obligation which cannot be amended or removed via the Articles of Association, which is contrary to the position on non-competition obligations.

Managers have an equal treatment obligation towards shareholders, where they are expected to act in the same way towards any of the shareholders where conditions are comparable. They must of course act within the framework of decisions of the Board of Management and by virtue of Article 627 of TCC which regulates the equal treatment obligation on Managers.

Representation of the Company

Managers who have authority to represent the company can have limitations placed on their powers determined by a General Assembly resolution. This resolution would need to be registered at the Trade Registry and announced at Turkish Trade Registry Gazette in order to be valid.

According to the TCC, business and transactions to be entered into on behalf of the company by (officially registered and announced) Managers are subject to different regulations depending on the scope of activity of the company irrespective of whether the business and transactions in question is directly related to scope of activity of the company. Accordingly, Managers who have representation authority may carry out all businesses and transactions related to the company. Transactions which are not related to the normal scope of the company shall be binding on the company provided that the counterparty to the transaction is unaware or cannot reasonably be expected to know that the transaction is unrelated to the scope of activity of the company.

The authority of Managersmay also be restricted via General Assembly resolution under two specific circumstances set out in the TCC, which are as follows:

  • Allocations of management representation authority to a specific headquarter or branch of the company: For example, a Manager allocated authority for Branch 'X' cannot render decisions for Branch 'Y' or on behalf of the Headquarters of the company.
  • Restriction of signature authority: For example, a Manager defined as belonging to Group 'A' may be able to sign unilaterally on behalf of the company whereas Group 'B' Managers may be required to obtain a second Manager's signature to validate their decisions. Authority levels set will apply to all managerial function, and specific management decision types cannot be carved out via this mechanism alone.

If either of these two above restrictions are placed, the company can claim that any decision of the manager that contravenes their scope is not binding upon the company. However, if other types of restriction are placed on a manager's authority, decisions made outside of that manager's scope is binding for the company provided that the counterparty is not aware of the restriction or cannot reasonably be expected to have been aware.

It is possible to not only to restrict Managers but also to remove representation and management authority entirely via a General Assembly resolution. Every shareholder of the company has a right to apply the court to demand restriction or removal of representation authority of Managers. There must be a valid reason to restrict or remove the representation authority however. TCC defines "valid reason" as a violation of contractual or legal obligations, duty of diligence and loyalty or losing necessary qualifications for good management of the company.

If there is a one shareholder in the LLC, transactions between this shareholder and the company shall be in written form. This written form condition has been established as a validity condition for transactions. This condition cannot be seen as a validation rule if the transaction between the shareholder and the company is a daily transaction in accordance with the experience of the market and daily life, has determined terms or ordinary qualification, carries no specific characteristic, has no opportunity for cronyism or if the same conditions apply regardless of the parties involved.

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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