Turkey: Duties And Obligations Of Shareholders And Managers In Limited Liability Companies

This article is intended to provide general information on the duties and obligations of shareholders and managers in a limited liability company (abbreviated in Turkish as "Ltd. Sti.") and the actions that can be taken by the company and/or the shareholders in case such duties and obligations are violated.

I- DUTIES AND OBLIGATIONS AS A SHAREHOLDER

I.1 RULES

I.1.1 Confidentiality

According to Article 613/1 of the Turkish Commercial Code ("TCC"), shareholders in a limited liability company are obligated to protect and maintain the confidentiality of company secrets. This obligation cannot be discharged and the scope of such obligation cannot be restricted in any way in the articles of association or in any other private shareholders agreement or with the consent of other shareholders.

The TCC does not define what is considered a trade secret, but it is widely accepted under Turkish law that any information such as customer/distributor information, production costs, know-how, pricing methods, patents, etc., unlawful access to or usage of which by the competitors may damage the company, is regarded as trade secret.

Unauthorized disclosure of the company secrets constitutes a direct violation of the above-mentioned confidentiality requirement without the need for existence of any physical damage on the company. That said, violations of the confidentiality obligation are often very difficult to prove as it is usually not possible to determine when, how and what exact trade secret is used or shared without consent.

I.1.2 Prohibition on Engaging Activities That May Damage the Company

According to the Article 613/2 of the TCC, unless written consent (tacit consent is not allowed) of all shareholders is obtained, shareholders in a limited liability company are prohibited from engaging in acts which may damage the company's interests and in particular from conducting activities which damage the company's main purpose, in order to pursue their personal interests.

The above-mentioned requirement has a very broad scope and any act which is likely to damage the company interests in any way, such as disparaging the company, hindering the company's activities or investments, damaging the company's business relationship with the third parties, may constitute a violation in such regard. There is no need to prove existence of any physical damage in order make any claim due to the violation of this requirement.

I.1.3 Non-competition

There is no non-competition obligation arising directly from the TCC for shareholders who are not managers, therefore, shareholder's mere competition with the company does not constitute any violation unless the competition causes damage to the company. However, the articles of association of the company may prohibit the shareholders from competing with the company.

I.2 SANCTIONS

I.2.1. Expulsion of the Shareholder

According to the Article 640/3 of the TCC, a limited liability company may initiate a lawsuit before the court to expel a shareholder from the company based on a justified reason.

The TCC does not define or indicate what justified reason is; however it is widely accepted under Turkish law that violation of the above-mentioned duties constitutes a justified reason for expulsion.

That said, as indicated under the Article 640/1 of the TCC, if the articles of association includes a provision which enables the company to expel a shareholder with a General Assembly resolution due to the reasons which are specifically indicated in the articles of association (such as breach of the obligations under Article 613 of TCC), the General Assembly of the company may decide to expel the breaching shareholder.

Unless a higher (cannot be lower) quorum is required by the articles of association, such expulsion resolution can only be adopted with i) at least 2/3 of the votes that are represented in the meeting which are cast ii) by shareholders owning shares that represent more than 1/2 of the capital of the company.

The shareholder who is expelled from the company with a General Assembly resolution as mentioned above must object to such decision and file a lawsuit within a maximum of three months starting from the date that the shareholder is notified of such resolution via public notary.

I.2.2. Termination and Dissolution of the Company

As per Article 636/3 of the TCC, where there is a justified cause, each shareholder can request the dissolution of the company from the court. However, the court may also decide to adopt other measures such as expulsion of the breaching shareholder or the claimant shareholder (provided that the shareholder is paid the real value of his/her shares). Under Turkish law, it is accepted that in order for courts to resort to dissolution of the company, the company's main purpose or the relationship between the shareholders must be severely affected.

I.2.3. Compensation

In case of shareholder's violation of the above-mentioned duties, the company and each of the other shareholders are granted under the TCC with the right to initiate a compensation lawsuit against the breaching shareholder according to the general principles of law. However, in order to make such claim, existence of the damages must be proven.

II- DUTIES AND OBLIGATIONS AS A MANAGER

II.1. RULES

II.1.1. Non-competition

According to Article 626/2 of the TCC, unless written consent (tacit consent is not allowed) of all shareholders is obtained, manager(s) in a limited liability company cannot engage in activities that compete with the company's primary physical business.

This non-compete obligation only applies to the businesses that the company actually performs and which are carried out with a commercial purpose. A business that is merely mentioned in the articles of association, but not actually performed by the company does not fall under the scope of Article 626/2.

II.1.2. Duty of Care and Loyalty

According to Article 626/1 of the TCC, managers in a limited liability company are obligated to perform their duties with the care of a prudent merchant and always protect the interests of the company under the principle of honesty.

Duty of care and loyalty puts forward a broader liability that encompasses the above-mentioned non-compete obligation.

II.2 SANCTIONS

According to Article 553 of the TCC, managers breaching their above-mentioned liabilities with their fault, are liable against the shareholders and the creditors of the company for the damages that the company incurs as a result of such breach. Any shareholder can request compensation for damages; however payment may only be made to the company. The plaintiff in a relevant lawsuit must prove negligence of the defendant and the existence of the damages in lawsuits arising out of Article 553.

The statute of limitations for enforcing Article 553 is 2 years following the date the plaintiff becomes aware of the breaching activity and the damage that is incurred by the company; and in any way 5 years upon occurrence of the breaching activity.

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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