Turkey: Provision Of Security By Publicly Listed Companies Under The New Communiqué On Corporate Governance

The Turkish Capital Markets Board (the "CMB") has this year introduced new rules on the corporate governance principles in line with the latest Turkish Commercial Code and Capital Markets Law in order to follow global novelties. For this purpose, the Communiqué on Corporate Governance Principles No.II-17-1 was published on January 3, 2014 (the "Communiqué"1) based on Article 17 of the new Capital Markets Law2. Fundamental changes and amendments have been set in for the new Communiqué. For example, the previous "Communiqué No.IV-56 on Determination and Implementation of the Corporate Governance Principles" and "Communiqué No.IV-41 on Principles to be complied by Joint Stock Companies which are subject to Capital Markets Law" were abolished; moreover, the Decision on the provision of security, pledges, mortgages and sureties by public companies, adopted by the CMB on September 9, 2009 (the "Decision"3) was elaborated in detail under the Communiqué. One of the novelties of the new Communiqué is to set forth the rules in relation to the provision of security, pledge, mortgage and surety4 by the publicly listed companies in favor of third parties, including their group companies, under a CMB Communiqué, which was previously regulated by the Decision.

First of all, the new Communiqué provides outlines for the limitations applicable to security, mortgage, pledge and surety transactions of publicly listed companies in line with the aforesaid Decision but it also extends the applicability of the rule to their subsidiaries (bağlı ortaklık).5 Within this context, Article 12/1 of the Communiqué regulates that publicly listed companies and their subsidiaries cannot grant security, mortgage, pledge or surety in favor of any third party other than (a) for the benefit of its own legal entity; (b) for the benefit of the companies included in their financial statements in full consolidation; or (c) for the benefit of other third parties in order to pursue its ordinary commercial activities. Although the exception provided under this Article 12/1(c) seems broad enough to cover many other circumstances where security is provided in favor of third persons other than the companies included in their fully consolidated financial statements – which may also be their group company-, the CMB's interpretation would be crucial in order to determine the scope of this exception.

Furthermore, the second paragraph of the same Article 12 of the Communiqué, introduces certain new limitations in relation to the provision of security in favor of affiliates (iştirak)6 and joint ventures (iş ortaklığı) by the publicly listed companies in which they have direct capital contribution. According to the relevant subsection, security, mortgage, pledge or surety may only be granted in favor of the aforesaid affiliates and joint ventures in proportion to the directly contributed capital share. As per the wording of the provision, the direct shareholding ratio determines the ratio of security that the publicly listed company may provide. It is not certain how the ratio of shareholding of a publicly listed company in the relevant affiliate will be calculated where it holds shareholding in that company via an intermediating company (e.g., whether the indirect shareholding ratio in the relevant entity will also be taken into account).7 In addition, the remainder of Article 12 of the Communiqué seeks further corporate approval and measures for security, mortgage, pledge and surety transactions of companies. For instance, approving votes of majority of independent board members shall be required in the board of directors' resolution regarding the security granted for ordinary commercial activities as per Article 12/1(c). Furthermore, incomes and benefits obtained from security transactions in favor of third parties shall be inserted as a separate agenda item in the ordinary general assembly meeting. Besides, corporations which have applied to the CMB for offering their shares to the public for the first time shall reduce their existing security breaching this article to zero level until the end of the fourth year following the year on which their shares have been admitted to the trading on the exchange. As to the other companies which are within the scope of the Communiqué, these rules are of mandatory nature and they are required to revise their ongoing security in line with Article 12 of the Communiqué until December 31, 2014. Finally, it should be noted that Article 12 is not applicable to publicly held companies where shares are not traded on the Istanbul Stock Exchange and to investment companies, banks and financial institutions in security, mortgage, pledge or surety transactions granted in favor of third parties.8

As to the consequences of non-compliance with these rules, we have seen from the CMB bulletins since the Decision, that the CMB has imposed large fines on companies and board members for non-compliance with the Decision before the new Communiqué. In addition to the high fines that might be imposed, the CMB has now broader powers to ensure compliance with the corporate governance rules after the new Capital Markets Law went into effect, including the authority to ex officio carry out the necessary actions, bring lawsuits regarding, among other remedies, the cancellation of the relevant action which is against the corporate governance rules and the enforcement of it. Therefore, compliance with the new rules under the Communiqué, including its Article 12, gains more significance. It is not only for the publicly held companies, but also for their subsidiaries, financing parties, or other third persons who are party to such transactions and to which the validity and enforceability may become a concern.


1. Published in the Official Gazette on January 3, 2014 and numbered 28871.

2. Capital Markets Law dated December 6, 2012 and numbered 6362, published in the Official Gazette on December 30, 2012 and numbered 2 8513.

3. The Decision having CMB meeting, September 3, 2009 and number 28/780 is published in the weekly bulletin dated September 9, 2009 and numbered 28/780.

4. The Communiqué and the Decision both refer/referred to "security, pledge, mortgage and surety". However, as the list refers to "security", other types of security under Turkish law other than pledge, mortgage and surety (e.g., guarantee) would also be within the scope of the relevant rule. Also, for the purposes of this article, wherever the word "security" is used, it covers pledge, mortgage, surety and other types of security as a whole.

5. The CMB takes Turkish Accounting Standards as the basis for the definition of subsidiary and according to the Turkish Accounting Standard No.6, a subsidiary would be a company where direct or indirect ownership by the parent company is more than 50% or stock rights in the same ratio or control by an appointed majority of board members present.

6. Under the Turkish Accounting Standard No.6, "affiliate" would be a company where direct or indirect ownership of the parent company shares is at least 10% up to 50% or voting rights in the same ratio by the parent company.

7. To give an example, if a company's (C) shareholding ratio in its subsidiary (B) is 50% and its subsidiary owns 75% of the affiliate (A) which the security will be provided in favor of, by C, it is not certain whether the ratio of security by C in favor of A will correspond to 0% (i.e. its direct shareholding), 37.5% (i.e. its indirect shareholding calculated via an intermediating company).

8. The CMB has very recently adopted a decision on the provision of security by real estate investment companies to their fully owned subsidiaries. Pursuant to the CMB Decision dated September 23, 2014 and numbered 28/928, real estate investment companies, for the purposes of financing of the real estate investments included in the portfolio of their 100% owned subsidiaries, may establish mortgage and other rights in rem on assets which are included in their own portfolio and grant security and surety in favor of the aforementioned subsidiaries provided that they would act in conformity with the Communiqué.

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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