Turkey: The New Liability System Provided For Members Of The Board Of Directors Of Joint Stock Companies Under The Draft Commercial Code

Last Updated: 31 July 2009
Article by Şebnem Işık and Yegan Ureyen

Introduction

The current Turkish Commercial Code (hereinafter referred to as the "TCC") entered into force on January 1st, 1957. Since 1957, the provisions of the TCC regarding liabilities of members of boards of directors (hereinafter referred to as the "BoD") of joint stock companies have not been amended. However, new structures were needed for newly developing business transactions and relationships, especially in the area of corporate governance. In consideration of the global tendency to set more transparent and strict corporate governance rules and the need to bring the current TCC in harmony with the regulations of the European countries, the Turkish Ministry of Justice decided to restructure the current liability system for members of the BoD while preparing the Draft Turkish Commercial Code (hereinafter referred to as the "Draft Code").

This article aims to provide a general summary of the amendments introduced by the Draft Code regarding the liabilities of members of the BoD of joint stock companies.

I. General Characteristics of Liabilities of Members of the BoD Under the TCC and the Draft Code

Pursuant to the TCC, directors of a joint stock company must manage the company in accordance with the TCC and the articles of association of the company. If they do not, otherwise, the company, its shareholders and its creditors are entitled to hold the directors liable for any damages arising from their wrongful acts and/or misconduct. The TCC contains explicit provisions regarding the liability of initial directors of a company for their conduct during establishment procedures. Pursuant to Article 308 of the TCC, members of the initial BoD have to make sure that there is no corruption in the establishment procedures of the company. If they do not comply with this obligation, members of the initial BoD will be jointly liable for any damage incurred by the company, its shareholders and its creditors.

According to Article 336 of the TCC, directors shall not be personally liable for any transactions and contracts concluded on behalf of the company. However, they shall be jointly liable towards the company, its shareholders and its creditors if (i) payments made by shareholders in relation to their capital subscription are incorrect; (ii) dividends distributed and paid are fictitious; (iii) the company books which must be kept in accordance with the law are not kept or not duly kept; (iv) decisions of a general assembly meeting are not executed without any reason; (v) the members of the BoD either intentionally or with negligence do not comply with their duties imposed on them by law or the articles of association of the company.

Contrary to Article 308 of the TCC, which specifically regulates the liability of members of the initial BoD, and Article 336 of the TCC, which provides a list of acts that expose members of the BoD to liability, the Draft Code does not make a distinction between initial and subsequent BoD members and regulates the liabilities of members of the initial and subsequent BoD under the same article. Pursuant to Article 553 of the Draft Code, members of the BoD may only be held liable for damages if they breach any obligation imposed on them by law or the articles of association of the company and if their fault or negligence caused the damage.

a. Liability Arising From Wrongful Acts

According to the TCC and the Draft Code, a member of a BoD may be held liable for his/her acts only if damage is incurred either by the company, its shareholders or creditors and fault or negligence is attributable to the member of the BoD. The burden of proof under both the TCC and the Draft Code is on the member of the BoD against whom a liability action is filed. Therefore, under both the Draft Code and the TCC, members of the BoD may be relieved from liability if they prove that no fault or negligence is attributable to them.

b. Delegation of Authority

According to Article 319 of the TCC, members of the BoD are entitled to delegate their representative and administrative authorities, in whole or in part, to a member of the BoD or to a manager. In such a case, only the member/manager to whom the authorities are delegated shall be liable for any damages caused as a result of the negligence or fault of the delegated member/manager in relation to any of the issues mentioned under Articles 336 and 346. In other words, there will be no joint liability for the members of the BoD for the acts of the delegated member/manager. According to the scholars' opinion in line with Article 320 of the TCC, the joint liability principle may still apply if the delegating members of the BoD do not comply with their duty of care while appointing the delegated member(s)/manager(s) and/or supervising their acts. The Draft Code explicitly states, under Article 553, that in cases where members of the BoD delegate their powers to other persons, they cannot be held liable for any damages as long as they prove that they acted with a reasonable duty of care while appointing these persons. Article 553 of the Draft Code goes further and draws the limits of the duty of care obligations of the members of the BoD by stipulating that (i) no one can be held responsible for violations of the law, or the articles of association, or corruptions, or acts which are beyond his/her control and (ii) this non-liability principle cannot be invalidated by alleging that the member who delegated his authority violated his/her duty of care and supervision. In light of the foregoing explanations, it can be concluded that the Draft Code narrows the duty of care obligations of the members of the BoD.

II. Liability Actions

According to the TCC, the company, its shareholders and its creditors may bring an action against the members of the BoD if they violate their above mentioned obligations. In order for the company to bring an action against the members of the BoD for compensation of the damages incurred by the company due to the wrongful acts of the board members, the general assembly of the company must take a resolution allowing the company to bring such an action.

Shareholders and creditors of the company may file liability suits against the members of the BoD for compensation of their direct and indirect damages. In the event a shareholder or a creditor of a company brings an action against members of the BoD for the indirect damages that he/she has incurred, the court must order payment of the relevant compensation to the company. The plaintiff (either the shareholder or creditor) shall be deemed compensated for his/her indirect damages through the compensation to be paid to the company. In the event a shareholder or a creditor files a lawsuit for the direct damages, the shareholder or the creditor itself will be entitled to compensation.

Under the Draft Code, contrary to the TCC, creditors are not authorized to open a liability suit unless the company goes bankrupt. According to Article 555 of the Draft Code, only the company and the shareholders which incurred damages due to the wrongful acts of members of the BoD can file a liability suit. The reasoning for only allowing creditors to file a lawsuit if the company goes bankrupt is that creditors cannot suffer from any damage as long as the company is capable of paying its debts.

Conclusion

As mentioned above in the introduction, the Draft Code is introducing significant changes regarding the liability of members of the BoD of joint stock companies for the purposes of satisfying the needs of the market and newly developed business relationships, and to harmonize the TCC with the latest global developments, especially in the area of corporate governance. The new liability system regulated by the Draft Code is now awaiting ratification by the Turkish Council of Ministers. Since the main purpose of the new liability system is to create a more transparent corporate management system, we hope that the Draft Code will be ratified as soon as possible.

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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