Turkey: Privilege To Be Represented On The Board Of Directors

According to Article 360 of Turkish Commercial Code No. 6102 ("TCC"), in joint-stock companies, provided that it is stipulated in the articles of association, a right to be represented on the Board of Directors may be extended to certain share groups, as well as to shareholders forming a certain group with their characteristics and qualifications, or to minority. There is no difference between the members of the Board of Directors to be appointed in accordance with Article 360 of the TCC and the other elected members, in terms of rights and obligations. Members proposed by certain share groups cannot act on the orders and instructions of these groups[1]. However, it is possible for the proposed member to protect the interests of the related share group, only if he/she gives priority to the interests of the company[2].

Certain Share Groups

In practice, privilege is granted to share groups by dividing the shares into (A) and (B) groups, and inserting a provision in the articles of association; for example, a joint-stock company with a three-person board of directors, such as "Two members of the Board of Directors shall be selected among the persons to be recommended by group (A)." In our legal system, it is not compulsory that a share group having privilege over rights, such as dividends, liquidation shares, preemption rights or voting rights (Articles 478 and 479 of the TCC) enjoys the rights as regulated in Article 360[3]. The legislator accepts the concept of "group privilege" in the second paragraph of Article 360 of the TCC by recognizing the privilege to "a certain share group"[4]. Since the privilege is granted to a group shares, not to individual shares, in the case of a transfer of shares, the new owner of the shares is included in the related group in any event, and benefits from the privilege.

Shareholders Forming a Certain Group with their Characteristics and Qualifications

Provided that it is regulated in the articles of association, the privilege of being represented on the board of directors can also be granted to the shareholders who form a group with their characteristics and qualifications. In this case, due to the fact that privilege is not granted to a share or a group to which the shares are included; in the event of a transfer, the transferee cannot benefit from the privilege in the absence of the characteristics and qualifications as regulated in the articles of association. Therefore, the interpretation of the concept of "shareholders forming a certain group" is essential, and determination of it in the articles of association is an issue that needs special attention. It is recommended that the required characteristics and qualifications of the persons to form the group to be regulated in the articles of association should be very clearly set out in a manner so as to leave no doubt[5]. Shareholders who work in the company, who are amongst the founders of the company, and who are members of a family, or who come from the same origin, or who supply raw materials in relation to the activities of the company, who belong to a certain profession, members of a sub-industry, as well as dealers, are considered as shareholders forming a certain group[6].

Minority

Since it is generally accepted in the doctrine that the concept of minority in Article 360 of the TCC is not used in a narrow or technical way (shareholders that constitute 10% of the capital or 5% of the capital in publicly traded companies), the doctrine argues that the shareholder(s) outside of the majority having more than 50% of the votes can be considered as a minority[7]. Clear definition of minority in the articles of association is important. It is also stated in the Code's preamble that it is not enough to mention the percentages to determine minority status; instead, the numbers of share certificates are a better criterion in terms of distinction. However, it is also stated in the doctrine that as this method already forms a certain share group, the aim of the legislator is not to create a third group, but to state that the right to be represented on the board of directors can be granted to "minorities" in a broad sense[8].

Selection of the Members of the Board of Directors from amongst Specific Shareholders and the Right to Recommend Candidates to the Board of Directors

Article 360 of the TCC states that "... as election of members of the board of directors from shareholders forming a certain group, certain share groups and minority may be stipulated in the articles of association, the right to recommend a candidate for membership to the board of directors may be provided, likewise".

As is clear from this provision, it is possible to grant the right to be represented on the board of directors through two methods. As election of members of boards of directors from shareholders forming a certain group, certain share groups, and minority may be stipulated in articles of association, the right to recommend a candidate for membership to the board of directors may be provided, likewise. However, as these persons cannot be given the authorization to directly appoint members of the board of directors, it is also possible that the general assembly does not elect the candidate recommended by holders of privilege for justified reasons (for example, the candidate's lack of competence and personal qualifications, close relationship with competitors, the person's legal capacity, the financial status, the restraints of election in Article 363/2 of the TCC, or non-compliance with the qualifications set out in the articles of association)[9] In accordance with the Turkish Commercial Code, it is possible to stipulate the right to be represented on the board of directors by electing some of the members of the board from certain groups of shareholders, or granting the right to recommend a binding candidate as specified in the Code's preamble.

Since the right to recommend candidates for membership of a board of directors is granted to all shares within a group, not to individual shares within a certain group, the shareholders to which the right is granted must convene a meeting. However, there is no regulation regarding this meeting or quorum in the TCC. If the articles of association do not contain any explicit regulations on this matter, according to an opinion in the doctrine, the provisions concerning the special meeting of privileged shareholders (Article 454 of the TCC)[10] should apply; whereas, another opinion defends that the provisions concerning the general assembly meeting is applicable[11].

