Turkey: Foreseen Risks For Special Purpose Vehicles (SPV) In Turkey: Evidencing Prohibition Of Competition In Managerial Competence At Joint Stock Companies And Limited Liability Partnerships

Last Updated: 21 November 2013
Article by Safak Herdem

The year 2011 was introduced as a "revolution year" in Turkish commercial life since the new commercial law was expected to regulate from A to Z in commerce however during the time elapsed several amendments and changes in effectiveness of the particular provisions manifested the realities of daily business life.

One of these realities was the non competition obligations of shareholders and managers in joint stock companies and limited liability partnerships still remains as a problem that seems impossible to be resolved since it directly relates evidence law in practice. The obstacle in evidencing the failures is still high risk especially for foreign companies set out or involved in special purpose vehicles in a form of joint stock company and limited liability partnership.

Pursuant to the article 396 of the Turkish Commercial Law "None of the members of the Board of Directors, without permission of the general assembly, either himself or on behalf of third party, shall not conduct any transaction in the same scope of the business of the company they take role or become as unlimited liability partner at a company in the same kind of business." Since the provision seems effectively enforceable at the first glance the boards of the joint stock companies endeavor to support and prove their claims in terms of evidencing.

As obviously seen, the phrases such as "any transaction" and the "same scope of business" are relatively difficult to be construed when proving the failures in competition is in question.

Even the law grants optional rights such of asking compensation for the company or deeming the transaction conducted on behalf of the company, these all requires judging and subject to argumentations that creates operational risk on SPVs.

The prescription period defined in the law also supports our criticism. According to the article 396 of the Turkish Commercial Law, these optional rights shall be exercised within three months period of time of being informed. Considering the purpose and duration of the SPVs in Turkish market, provisions having no practical effect in daily business leads foreign companies to re-think in establishment of SPVs in Turkey.

The same also applies to limited liability partnerships which is any other type of corporations in Turkey. According to the article 613 of the Turkish Commercial Law Partners of a limited liability partnership are responsible for protecting company secrets. This liability shall not be removed by articles of association of partners assembly resolution. The provision follows that "Partners may not act that may jeopardize the interests of the company. In particular, they are not allowed to carry out transactions providing a special interest to them or resulting damage to the company. The provisions related to the obligation of non competition shall be brought by articles of association"

As clearly seen, on one hand the law prohibits the competitive manners of partners against the company interest and follows by stipulating that this shall be provided by articles of association which creates a dilemma in implementation of the law.

We see that not being limited to above regulations in limited liability partnerships, the article 613/4 of the Turkish Commercial Law gives green light to breach of non-competition obligation. Accordingly, providing the approval of all other partners in writing, partners shall conduct transactions contrary to loyalty commitment and non-competition obligation.

These all put down to the fact of how the mentality of "corporating" may be transformed a tool to create an obstacle against managerial competence at a company. In today's Turkey as an emerging market with growing rate in FDI; as legal advisers we need to suggest foreign companies to spent more time on management & partnership structuring that are cornerstones of the investment in all forms of corporations including but not limited to SPVs.

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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Safak Herdem
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