The new Turkish Commercial Code (the "TCC"), which came into effect on 1 July 2012, introduced innovations to the issue of board of directors' (the "BoD") liabilities in joint stock corporations (the "JSC1").
From a general point of view, the BoD is responsible for the management and representation of a company. The BoD has two types of liabilities, which can be categorized as (i) civil liability and (ii) criminal liability. With respect to civil liabilities, while the former Turkish Commercial Code (the "Former TCC") imposed an absolute joint liability system, the TCC introduced a new rule in order to clarify the level of liability. Since all BoD members are deemed liable for all damages jointly, the absolute joint liability system adopted in the Former TCC had always created ambiguity in practice. The TCC has removed this ambiguity with Article 553/3, and now no person may be held liable for illegal acts, which have occurred out of his/her control, and neither the obligation of supervision, nor the duty of care may be used as grounds for holding the relevant person (i.e. board member) liable. As to criminal liabilities, since no person can be accused of a crime unless it is explicitly stated in a law (nulla poena sine lege) all crimes that can be attributable to BoD members are defined in the TCC and other relevant legislation. This article will provide a brief explanation of the liabilities of the BoD members defined under TCC and other relevant legislation.
I. Duty of Care and Loyalty
Article 369 of the TCC sets forth the level of duty of care and duty of loyalty of BoD members. BoD members are obligated to act as cautious executives and protect the interests of the company while performing their duties in accordance with the principle of good faith. A cautious executive must make business judgments pursuant to the principles of corporate governance. Articles 2032 and 205 of the TCC are reserved. As long as the BoD members act as cautious executives in good faith, no liability arises.
II. Book Keeping
BoD members are under an obligation to ensure that the company keeps a document ledger, general ledger, inventory ledger, share ledger, BoD resolution book, general assembly meeting minute book and any other books that specified by the relevant legislation. As per Article 562 of the TCC, a monetary penalty corresponding to at least 300 days of imprisonment shall be imposed if this book-keeping obligation is not fulfilled. If the records are not maintained in line with the Turkish Accounting Standards, a monetary penalty corresponding to at least 300 days of imprisonment shall be imposed.
Article 527 of the TCC provides that the BoD must keep company documents and information confidential. In case of a breach of this obligation, Article 2393 of the Turkish Criminal Code will be applied.
IV. Documents and Declarations Contradicting the Law and Liabilities regarding Capital of the Company
The documents related to incorporation, increase and decrease in capital, merger, spin-off, change in corporate type, issuance of bonds and other similar documents need to be fully in line with the laws and reflect the truth. BoD members are obligated to prepare these documents. In the event of any violation of this obligation, BoD members will be held liable and punished by imprisonment from one to three years.
Those responsible for reporting that the capital of a company has been paid, when in fact it has not been, will be held liable together with the authorized signatories of the company for the unpaid amounts provided that they are in fact negligent. They would also be subject to imprisonment from three months to two years as per Article 562 of the TCC. Additionally, those responsible for determining a value for any in-kind capital that is higher than its actual value will be held liable for the loss incurred from the difference in value.
Article 1524 of the TCC provides that companies subject to audit are obligated to have a website in accordance with the provisions of the relevant article. The members of the BoD are responsible for ensuring that the company has a duly created website and that the website contains the relevant necessary content, as defined in the law. Article 562 of the TCC provides that breach of these obligations will result in a monetary penalty corresponding to imprisonment from 100 to 300 days.
VI. Delegation of Powers
The BoD is entitled to delegate its management powers to certain members of the BoD or to third parties (as managers), as long as the Articles of Association (the "AoA") provides for such delegation and the BoD adopts an internal directive (iç yönerge). However, at least one BoD member must always have representation powers.
BoD members and managers may be held liable in the event of a breach of their obligations set forth by laws or the AoA, unless they prove that they were not negligent. In the event of a delegation of powers, those who delegated powers may not be held liable, unless they breach the obligation to delegate to appropriate persons. It should be noted that if a power is delegated, which may not be delegated according to law or the AoA, the delegation will be deemed illegal, and the BoD member(s) will be held liable.
The powers of the BoD that are not subject to delegation are listed under Article 375 of the TCC, which are as follows:
- High-level management of the company and the power to give instructions regarding the same;
- Determining the management structure of the company;
- Establishing the necessary organization for accounting, financial auditing and financial planning (at a level required based on the size of the specific company);
- Appointing and dismissing managers and other upper-level personnel, and persons who hold representation and binding powers;
- Carrying out high-level auditing of persons engaged in management in compliance with the law, the AoA, internal directives and written instructions of the BoD,
- Maintaining the share ledgers, BoD resolution and general assembly meeting minutes; organizing and submitting the annual activity report, and declaration regarding compliance with corporate governance rules to the general assembly; preparing for general assembly meetings; and enforcing the general assembly meeting resolutions; and
- Notifying the court if the capital of the company is in debt.
VII. Public Receivables
In accordance with Repetitive Article 35 of the Law on Procedures of Collection of Public Receivables and Article 10 of the Tax Procedure Law, the legal representatives of a JSC shall be jointly and severally liable for public receivables.
As to the application of these laws and as explained above under Section VI (Delegation of Powers), the legal representatives could either be the members of the BoD or third parties appointed as manager by the BoD. As per Article 367/2 of the TCC, all members of the BoD will be considered as legal representatives in cases where the representation authority is not assigned to executive directors or third parties as managers. Legal proceedings in relation to public receivables cannot be initiated for other members of the BoD in cases where the authority to represent the company has been delegated to executive directors or third parties as managers.
1 This article will focus on the liability of board members in closed JSCs as opposed to public JSCs.
2 Instructions of the holding company: BoD members of a subsidiary company need to comply with the instructions of the holding company's BoD (provided that the holding company owns 100% of the shares and voting rights of the said subsidiary company and that the instructions are in line with the pre-determined business strategies of the holding company) even if the instructions creates a loss for the subsidiary company. Since the BoD members of the subsidiary company must follow orders received from the parent company, the BoD members of that company will not be held liable for the results of the actions taken as a result of the orders received from the parent company.
3 Article 239 of the Turkish Criminal Code regulates crimes with respect to the disclosure of commercial secrets. Any person who delivers information or documents, which he holds by virtue of office, about customers, or discloses commercial or banking secrets shall be sentenced to imprisonment from one year to three years and also shall be imposed a punitive fine up to five thousand days upon complaint.
© Kolcuoğlu Demirkan Attorneys at Law, 2014
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.