Turkey: Rules And Practical Tips On Board Meetings And Composition

Last Updated: 27 March 2019
Article by Serkan İçtem and Çağla Eren

Introduction

The board of directors is the executive and representative authority and a mandatory corporate body of a joint stock company. Therewithal, as stated in Article 375 of the Turkish Commercial Code ("TCC"), it is the corporate authority authorized to take decisions on all matters related to the administration and performance of company's business except those specifically fall under shareholder reserved matters. Board of directors takes decisions in two ways: by a physical and actual meeting or by signing a written decision proposal circulated among directors which is called a circular decision. The authority to call for a meeting belongs to the chairman (and to vice chairman in his absence) which in practical terms is the most important practical advantage of being appointed as chairman (since the chairman may not legally have a casting vote). Reasons leading to a board decision being declared either null and void or invalid are enumerated by law which are briefly outlined herein together with some practical tips concerning operation of the board.

Number of Directors

Article 359 of the TCC overrules the minimum three directors requirement of the previous code and allows the board to be formed with one or more members. There is no upper limit for the number of directors. It is however mandatory to specify the number of directors in the articles of association according to the TCC. In this case, the question is whether it is possible to grant authority to shareholders to determine the number of directors between a given lower and upper limit as stated in the articles of association. In accordance with article 340 of the TCC, articles of association of a company may deviate from the statutory provisions generally applicable to a joint stock company only if it is explicitly permitted by law. Article 339 (2)/g of the TCC states that "number of the members of the board of directors and members having authority to sign on behalf of the company" shall be stated in the articles of association. Therefore, TCC does not explicitly allow shareholders to determine a given range for the number of directors. However, there are examples in practice where a lower and upper limit is stated in the articles of association and exact number of directors is left to a formal shareholder decision.1 This choice often leads to practical issues especially when the number of directors forming the board is changed due to resignations or new appointments even though remaining within the agreed range and often ends up having to convene frequent shareholder meetings.

On top, practice shows us that shareholders often forget the applicable range stated in the company bylaws and make a nonconforming number of appointments. A decision of the Supreme Court on the meeting and decision quorums in the case of a board composed of a nonconforming number of directors is as follows2:

"...The number of the members of the board is stated as minimum three and maximum five in the articles of association. General assembly of shareholders must adhere to these stated lower and upper limits and take a decision within these limits. In case general assembly elects one director even though minimum number of board members is stated as three in the articles of association and a board decision is made by such sole selected director, a question arises over the validity of such decision. In such case, the number of (minimum) directors specified in the articles of association shall be taken as the basis while setting the meeting and decision quorums and not the actual state..."

Therefore, any decision taken by such sole director, in this case, was deemed invalid.

Practical Tip No 1: It is advisable to state an exact number of directors that will form the board as opposed to a variable number.

Board Meetings

The board performs majority of its duties by convening a physical meeting and taking decisions during such meeting. Attending to a board meeting, engaging in discussions and voting is a duty as well as a right for directors.

Practical Tip No 2: In order to avoid personal liability issues, it is advisable that a director attends and casts a negative vote for a matter in which he does not agree, as opposed to simply being silent or absent.

Meeting times, frequency and location may be set out in the articles of association, or if such an agreement is not made, invitation for each meeting will be made by the chairman or –in the chairman's absence- the vice-chairman. Although there is a special invitation procedure for formal shareholder meetings, there is no strict formality or procedure for an invitation to a board meeting. If preferred by shareholders, a specific process for invitation may be provided under the articles of association or internal directive. Pursuant to Article 392 (7) of the TCC, each director may also request from the chairman in writing to gather the board for a meeting. In other words, the rule is that the chairman has the default authority to call for a meeting and other directors are not authorised to circumvent the chairman and call for a meeting directly. Important note is that other directors may choose to follow the circular decision taking option that is submission of a written decision proposal to the directors without physically convening for a board meeting but even in such case such written decision proposal/draft must be submitted to "all" directors and not only to a selected bunch and none shall raise an objection to take such decision without an actual/physical meeting.

In the event that meetings are held in the absence of the chairman (by ousting the chairman) as a result of any other director's invitation or organization, the decisions taken in such meeting will not be valid.3 The Supreme Court adopts the principle of "no decision without making the chairman aware of the meeting" (thus chairman's explicit or implicit invitation or awareness).

Practical Tip No 3: Chairman position does matter and has a practical advantage in controlling the board meetings.

In the event that directors make a request to chairman to call the board for a meeting and the chairman does not answer or obey this request, there is nothing that directors can do to push for an actual meeting except applying to court according to Article 392 (7) of the TCC and request a court ordered meeting.

Practical Tip No 4: Shareholders who are concerned about ex parte meetings are advised to set up a formal meeting procedure in the articles of association.

Clearly, board decisions run an illegality risk if they are taken during a meeting outside the knowledge of each and every director. Ousting a director is never a good idea and almost always leads to objections and legal challenges by a displeased director. However, we observe that Supreme Court sometimes makes a deliberate effort to keep decisions taken in absence of some directors valid as much as possible. In this respect, Supreme Court may make an exception for board decisions that are taken in the absence of some uninvited directors if and when there is sufficient meeting and decision quorum (at least more than half total directors being present) and an executory decision is not taken at such meeting.4 This demonstrates a clear distinction between cases where the uninformed director is the chairman or not. We see that the Supreme Court is rather strict in terms of invalidating decisions taken in meetings that are not convened by the chairman or by circular decisions that have not been submitted to the chairman even if such decision was otherwise taken pursuant to a valid meeting and decision quorum and is not willing to provide any exceptions in such case. However, the case may be different for non-chairman director absentees if the decision taken relates to an internal company governance matter and not to a third party action or interest. Needless to say the exception that the Supreme Court makes must be cautiously read and it may not be always very easy to determine whether a decision taken in this respect was an important and executory decision or not.

