Turkey: Family Corporations And The Legal Problems Associated With Them

Most of the family corporations, which play an important role in the trade life, cannot institutionalize because of the multiple shareholding structures, showing emotional approach instead of the corporate approach and the management problems, and thus they fade from the trade life without being transferred to the third generation. Mostly, the multi-headed structure of the family corporations, the blockages occurring in the process of decision-making and the internal conflicts among the family members restrain these companies from keeping up with the modern trade life and prevents the company, which struggles with these problems, from developing and growing as a result of which directs the same to the inevitable end.

In that respect, within the scope of the institutionalization of family companies, it is of the essence that a course of action in relation to the management, representation, operation of such companies as well as the current shareholding structure of the same, which can change in the future, must be put into practice. It should of course be noted that, in the process of solving this problem, the kind approach of family members and the trust bonds among them have a profound effect without a doubt but in order to achieve a precise and solid solution, it must be accepted that the good will and trust are not enough alone and that generating radical solutions, which have legally binding effect, is crucial for providing the continuance of family corporations.

What is a family corporation?

A family corporation, in general terms, can be described as a company incorporated for the purpose of increasing the earnings of family, protecting the existing earnings and/or preventing the inheritance to be distributed against the family's interests, and substantially managed by the person maintaining the family and other family members. In addition, the family members are significantly effective in decision making process of the company and at least two generations of the family are recruited in the same.

It should be stated that in Turkey, the vast majority of the companies, especially more than 90% of the joint stock companies, are family corporations. This ratio is extremely high compared to the European countries and other developed countries. Given the shareholding and management structure of companies established in Turkey as well as the relations among the family members and reflections of the problems among them to the management of the company, it has become obligatory to make legal and binding regulations in order for the same to continue its existence.

What are the main problems of family corporations?

When family corporations are analyzed carefully, it could be seen that the biggest problem of these companies is the absence of professional management and distribution of work, and a prospective vision. In most family corporations, the shareholders' holding executive, directive, and supervisory functions wholly in their hands creates weakness for the company in terms of management. On the other hand, in contrary cases, it could be seen that the company may be left to a general manager or a couple of managers to be administrated by the same. However, since such transfer of managerial powers is not made through an internal directive according to the Turkish Commercial Law, the limits of their authorities and responsibilities are not set forth clearly and thus the liability arising from their actions remain with the board of directors despite of transfer of such managerial powers. This situation makes it extremely difficult to hold the general manager or the managers legally liable, in case they violate or neglect their duties in the company. For example, in the event that the company suffers any damages due to the reason that the general manager or manager, who is not a family member and has the managerial authority, has not fulfilled his/her duties properly, the litigant of the lawsuit filed by the company for the compensation of such damages would be the members of the board, as the managerial authority of company still officially belongs to the said board. In addition, since the board of directors in a family corporation may also be the shareholders themselves, it is highly likely that a deadlock occurs in the process as a result which will be a lot more difficult to claim damages from the managers or the general manager.

In addition; the absence of corporate work and authority distribution makes it harder for the second or the third generations to engage in the operation and the management of company. In order for them to engage in the operation and the management of company and to work more actively and efficiently in the same, it would be necessary that the duties and authorities of the family members are clearly determined, the reporting and supervising activities are performed properly and if necessary, committees for performing such activities are established.

In that respect; the work distribution should be explicitly and effectively determined, and the transfer of representation and management powers must be done in compliance with the provisions of the Turkish Commercial Code No.6102 in such a way that the limits of each manager's authority and responsibility are drawn precisely by leaving no room for any controversy.

Another problem that the family corporations may face is the disturbance of the management structure that might occur, when one of the shareholders passes away and thus the shareholding structure of the company changes. It is beyond doubt that the persons, who will acquire the shares of the company by inheritance, would be the family members and they would claim possession on the company. However, this situation will mostly make the other shareholders and managers nervous, who have been working in the company for years and who are familiar with the company's activities, management and operation. It is beyond doubt that each shareholder has a right to speak in proportion to their shares in the company regarding the election of the board members and it is obvious that the shareholders, who hold the majority of the shares, will be more effective in the appointment of the same. On the other hand, for the sake of continuity of company, the same must be managed by the persons, who know the company very well. In that respect, if a shareholder, who does not know much about the company's operations and activities, has a right to speak in the management of it can damage the balances in the company and might cause considerable errors in the management of the same. Therefore, it would be appropriate to take resolutions in advance aiming the provision of company's sustainability, and to provide the company being always managed by well-informed and experienced persons by way of amending the articles of association of the company and creating specific privileges.

Another problem that may occur in family corporations is the sale of shares by the current shareholders to the third parties due to the conflicts among the family members. The important thing for the family corporations is protecting the current structure and that the family never loses control over the capital and shares. However, since any shareholder is free to sell their shares as a rule pursuant to the Turkish Commercial Code, it could be inevitable for the current shareholders to end up with another shareholder that they do not know. Even though the transfer of shares can be restricted to some extent as envisaged by the law, such regulations under certain circumstances may not legally concern the shareholder, who has sold his/her shares, or inheritors acquiring the shares by way of inheritance. Hence, it is crucial for the continuity of family corporation that the risks, which might occur as a result of any possible share transfer, must be determined in advance and such risks must be removed or minimized by way of actualizing necessary legal regulations seeking that purpose.

How to Solve abovementioned Problems of the Family Corporations?

A "Family Constitution" has become an important movement lately in family corporations. The Family Constitution, although it is not a typical type of contract regulated in the Turkish Law, is an atypical agreement among the family members, which is concluded within the scope of freedom of contract. Nevertheless, since the company is not a party to the Family Constitution, it is not a document that can directly be executed and grants any right to the parties to it to make claims against the company. In that respect, the Family Constitution is binding only for the family members signed the same and it is not applicable to the other family members and shareholders, who are not parties to it.

Even though a Family Constitution is considered as an important opportunity for the solution of such problems; since it does not employ a further duty than a letter of good will that is not legally valid, we are of the opinion that it is not possible for the same to play an important role in removing the problems stated above. Since the Family Constitution is not a legally binding document, it will not be more than a letter of good will that regulates the functioning of family-owned company within the scope of said constitution. In fact, contrary to common belief, as the Family Constitution does not have any binding effect on the shareholders, managers and possible inheritors, neither the same will have any incentive or persuasive influence on the related parties.

Therefore, a detailed legal analysis must be held for each family-owned corporation, the elements needed for the sustainability of company must be determined, a legal course of action must be planned concerning the company's shareholding, management, representation and operation by also taking into account the properties and dynamics of the same and thus necessary legal regulations must be enacted in this regard, which must be also made binding on shareholders and managers as well as the possible inheritors. The most legally valid and solid way of doing this is to make these regulations in the articles of association of the company and the shareholders' agreement to be concluded rather than a Family Constitution.

Given the trade life, where the competition increases day by day and becomes more relentless, we are of the opinion that constructing an efficient legal basis, which is the fundamental element of institutionalization and where the relations among the shareholders as well as the administrative matters are well founded, is the most efficient way for family-owned corporations to be able to survive.

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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