Introduction
The Turkish Commercial Code (hereinafter to be referred to as the "TCC") entered into force on January 1st, 1957, and for over 50 years since then while most of the European countries have adopted new codes or amended their regulations in accordance with the latest developments taking place in the world, the TCC has not been significantly amended. New structures were needed for newly-developing business transactions and relationships, especially in the area of corporate governance. Massive corporate scandals involving Enron, World.com, and Parmalat, to name but a few, obliged legislators in the United States of America and the European countries to set stricter and more transparent corporate governance and auditing rules. In this respect, the Sarbanes-Oxley Act dated July 30, 2002, was promulgated in the US, and similar legal arrangements were made in the European Union legislation. Given the fact that Turkey, as a candidate for EU membership and as an emerging market, aims to attract foreign investment, Turkish corporate legislation needed to be brought into line with the rest of the world in order to continue the economic integration that started with globalization. In 2006, the Turkish Ministry of Justice formed a commission composed of scholars, judges, and practitioners for the preparation of the draft Turkish Commercial Code (hereinafter to be referred to as the "Draft Code").
The change was essential especially taking into account developments in the modern world and the economic and legal developments taking place in Turkey since the 1950s. The Draft Code aims to be in line with the EU legislation and better meet the requirements of both foreign and local investors. The Draft Code is waiting to be ratified by the Council of Ministers.
The principles of transparency, equity, and liability are the cornerstones of the Draft Code. The main purpose of the Draft Code is to integrate modern corporate governance rules into Turkish commercial life. With regard to corporate governance matters, there are major amendments to be made to the structures and governance of all types of companies in order to provide a sustainable and reliable legal environment both for foreign and local investors. The TCC only includes provisions regarding private companies, whereas the Draft Code includes provisions governing both private and public companies. The Draft Code will be the fundamental code regulating all types of joint stock companies, both public and private (hereinafter to be referred to as "JSC").
This document aims to provide a brief outline of the reforms that will take place with the implementation of the Draft Code, particularly with respect to JSCs and Limited Liability Companies (hereinafter to be referred to as "LLC").
I. General Amendments Introduced for all Types of Companies:
- New Auditing System
Pursuant to the TCC, an internal audit committee is one of the corporate organs of a company. However, experience shows that in practice this committee loses its independence and cannot be impartial vis-à-vis the shareholders. Under the Draft Code, an audit committee is no longer considered an organ of a company. The Draft Code adopts a reformist and unifying approach that obliges all types of companies to retain external auditors and be audited by eligible, professional, and independent auditors complying with international accounting standards and acting with due care. According to the Draft Code, companies' financial statements and reports will be prepared and audited in accordance with the Turkish Accounting Standards, which is almost a complete translation of the International Financial Reporting Standards. It should be noted that even though the Draft Code aims to unify the auditing principles for all types of companies, it separates large, medium, and small companies. According to their categorization, medium and small companies can be audited either by one or more sworn financial auditors or independent auditors, whereas large companies can only be audited by independent auditing firms.
Also, in order to make sure that the independence of auditors can be preserved, the Draft Code stipulates that an auditor can only serve the same company up to maximum of 6 times within a 10-year period. Statements of accounts, annual reports, or any amendments to be made to these documents must be audited and approved by independent auditors; otherwise, they will be deemed invalid.
The Draft Code requires that independent auditors also be audited by the Higher Audit Institution. However, until this institution is established, the Ministry of Trade will be in charge of auditing independent auditors.
- Obligation to launch a web-site for the
company
With the Draft Code, all types of companies will be required to maintain a company web-site. All information regarding general assembly meeting documents and invitations, financial statements, evaluation reports, nullity actions, invitations to use pre-emptive rights or any information pertaining to investors' interests (excluding company secrets or confidential information) are required to be published on the web-site of a company. All resolutions and transactions which are subject to registration will be shown on the web-site.
II. Amendments Specifically Introduced for JSCs:
- A company can be established by a single
shareholder
Pursuant to the TCC, a JSC must be formed by a minimum of 5 shareholders. Our experiences have shown us that most of the JSCs are dominated by one or two major shareholders. The rest of the shareholders exist only to fulfill the requirement regarding the minimum number of shareholders.
- Capital Issue
The minimum capital required for a JSC remains the same, viz., NTL 50,000 (currently USD 33,445).
The Draft Code expanded the capital in-kind which can be put into JSCs to include web sites or domain names. Considering recent technological developments, the Draft Code enables any instruments or property rights, including IP rights and domain names, to be used as capital by the JSCs if the property rights are not subject to any liens or injunctions.
Under the current legislation, shareholders cannot transfer shares obtained as a result of their subscription into the company's capital in the form of capital in-kind within a period of two years from their subscription.
Under the Draft Code, shareholders who have participated in a company by providing capital in-kind are entitled to transfer their shares at any time.
