Turkey: Effects Of The New Draft Commercial Code On Joint Stock Corporations

Enacted in 1956, the current Turkish Commercial Code ("TCC"), governing commercial transactions, is insufficient to meet today’s legal and commercial demands. In order to embrace globalization and new legal institutions, and to respond to the business requirements arising out of the harmonization of the TCC with the acquis communautaire due to Turkey’s recognition as a candidate for full European Union membership, a draft commercial code ("Draft") has been prepared. In this article, the new corporate approaches adopted in the Draft regarding Joint Stock Corporations (anonim şirket)("JSC") will be reviewed.

Single Shareholder Companies

Contrary to the current TCC requiring a minimum of five shareholders and a Board of Directors ("BoD") formed by a minimum of three members for the establishment of a JSC, the Draft provides that a JSC may be established by one shareholder and it may have a BoD consisting of only one member. Furthermore, non-shareholders and legal entities may be members on the BoD, which would enable professional directors to collaborate more efficiently. In adherance to corporate governance principles and guidelines, similar to the Banking Law and capital markets legislation, the Draft provides that at least half of the BoD members must have a university degree in order to achieve more successful operations.

Capital Increases Based on BoD Resolutions

In conformity with the TCC, the Draft keeps the requirement that the JSC’s share capital must be at least 50.000 YTL, unless a special law requires a higher amount. The Draft allows the registered capital system for privately held (non-public) JSCs having an initial capital of more than 100.000 YTL, whereas the current legislation permits the registered capital system only for publicly held companies. Under the Draft, private JSCs will benefit from the convenience provided by the registered capital system for a share capital increase such as the possibility to increase the capital without a general assembly ("GA") resolution, but through a BoD resolution. Private JSCs with an initial capital of less than 100.000 YTL cannot be subject to the registered capital system.

Online Corporate Information

The Draft intends to make use of today’s technological developments by requiring JSCs to maintain a corporate website where they will publish official corporate announcements, important explanations for shareholders, audit reports and financial statements. Perhaps more importantly, the meetings of the BoD and the GA may be audiovisual.

Minority Rights

The Draft includes new minority rights, for those owning 10% of the shares in private companies and 5% of the shares in publicly held companies. According to the new rights contemplated by the Draft, minority shareholders may:

  1. apply to a court for the appointment of a new company auditor;
  2. require printed share certificates from the BoD;
  3. demand the company’s dissolution; and
  4. nominate a candidate for the BoD.

Dividend Distribution

The TCC provides that BoD members may receive dividends on the net profit after the allocation of the statutory legal reserves and distribution of dividends at the rate of 4% to the shareholders. The Draft raises this to 5%.

Mergers and De-Mergers, Spin-Offs and Transformations

The TCC is often criticized for not adequately covering mergers, divisions and transformations of JSCs. The Draft aims to address this deficiency, and sets forth the legal provisions applicable to such transactions. According to the Draft, a "merger agreement" must clearly include corporate information regarding the companies to be merged and the new company, such as the headquarters, company title and the exchange rate of the shares. Furthermore, a merger report determining the scope and results of the merger, approvals obtained from authorities, the exchange rate of the shares and other relevant effects of the merger on employees and creditors of the companies must be prepared by the BoDs of the merging companies. Such report must be endorsed by an independent audit firm. Then, the BoD must present the merger agreement to the GA for approval. The resolution regarding a proposed merger must be published in the Turkish Trade Registry Gazette. Similarly, these requirements are also applicable for de-mergers, spin-offs and transformations of companies.

Risk Analysis

The Draft requires the establishment of an "Early Determination of Risks Committee" by the BoD in order to determine the causes jeopardizing the existence, development and continuity of a listed company. Such committee shall be composed of members or non-members of the BoD, who will examine the said causes and take the necessary precautions. This committee shall be immediately formed in non-publicly held companies in the event the auditor finds its establishment necessary and informs the BoD in writing.

Company Groups (Holding Companies)

The Draft includes provisions related to groups of companies. In this context, the Draft is also the first Turkish law to define the concept of "control". It addresses the direct or indirect control of a capital company by another capital company, which will lead to the establishment of "groups of companies" due to the means of control (such as having the majority of voting rights; right to elect the majority of the BoD; and using the majority of voting rights apart from individual voting rights arising out of a separate control agreement). In the event the affiliated company acquires the shares of the controlling company, the affiliated company cannot use rights related to more than a certain portion of the shares and votes of the controlling company. However, in the event a company directly or indirectly owns 100% of the shares and voting rights of another company, the BoD of the controlling company may give instructions related of the direction the affiliated company, even to its detriment.

D&O Insurance

The Draft introduces professional liability insurance for BoD members for damages they may cause during the performance of their duties. If a director is insured for an amount exceeding 25% of the company’s capital, then this situation should be notified the Capital Markets Board for publicly held companies and, if it is listed in the stock exchange, in the ISE.

Taking into consideration these proposed amendments, the Draft attempts to bring institutions and practices into conformity with the actual needs of contemporary commercial relationships.

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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