Certain sections of the draft Turkish Commercial Code1 (the "Draft TCC") that are still pending before the Turkish National Assembly were summarized in one of our previous Mondaq articles2 dated 10 June 2008. This article discusses some of the other sections of the Draft TCC which represent a significant departure from the old approach adopted by the Turkish Commercial Code (the "TCC").
The scope of Joint Stock Corporations' Articles of Associations – Compulsory Shareholders Agreements?
One of the major changes introduced by the Draft TCC is the limitation of the provisions that may be included under a Joint Stock Corporation's (a "JSC") articles of association ("AoA"). While the TCC only lists the provisions that are obligatory for the AoA, the Draft TCC contains a provision that an AoA may not list any provisions other than those that are obligatory and listed in the Draft TCC, unless the Draft TCC specifically authorizes to the contrary. Accordingly, a JSC may not register an AoA with the trade registries that is not in line with this provision. Even if a unique provision in the AoA is permitted by trade registries in practice, the concerned parties will have no recourse to the legal remedies available under the Draft TCC.
When the mandatory AoA provisions3 and the voluntary AoA provisions authorized by the Draft TCC are reviewed together, the Draft TCC no longer authorizes the shareholders of a JSC to include provisions in their AoA that set forth the obligations of the shareholders towards each other. Provisions concerning tag/drag-along and pre-emptive rights granted to shareholders, if a JSC's shares are transferred to a third party, give an ideal example of what cannot be reflected in the AoA according to the Draft TCC. We believe that the strict approach adopted in the Draft TCC will increase the necessity for shareholders of JSCs to execute shareholders' agreements concerning their obligations towards each other. However, such obligations will only be enforceable vis a vis the shareholders under the scope of the law of contracts.
As noted above, there are circumstances where the Draft TCC authorizes JCSs to extend the scope of their AoA beyond the mandatory provisions listed in the Draft TCC. For example, Article 482 of the Draft TCC enables JCSs to adopt a penalty provision to apply if shareholders do not comply with their share capital undertakings.
The Draft TCC provides that any breach of other laws, despite possible relation to issues covered by the TCC, will be subject only to the remedies set forth pursuant to such laws. In other words, the Draft TCC explicitly states that the remedies included in the TCC may not be used if the breached requirement is based on another law. Accordingly, if an AoA provision reflecting a requirement arising from the capital markets legislation is breached by a resolution of a company's general assembly, this will not cause the cancellation of such resolution, i.e. a remedy set forth in the Draft TCC. However, it will trigger the remedies provided for in the capital markets legislation.4 Obligations imposed by the Electricity Market Regulatory Authority are other examples of AoA provisions that if breached, are not subject to any remedy under the Draft TCC.
According to the Draft Law on the Implementation of the Turkish Commercial Code, AoAs of JSCs are required to conform with the Draft Law within one year of its coming into force.5
JSC Administrative Bodies
The Draft TCC includes significant changes concerning the administrative and governing bodies of JSCs. Set out below are newly adopted concepts concerning the statutory bodies of JSCs:
Board of Directors
The Draft TCC includes a provision pursuant to which minority shareholders, or shareholders who form, or belong to, a class, may be granted the privilege of nominating members of the board of directors if such right is explicitly set forth in the AoA. A description of these shareholder groups (e.g. based on a profession or scope of activity), or minority shareholders who are entitled to appoint a member of the board of directors, is at the discretion of the JSC. A general assembly cannot refrain from appointing the members who are nominated by such shareholder groups, unless the rejection is based on a justifiable reason. The number of members of a board of directors appointed pursuant to this provision may not exceed one-half of the number of members of boards of directors of publicly held JSCs.
In order to improve the efficiency of, and modernize general assembly meetings, the Draft TCC includes a fully new concept of "institutional proxy". Institutional proxies will declare the management policy that they will be supporting, identify the candidates they support to be elected to the board of directors, or publicize the dividend distribution policy they are in favor of, and invite the shareholders to authorize them to act as their proxies. The intention of this new provision is to provide a mechanism whereby the minority shareholders have more input into the management of the JSCs as a potential voting block, as opposed to the current, more fragmented practice.
The Draft TCC introduces a radical change concerning the JSCs' auditors. The auditing function will have to be performed by a sworn independent auditing firm pursuant to a contract between the JSC and such auditing firm, as opposed to the current practice where real persons, who are not sworn independent auditors, are appointed as statutory auditors.
JSCs may now acquire their own shares up to 1/10th of the entire share capital
The Draft TCC is more liberal concerning a JSC's acquisition of its own shares. It sets a threshold of 10% of the share capital for the shares that are not subject to the acquisition or pledge prohibition currently existing in the TCC. This strict approach adopted by the TCC has been highly criticized by scholars and has finally been softened in the Draft TCC. It now more closely resembles the established American practice, and as well, follows new developments in the European Union legislation.
According to the Draft TCC, JSCs may acquire the ownership of, or pledge a right over, up to 10% of its shares, provided that (i) the board of directors is authorized by the general assembly,6 (ii) the value of the JSC's assets must be at least equal to the total of the JSC's share capital and the statutory reserves of the JSC, after the amount paid by the JSC to acquire its own shares has been deducted, and (iii) the value of the acquired shares has been fully accounted for as paid in capital.
Certain exceptions to the prohibition to acquire or pledge the remainder of the share capital, (i.e. 90%) are also reflected in the Draft TCC. Some of those exceptions concern circumstances where the acquisition is based on the necessity of a statutory purchase obligation and the acquisition of another entity, together with all of its debts and receivables. However, even in such circumstances, the Draft TCC requires the JSC to re-sell the shares acquired as soon as the sale is executed, or at the latest, within three years from the acquisition of such shares. The maximum term of three years is a new requirement adopted in the Draft TCC.
Hergüner Bilgen Özeke will report on other new developments in the TCC as they arise.
1. The Turkish Commercial Code was originally enacted on 9 July 1956 and, having been through several minor amendments, is still in force.
3. Commercial title and headquarters, the scope of activity, share capital and the nominal value of each share, type of share certificates, privileges attached to shares, share transfer restrictions, number of members of the board of directors, issues concerning general assembly meetings, financial year, benefits granted to members of the board of directors and third parties in respect of profit, share capital contributions other than capital in cash, and the terms of the JSC are among the mandatory AoA provisions listed in the Draft TCC.
4. Such as the requirements concerning dividend distribution policies imposed by the Capital Market Board on publicly held companies.
5. The one year term may be extended for another year by the Ministry of Industry and Commerce.
6. If the JSC is facing a major and imminent risk, the board of directors may even proceed with the acquisition of the JSC's shares on its own initiative without being authorized by the general assembly.
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.