The new Turkish Commercial Code No. 6102 ("NTCC"), which came into force on 1 July 2012, contains a whole new section of nearly 25 articles on group companies that was not present in the former code.
As it is further elaborated below, the relevant provisions on group companies will certainly affect multinational companies that have a subsidiary or an affiliated company in Turkey. While some of the provisions impose significant obligations on parent companies, the main purpose for providing for this matter under the new code is to achieve a certain level of transparency and justice by regulating the relationship between parent companies. As it is also stated under the rationale for the new code, these new provisions aim to abandon the former approach, which was to hold the board members of a company responsible without considering the instructions provided by the parent company. Thus the new code now recognizes the concept of group companies and considers such a group as a whole.
1) Control Criteria
Article 195 of the NTCC provides a definition for controlling companies and affiliates and the criteria for determining the extent of control as follows.
1. In the event that a company, whether directly or indirectly:
(a) holds the majority of the voting rights or
(b) is entitled to procure the appointment of board members constituting the majority who are able to take decisions in the management body in accordance with the articles of association of the company,
(c) holds the majority of the voting rights, either by itself or together with other shareholders or partners, apart from its own voting rights relying upon an agreement, or
2. In the event that a company is able to keep another company under its control pursuant to an agreement or otherwise (e.g. mergers, demergers, share acquisitions, etc.)
the first company will be deemed as the controlling company and the second company will be deemed as the affiliate.
Except for the circumstances stipulated above, if a company holds the majority of the shares of another company or sufficient number of shares to enable it to take management decisions with respect to such company, this will be deemed as a presumption for the existence of the controlling nature of the first company, unless and until proven otherwise.
2) Wider Application of NTCC Provisions
According to Article 195 of the NTCC, in the event that the principal offices of at least one of these companies are located in Turkey, the provisions with respect to group companies in NTCC shall apply. Therefore, multinational companies with a subsidiary or an affiliate in Turkey shall be bound by the relevant provisions.
3) Affiliation Report
The boards of affiliate companies are obliged to prepare a report with respect to the relationships within the group and to declare the outcome to the shareholders.
Affiliation Report shall be prepared by the affiliate's board of directors and will contain information regarding the relationship of the company with the controlling company and other affiliates in the same group.
According to Article 199 of the NTCC, the following issues will be dealt with in the affiliation report:
- All legal transactions entered into within the previous financial year with the controlling company, or an affiliate of the controlling company, or in favour of the controlling company or an affiliate of the controlling company under the guidance of the controlling company,
- Regarding the transactions entailing mutual performance, assessments with respect to suitability and necessity of the counter action,
- If there are any legal transactions which are discontinued, assessments with respect to the reasons and suitability of such course of action,
- If risk bearing contracts have been entered into, information as to whether the necessary steps have been taken,
- Suitability assessment with respect to the steps taken or avoided for the benefit of the company group,
- If any loss has arisen due to such transactions, information and assessments with respect to the loss and, if any offsetting has been carried out, the manner in which the offsetting has been or will be carried out.
The first affiliation report to be prepared by the boards of affiliated companies will be submitted at the General Assembly meeting within the first three months of 2013.
Disclosure of the full report is not required. The board of directors is only requested to clarify its assessment "as to whether an appropriate counter action has been carried out in each transaction based upon the conditions and circumstances known to them when the transaction was being carried out or the steps were being taken or avoided and whether the steps taken or avoided have caused any damages (losses) to the company". This assessment, set out in the conclusion part of the report, is submitted to the ordinary general assembly by being included in the annual report of the board of directors.
In the event of violation by the companies within the group company of this article, judicial fines which will not be less than two hundred days will be imposed.
4) Abuse of Dominance by Controlling Companies
Although the concept of dominating another company is not per se unlawful, the NTCC has brought "restrictions with respect to exercise of control" and provided that certain circumstances shall be considered as unlawful.
According to the NTCC, a controlling company cannot use its dominance over the affiliate(s) in a manner that would cause damages for the affiliate(s). For instance, it cannot force the affiliate(s) to engage in legal actions such as transfer of assets or receivables, provision of surety, guarantee as well as the material facts such as restriction of investments or non-renovation of its premises without any justified reason, etc.
The losses incurred by the affiliate as a consequence of the act or actions of the above nature must be remedied by "offsetting". Offsetting shall be carried out by the controlling company and method to be used is the "actual remedy of the loss within the same financial year" or "the affiliate being entitled to make claims with respect to the remedy of the losses within the same financial year".
According to Article 18 of the Enforcement Code, upon the new TCC coming into force, if there is/are loss(es) falling within the scope of Article 202, such losses should be rectified within two years from 1 July 2012.
5) Lawsuits and Claims
Under the NTCC, each shareholder and creditor of the affiliate company is entitled to claim directly from the controlling company or its board members, indemnification of the damages of the affilate company, which has incurred significant damages, in the event that such damages cannot be rectified by offsetting.
On the other hand, in procedures such as mergers, demergers, conversions which are realised by way of exercising controlling position but which are not based upon clearly understandable rightful grounds with respect to the affiliate company, shareholders which have attended the general assembly but have casted negative votes are entitled to claim compensation of their damages from the controlling company or demand from the court that their shares are sold at least at the price quoted by the stock exchange, or if this is not available, at their actual price or a price to be determined by a generally accepted method. Such claims will be subject to a time bar of two years beginning from the relevant general assembly meeting date or announcement of the relevant board resolution.
6) Liability Arising from Trust
In cases where the reputation of a company reaches a level creating trust within society and consumer, the controlling company will have responsibility with respect to the trust created by using such reputation.
The aim of this provision is to procure that controlling companies bear responsibility for trust created within society and consumer. In fact, it is common for the affiliated companies to use the reputation of their controlling companies and promote their companies in the eyes of society and consumers, without however the controlling company having any responsibility or incurring any obligations in this respect. Controlling companies that do not object to their affiliates' use of their names will be responsible for the consequences.
7) Total Control
In accordance with Article 203 of the new TCC, in the event that a company directly or indirectly holds 100% shares in or voting rights of another company, the board of directors of the controlling company may give instructions with respect to the guidance and management of the affiliate even if these may lead to consequences which may cause losses, provided that they are a requirement of the determined and concrete policies of the company group. Organs of the affiliate will be obliged to comply with such instruction.
Article 204 is an exception to the above provision stating that the company having total control may not give instructions which clearly exceed the paying capacity of the affiliate, which may endanger the existence of the affiliate or which may cause it to lose its important assets.
Board members of the affiliate are protected under Article 205, which stipulates that they cannot be held responsible for non-compliance with the instructions given by the company having total control in accordance with Articles 203 and 204.
Originally published August, 2012.
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.