The Turkish Commercial Code No. 6102 ("TCC") adopts a different system from the old Turkish Commercial Code No. 6762 ("Old TCC") and regulates group companies. One of the most important regulations with respect to group companies is contained in the articles that regulate the liability of the controlling company. Paragraphs 1 and 2 of TCC Art. 202 set forth two different conditions which would constitute a contravention of the law. This paper will examine the conditions of contravention of the law regulated under paragraph 1 of TCC Art. 202 and the lawsuit that may be filed due to this contravention of the law.
The Contravention of Law as Regulated under TCC Art. 202/1
In accordance with Art. 202/1 TCC, a controlling company may not exercise its control in a way that would make the dependent company incur a loss. If the controlling company exercises its control in a way that causes losses to the dependent company, this would constitute a contravention of the law. Art. 202/1 provides examples of the acts and transactions that may create loss. Accordingly, the controlling company may not direct the dependent company to carry out legal transactions such as the transfer of business, assets, funds, staff, receivables and debt; to decrease or transfer its profits; to restrict its assets with real or personal rights; to undertake liabilities such as providing surety, guarantee and bill guarantee; to make payments; to adopt decisions or take measures which negatively affect the dependent company's efficiency and activity such as not renovating its facilities, limiting or stopping its investments without any reasonable grounds or refraining from taking measures that will ensure its development.
If a loss due to any of the aforementioned occurs, the controlling company will be obliged to compensate the dependent company. Where the controlling company fulfills its compensation obligation, the contravention of the law will be eliminated and the controlling company will be relieved of its liability. Pursuant to Art. 202/1, the compensation obligation may be fulfilled by compensating the loss within that activity year or a right to claim of equivalent value is granted to the dependent company at the latest by the end of that activity year by specifying how and when the loss will be compensated.
In the event that the compensation foreseen under Art. 202/1 TCC has not been paid/ performed, a contravention of the law will be deemed to exist and the shareholders of the dependent company may file suit for the damages incurred by the dependent company. The provisions of the lawsuit will be briefly examined below.
Cause of Action
In order to file a suit as regulated under Art. 202/1(b), certain factual elements must be met. The first element is the existence of a group. Moreover in order to file a suit for damages there must be a dependent company and a controlling company in compliance with Art. 195 TCC. This type of action seeks to compensate the damage caused to the dependent company for losses incurred due to abuse of control. Consequently, the presence of a controlling company and dependent company is essential. Furthermore, there must be a contravention of the law pursuant to Art. 202/1(a). A contravention of the law will arise where the dependent company incurs a loss due to use of control and such loss has not been compensated within the period prescribed by the law. In the presence of these factual elements, a suit for the dependent company's damages may be filed by the shareholders of the dependent company.
Pursuant to Art. 202/1 of the TCC, if compensation has not been paid/performed within the activity year in which the damage occurred or if a right of equivalent claim has not been granted within the due period, each shareholder of the dependent company may demand that the loss incurred be compensated by the controlling company and its board members who caused the loss. The plaintiff is set forth as the shareholder of the dependent company, as the dependent company is not entitled to file a suit pursuant to said article. The preamble of the TCC explains the reasoning behind this regulation. In accordance with the preamble of the TCC, the dependent company may not carry out this lawsuit against the controlling company in good faith since it is affiliated with the controlling company.
In accordance with said article, the suit may be filed against the controlling company or its board members who caused the loss. The controlling company shall be liable for the entire loss. On the other hand, the lawsuit may also be filed against the board members who caused the loss. Pursuant to Article 202/1(e), Articles 553, 555 to 557, 560 and 561 shall apply to the action to be taken by shareholders, by analogy. The aforementioned articles regulate the liability of the board members of a joint stock company. Accordingly, the board members may only be held liable where they are at fault. The principles of differentiated succession shall apply to the liability of the board members.
Release from Liability
Article 202/1(d) TCC stipulates a special condition where the controlling company and its board members may be released from liability. Where it is proven that under the same or similar conditions, the board members of an independent company, who take care of company interests in good faith and act with the care of a prudent manager, would also have carried out or refrained from a transaction as a result of which loss occurs, compensation may not be awarded.
The plaintiff may demand that the controlling company compensate for the loss incurred by the dependent company. The amount of the claim shall be the difference between the current status of the company's assets and the would be position of its assets if the act or transaction realized due to the performance of control had not been realized. The facts which have a causal relation to the act that gave rise to the loss shall be taken into account while calculating the loss. The judge has sole discretion while determining the method of compensation.
The claimant may request the purchase of his shares by the controlling company instead of filing a compensation claim. However, in order to apply this solution, the request of compensation should not be possible. Furthermore, if it is justifiable; instead of compensation, the judge may decide that the plaintiff shareholders' shares must be acquired by the controlling company or decide on another solution, which is acceptable and appropriate to the situation. Accordingly, this provision is assumed as an important provision since the judge may use his discretionary power while deciding on the solution. The judge, without any request, by considering the circumstances of the relevant case, may rule for the purchase of the shares or for any other solution. Art. 202/2 shall be applied while determining the purchase price of the shares. In accordance with Art. 202, if possible, the shares shall be purchased at least at stock exchange value. If there is no such value or if the stock exchange value is not just, then they shall be purchased at actual values, or at a value to be determined in accordance with a method that is generally accepted.
Jurisdiction and Statute of Limitations
The competent court is the commercial court of first instance, pursuant to Art. 561 TCC. Said article sets forth that the lawsuit against the respondent shall be filed in the commercial court of first instance where the headquarters of company is situated. However, said article does not clarify whether "headquarters" refers to that of the controlling or the dependent company. Art. 202/1(e) stipulates that if the headquarters of the controlling enterprise is located abroad, the suit for compensation shall be filed in the commercial court of first instance at the location of the headquarters of the dependent company.
TCC Art. 560 shall be applied with respect to prescription period due to reference to art. 560. In accordance with this article, the compensation claims must be made within two years from the date on which the claimant became aware of the loss, and the person that is responsible of that loss and in any case, within five years from the occurrence date of the act which caused the loss.
TCC Art. 202/1 brings a new dimension to liability law and foresees the indemnification of a dependent company for the acts and transactions conducted by the dependent company upon the instruction of the controlling company. The suit for damages may be filed where there is a loss incurred by dependent company and where such loss has not been compensated within the period prescribed by the law. The lawsuit is filed by the shareholder of the dependent company and the respondent is the controlling company or its board members who caused the loss. TCC Art. 202/1 is an important provision since it regulates the liability of the controlling company within the framework of group companies.