Consequences of Violating Article 360 of the TCC

Although Article 360 of the TCC is mandatory, violating mandatory provisions causes annullability, nullity, or nonexistence, depending on the nature of the violation. Violations referred to in Article 447 of the TCC and other similar reasons result in nullification[12]. If the reasons listed in this article or similar reasons do not exist, the decision of the general assembly is deemed to be an annullable decision, even if it is contrary to a mandatory provision.

The 11th Civil Chamber of the Court of Cassation decided in the files regarding amendments to articles of association[13] that since such rights are not granted to shares, but to shareholders, they cannot be accepted as privilege; but they are vested rights granted through the articles of association that may not be changed without the consent of the shareholders. In its decision, the 11th Civil Chamber states that "Since the vested right granted to the plaintiff through the articles of association cannot be changed without his consent, the provision of the articles of association in this respect cannot be removed by the decision of the ordinary general assembly without the consent of the plaintiff. (Article 452 of TCC numbered 6762; Article 385/1 of the TCC). Considering that Article 5 of the Law on the Execution and Implementation of the Turkish Commercial Code is presumed to protect vested rights, it is inferred that reversing the decision of the general assembly of the said change of the articles of association is necessary."

Conclusion

According to Article 360 of the TCC, provided that it is stipulated in the articles of association, a right to be represented in the Board of Directors may be provided to certain share groups, shareholders forming a certain group through characteristics and qualifications, and minorities. During the period that TCC number 6762 was in force, the privilege regarding the right to be represented could only be granted to a share, but Article 360 of the TCC regulates that this right may be granted to the shareholders forming a certain group with their characteristics and qualifications, and minorities, in addition to certain share groups. The concept of shareholders forming a certain group should be broadly interpreted, and each criterion that enables making a distinction between the shareholders should be considered sufficient to form a group. The right to be represented on the board of directors granted to a certain person through the articles of association, and the rights that are granted through intention of privilege, but do not have the characteristics of privilege, may be eliminated at any time by amendment of the articles of association. The right to be represented on the board of directors, which is granted through the articles of association in accordance with the Law, is a privilege. However, the legal status of the members of the board of directors who are appointed based on the right of privilege, and the members of the board of directors elected in the normal manner, are equal.

As election of the members of the board of directors from shareholders forming a certain group, certain share groups, and minorities, may be stipulated in the articles of association, and rights to recommend candidates for certain numbers of membership of the board of directors may be provided to certain groups, likewise. In order to exercise the right granted in the form of nominating a candidate, if the shareholders to whom the right is granted are more than one, they should hold a meeting. The candidate recommended at this meeting shall be selected by the General Assembly unless just cause to the contrary is given. Although Article 360 of the TCC is mandatory, not all violations of this Article result in nullity. An assessment should be made according to the characteristics of the solid case, the stipulated provision of the articles of association, and the decision of the general assembly.

[1] Rauf Karasu, https://dergipark.org.tr/download/article-file/270563.

[2] Kırca, Şehirali Çelik, Manavgat, Anonim Şirketler Hukuku V. I, 2013 p. 438.

[3] Kırca p. 427, fn. 104.

[4] Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku I, 2014, p. 384.

[5] Poroy, Tekinalp, Çamoğlu, p. 385.

[6] Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, 2013, p. 399.

[7] Pulaşlı, p. 400, Kırca, Şehirali Çelik, Manavgat p. 430.

[8] Kırca, p. 431.

[9] Ercüment Erdem, Türk Ticaret Kanunu ile İlgili Makaleler (2009-2016), 2017, p. 381

[10] Pulaşlı, p. 402.

[11] Kırca, p. 434.

[12] MADDE 447– (1) Genel kurulun, özellikle; a) Pay sahibinin, genel kurula katılma, asgari oy, dava ve kanundan kaynaklanan vazgeçilemez nitelikteki haklarını sınırlandıran veya ortadan kaldıran, b) Pay sahibinin bilgi alma, inceleme ve denetleme haklarını, kanunen izin verilen ölçü dışında sınırlandıran, c) Anonim şirketin temel yapısını bozan veya sermayenin korunması hükümlerine aykırı olan kararları batıldır.

[13] No. 2013/16479 E. 2014/1014 K., 17.1.2014 (Kazancı) and 2015/893 E. 2015/8774 K., 30.6.2015 (Kazancı).

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