- Privileged Shares
The TCC allows privileges to be attached to a company's shares without setting a limit on the number of votes a privileged share can have. This situation causes serious inequality between majority and minority shareholders. Under the Draft Code, voting privileges are limited to 15 votes per share. However, this number can be increased by a court decision. The possibility of privileged shares' blocking a capital increase has been renounced. In addition, privileged votes cannot be used in voting on resolutions regarding amendment of the articles of association (hereinafter to be referred to as the "AOA") of a company, appointment of a transaction auditor, or filing of discharge or liability suits.
- Registered Share Capital for JSCs
The Draft Code introduces the registered share capital system as an option for JSCs. Under the current legislation, the registered share capital system is available solely to public companies. Under the Draft Code, a company which adopts the registered share capital system is required to have a minimum capital of NTL 100,000, and the company may increase its capital without going through the burdensome procedures of holding a general assembly meeting. Instead, increases can simply be made by a board of directors' resolution.
- General Assembly
With the ratification of the Draft Code, it will be possible for the shareholders of a JSC to hold general assembly meetings on-line.
Furthermore, for corporate governance reasons, the Draft Code obligates the board of directors of JSCs to frame an internal regulation governing the procedures for convening general assembly meetings.
One of the most important rights of shareholders is probably the right to have access to company information. In this regard, the right of shareholders to information has also been revised with the Draft Code, and these rights have been expanded and specified.
- The Board of Directors may be composed of a single
director
With the Draft Code, the Board of Directors can now be composed of only one director, and this director is not required to be a shareholder of the company. The Draft code also enables legal entities to become board members. However, a legal entity board member will be represented on the board of directors by only one representative.
The Draft Code aims to increase the number of professional board members. To this end, it requires that at least one-quarter of the members of the Board of Directors have graduate degrees from universities.
As mentioned above, the Draft Code enables the board of directors' meetings to be held on-line, and this will provide the directors the opportunity to attend to the meeting without having to travel to the place where the meeting will take place. This amendment will especially be favored by companies who have board members residing in a foreign country.
The Board of Directors is entitled to acquire or accept as a pledge up to 10% of the fully paid capital of the company upon an authorization granted by the general assembly. Such an authorization must be used within 18 months from the date of the relevant authorization. These authorizations may be used solely to benefit the company, to protect company instruments, and to prevent the abuse of the company. This provision aims to grant the board of directors the right to introduce certain measures to protect the interests of the company. In cases where it is likely for the company to suffer a severe loss, the board of directors is entitled to acquire the company shares without being subject to the 10% limitation and without having to obtain authorization from the general assembly. In this regard, hostile takeovers and manipulations can be considered as close and serious dangers.
- Liability
Under the Draft Code, the liability of the board of directors has been regulated in detail. According to the Draft Code, members of board of directors are jointly liable for each and every transaction of the company unless a responsible person is assigned for a specific duty with a written resolution of the board of directors. In this respect, the assigned person or persons or, if there is no assignment of duty, the members of the Board of Directors will be liable if any documents or declarations regarding the company or its transactions are fraudulent, misleading or illegally prepared.
The Draft Code, in fact, brings a new aspect to the TCC by imposing personal criminal liability on the members of the board of directors. Criminal records of judicial fines cannot be expunged from the judicial records for 5 years even though the fines have been duly paid.
III. Amendments Specifically Introduced for LLCs:
The Draft Code, like the TCC, does not contain detailed provisions regarding LLCs. Provisions regarding JSCs are considered to be applicable to LLCs by way of reference in cases where the Draft Code remains silent on LLCs.
The minimum capital required for the establishment of an LLC is increased from NTL 5,000 (currently USD 3,345) to NTL 25,000 (currently USD 16,723) with the Draft Code. The capital in the form of cash must be fully paid up in one installment by the partners in order for the LLC to be established.
Under the Draft Code, partners may be granted veto rights or privileged voting rights.
The Draft Code enables partners to have more than one share, and also expedites and simplifies the transfers of shares. The bankruptcy of a partner will not lead to the bankruptcy of the company since the creditor will only be able to place an attachment on the share of the debtor-partner and cannot request the liquidation of the company.
The Draft Code enables the board of partners' meetings and the board of managers' meeting in LLCs to be held on-line.
Conclusion
As also mentioned in the introduction, significant changes had to be made to the TCC to bring it into line with the generally accepted principles used in the rest of the world and to meet the needs of commercial enterprises and investors. Most of the reforms contemplated by the Commission are reflected in the Draft Code, and it is now awaiting ratification by the Council of Ministers. It should be noted that since the Draft Code has not yet been finalized, amendments may still take place before its ratification. Commercial enterprises and investors are looking forward to the enactment of the Draft Code with great anticipation. Given the fact that the world is at the edge of an enormous financial crisis due to the current credit crunch, it is now even more vital for an emerging market like Turkey to be attractive for foreign investors. The only way to accomplish this is to create a transparent and secure business environment, which is also the aim of the Draft Code. Therefore, we hope that the Draft Code will be ratified as soon as possible without losing any more time in this critical period.
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.
