The Turkish Commercial Code (“TCC”) was adopted in 1956, inspired by arguably the best codes of its age and since then, it was only sporadically updated. An overall effort to modernize the TCC has been in progress for the past five years, and finally, the relevant Commission of the Ministry of Justice presented the “Turkish Commercial Code Draft” (“Draft Code”) for public opinion in late February 2005. The Draft Code aims to regulate commercial relations in line with the recent changes in the local and global business environment as well as technological and legal developments including the EU legislation. The Commission has paid particular focus to electronic transactions, consumer protection, minority shareholders’ rights and corporate governance. The Draft Code aims for an overall change, but in this article we will only draw attention to those issues we believe would be of most interest to foreign investors.
Trade Registry and Commercial Books and Records
Important changes are proposed in the Draft Code regarding the trade registry and the function of registrations. The authorized bodies to keep track of company records are defined exhaustively as the chambers of commerce and chambers of industry. Furthermore, the Turkish Union of Chambers and Stock Exchanges is required to establish and maintain an online data room, where any and all issues required to be registered will be stored and regularly updated.
Under the Draft Code, a plaintiff may no longer rely on the commercial books and records of a commercial enterprise as evidence to prove a claim. The Draft Code, however, stipulates that merchants must keep commercial books and must record their commercial actions and assets in their books in line with the Turkish Accounting Standards, in a manner clear enough for third parties to understand. The books may be kept in written, visual or electronic form.
The Draft Code introduces some major changes to provisions regarding unfair competition. It aims to ensure an honest and uncorrupted competition environment to the benefit of all market players. Misleading, insulting, libelling statements, sales techniques imperative to competition, actions that may lead a person to cancel or violate a contract, unauthorized exploitation of another person’s work products are considered as actions and practices that violate the good faith principle. The Draft Code, among others, sets out a non-exhaustive list of actions that constitute unfair competition. These include misleading customers about the fair price of a product, limiting consumers’ freedom of choice by employing aggressive sales techniques, and dishonesty in instalment sales.
The Draft Code introduces the concept of “multi-company groups” (şirketler topluluğu). Accordingly, a multi-company group is formed when a corporation, directly or indirectly, controls the majority of voting rights, or is in a position to vote for the appointment of enough members to establish a majority in the governing body, or exercises the majority of the voting rights due to contractual relations on its own or with other shareholders, or keeps another corporation under control by virtue of a contract or in any other manner. Furthermore, the Draft Code stipulates that if a real person or a legal entity or enterprise (that is not a corporation), regardless of whether its residence is in Turkey or abroad, is at the head of a multi-company group, the multi-company group principles will still be applied and the person or entity in the controlling position will be considered as a merchant. It is mentioned that the purpose of defining and regulating multi-company groups is to achieve transparency, accountability, and a balance of interests in transactions between the parent (controlling) and the affiliate (controlled) companies.
There are various duties and liabilities imposed on the members of the Board of the parent company, such as the requirement to prepare a report concerning all legal transactions with affiliates, any precautions taken or not taken, as well as the losses of the affiliate in detail within the first three months of each operational year. Furthermore, members of the Board of the parent company may request a detailed report relating to all transactions with affiliate companies, and may also request such reports to be included in the annual reports of the parent company. Additionally, according to the Draft Code, shareholders of the parent company are entitled to request reports on the financial status of affiliate companies at the general assembly meetings of the parent company. The Draft Code provides that parent companies cannot use their controlling positions to direct the affiliate to act in certain ways to the detriment of the affiliate.
Number of Shareholders
Another major change proposed by the Draft Code concerns the number of shareholders. Under the current TCC, a minimum of five shareholders is required to incorporate a joint stock corporation and a minimum of two partners for a limited liability partnership. The Draft Code reduces this number to one shareholder both for joint stock corporations and limited liability partnerships. The Commission noted that the rationale behind this change was to avoid the presence of nominee shareholders with as little as 0.001% stakes in companies solely for the purpose of complying with the minimum shareholder requirement imposed by the TCC.
The Draft Code provides that under equal circumstances, all shareholders of a joint stock corporation must be treated equally. The Draft Code recognizes privileged shares, and a privilege is described as “a prevailing position with regard to rights such as dividends, liquidation shares, rights of first refusal and voting or other shareholder rights not foreseen in the Draft Code”. Thus, “voting privileges” are recognized, whereby shares with equal nominal value are ascribed with different voting powers. However, the Draft Code limits the number of votes per privileged share to 15, unless required by the circumstances of institutionalization or a justified cause is proven. Nonetheless, the relevant commercial court must inspect the institutionalization project or the justified cause and decide in favor of one of the two exceptions being adopted.
Another significant change is the abolition of the requirement to have statutory auditors among the statutory bodies of joint stock corporations. According to the system prescribed by the Draft Code, auditing of joint stock corporations of all sizes shall be conducted by independent auditing companies, or alternatively, in small-scale joint stock corporations, by a minimum of two independent sworn-in auditors or public accountants to ensure compliance with laws, Turkish Accounting Standards, and the articles of association.
The Draft Code is still open to discussion and yet to be included in the agenda of the Parliament.
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.