This distinction made by the Supreme Court is criticized by the doctrine since directors, no matter their position, are not only entitled but also obliged to attend to board meetings as mentioned before. Legal scholars often argue that declaration of consent of the director who is not called for a meeting will be incomplete and that the decision of the board taken in this fashion must be null and void5. However, the Supreme Court only seeks for a call to all members of the board of directors when an "important and executory decision" is made.6

Practical Tip No 5: It is good practice for chairman to invite all directors to a board meeting and document such invitation (even by way of a simple email or even a WhatsApp message) to avoid any displeased director objections.

The principle of commitment to (or necessity to follow) a pre-declared meeting agenda is not applicable in terms of board meetings. In addition to any discussion or decision topics declared before or during the meeting, any issue or subject may be discussed and decided during the meeting.7

Practical Tip No 6: A long meeting is better than an invalid meeting! It is not a good idea to block any discussion during a board meeting with an excuse that such issue was not in the meeting agenda and such act often prejudices other decisions taken during such meeting as well.

Also, important to note that directors may not attend board meetings by way of proxy, either by empowering another director or a third party, as such is a duty to be personally performed.

Meeting and Decision Quorums

The board of directors is legally allowed to convene by simple majority of the total number of directors unless an increased quorum is designated in the articles of association according to Article 390 (1) of TCC. Decisions are also made by majority of those directors that are present at the meeting forming sufficient meeting quorum.

Validity of Board Decisions

a. Null and Void Board Decisions

Board decisions may be declared null and void if they lack the very basic and constituent elements that are compulsory for a decision to be formed and such aspect may be argued at any time by any interested party without being subject to a statute of limitations period. A board decision must be taken by parties who are validly appointed directors, whose office term has not expired and in strict compliance with the meeting and decision quorums stated in the articles of association or by law. Also, a board may only take decisions within its legally granted authority and shall not intervene with any statutory shareholder reserved matter.

b. Invalid Board Decisions

Apart from a board decision being null and void retrospectively, TCC Article 391 also lists the grounds where a board decision may be invalidated upon an interested party's objection in this respect. Board decisions that are:

  1. Violating the principle of equal treatment among shareholders,
  2. Failing to comply with the basic corporate structure of a joint stock company or the principle of capital maintenance,
  3. Violating, impeding or restricting statutory shareholder rights,
  4. Transferring exclusively designated corporate authorities may be legally challenged and declared to be null and void.

As seen from the statutory grounds, the law requires the board to pay specific attention to observance and free performance of shareholder rights and aims to avoid shareholder preference by the board which is often an issue observed in practice especially in those cases where board sympathises more with a controlling shareholder interest and acts accordingly.

Practical Tip No 7: A board of directors shall treat each shareholder (group) equally and refrain from taking any decision that may be challenged based on shareholder preference.

Equally important are those decisions that relate to capital maintenance issues. In this respect, the board's primary duty is towards the company and protection of its assets, namely its capital. Protection of the company's capital also concerns creditors and public at large interest. Unjustified payments out of company's capital even if made to all shareholders on an equal or pro rata basis (which does not otherwise indicate a shareholder preference) may be challenged on the basis of unjustified reduction or return of capital.

Practical Tip No 8: A board of directors shall never feel absolute liberty while spending company funds even if such spending is made to shareholders.

Footnotes

1. Füsun Nomer Ertan, Anonim Ortaklık Yönetim Kurulu Toplantı ve Kararları, Yürürlüğünün 6. Yılında ve Yargıtay Kararları Işığında Türk Ticaret Kanunu Sempozyumu. İstanbul Üniversitesi Hukuk Fakültesi, İstanbul 2018.

2. Supreme Court 11th Chamber, 26.03.2014, E. 2013/10919, K. 2014/5889 (For the full text see. Kazanci.Com, 2019, http://www.kazanci.com. Emhasizes in the decision are added.)

3. Supreme Court 11th Chamber, 26.01.2016, E. 2015/3129, K. 2016/804 (For the full text see. Kazanci.Com, 2019, http://www.kazanci.com. Emhasizes in the decision are added.)

4. Supreme Court 11th Chamber, 06.06.2017, E. 2016/3443, K. 2016/5382 (For the full text see. Kazanci.Com, 2019, http://www.kazanci.com. Emhasizes in the decision are added.) Executive decision is often regarded as decisions taken by the board that are binding effective upon third parties as opposed to merely internal regulatory decisions.

5. İsmail Kırca, Anonim Ortaklıklar Hukuku, C. I., Ankara.

6. Füsun Nomer Ertan, Anonim Ortaklık Yönetim Kurulu Toplantı ve Kararları, Yürürlüğünün 6. Yılında ve Yargıtay Kararları Işığında Türk Ticaret Kanunu Sempozyumu. İstanbul Üniversitesi Hukuk Fakültesi, İstanbul 2018.

7. Necla Akdağ Güney, Anonim Şirket Yönetim Kurulu Kararları, İstanbul 2012.

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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