Turkey: Board Of Directors Of A Joint Stock Company In The Light Of Draft Turkish Commercial Code

Last Updated: 24 August 2009
Article by Nilay Celebi

The Board of Directors ("BoD") of a joint stock company has been one of the most significant areas in the commercial environment. In my view, the reason for such significance could be due to the fact that, the BoD is the representation and administration body of a joint stock company among third parties or another reason for such significance could be on the basis that majority of the shareholders desire to manage the company and in doing so they would like to elect their own directors.

For the abovementioned reasons I would like to draw attention to the "Board of Directors of a Joint Stock Company" under the draft Turkish Commercial Code ("Draft TCC") by comparing it to the Turkish Commercial Code ("Current TCC").

The Current TCC was adopted in 1956 and took into consideration Swiss and German Law. An overall effort to harmonize the Current TCC to Turkey's economic, legal and technological growth and development has been in progress over the previous years. The Draft TCC has been accepted in the Parliament and currently approximately the first eighty (80) articles have been accepted.

The Draft TCC regulates commercial relations with respect to commercial, technological, legal, doctrinal developments in addition with common practice. The Capital Markets Board Corporate Governance Code ("CMB Corporate Governance Code") and some significant court of appeal decisions are also reflected in the Draft TCC.

Board of Directors

Article 312 of the Current TCC states that; the Board of Directors ("BoD")1 consist of at least three (3) members all of whom must be shareholders. In addition to that the BoD members must be real persons.

Article 359 of the Draft TCC states that; the BoD may consist of one or more members. In other words, the BoD is no longer required to consist of at least three (3) members. Please note that with this article, a BoD member can also be a legal entity. In case of a selection of a legal entity as a BoD member, the real person appointed by the legal entity as well as the legal entity shall be registered and announced in Turkish Trade Registry Gazette. Accordingly, such selection shall be announced on the web site of the company2. Please also note that, only such registered persons shall vote on behalf of the legal entity.

Another major change proposed by the Draft TCC concerning the directors is that they no longer have to be shareholders.

In case there is more than one director, at least one director must be Turkish and be resident in Turkey. In this Article, we can see the reflection of CMB Corporate Governance Code, which requires at least one of four directors to have a high level of education.

Organization

In practice, Article 318 of the Current TCC has been interpreted to allow for only one vice chairman (particularly the Trade Registry offices have been interpreting such Article).

Article 366 of the Draft TCC now clarifies this interpretation and states that the BoD can elect more than one vice chairman among its members. It may also be determined under the AoA for any chairman and vice chairman to be elected by the GA.

The Draft TCC also proposes and encourages the professional administrative. As a consequence, the concept of "executive- non executive director" is introduced with the Draft TCC (such is reflected in the CMB Corporate Governance Code).

In line with Article 367 of the Draft TCC, the administrative and representative duties can be transferred to any BoD member or a third person provided that such transfer is determined by the AoA. In such a case the BoD shall prepare an "internal regulation" determining the administrative duties and their definitions.

Scope

Pursuant to Article 321 of the Current TCC; the transactions of a joint stock company shall be within the scope and aim of the company as determined under the AoA ("ultra vires" rule). The transactions beyond the scope or aim of the company shall be null and void. There are several court of appeal decisions on such issue.

Nevertheless, the ultra vires rule has been eliminated with Article 125 and 371 of the Draft TCC. Even tough the objects are silent in the AoA then all transactions beyond the scope and aim of the company shall be binding on the company (annulment of ultra vires rule).

Resolutions

According to Article 330 of the Current TCC; the presence of one half of the directors plus one is required for passing a resolution and the resolutions shall be taken by the majority of the directors present at the meeting. The majority under this article has been interpreted differently under the doctrine and court of appeal decisions. i.e. "in case there are three (3) members; since there cannot be 1,5 members it shall be interpreted as two (2) members, the majority than will be three (3) (one half of the directors plus one) which is all of the members.

However Article 390 of the Draft TCC stipulates that; the BoD can convene with the majority of the BoD members. (i.e. if there are three (3) members, the majority then will be two (2) members). The quorum of the resolutions of the BoD is also the majority of the participants.

Furthermore, the BoD meetings can be concluded in an electronic environment and the resolutions can be adopted thereto. The Draft TCC also introduces the concept of taking the signatures of the BoD members in different pages. According to the Current TCC, the participant BoD members should sign the resolution in any manner whatsoever. Even though it is not clear in the Draft TCC as for the Turkish doctrine, the signatures of the BoD members can be taken on different pages of the same resolution. It is my view that this article will make it easier to pass a resolution when the BoD members are in different cities/countries.

Void and Null Resolutions

Article 391 of the Draft TCC is to clarify the BoD resolutions which are void and null (i) resolutions contrary to the equality rule; (ii) resolutions contrary to the company or the securing capital rule; (iii) resolutions contrary to the shareholders rights and which limit the utilization of such rights; and (iv) resolutions which are inalienable duties of other organs. Please note that, such circumstances are not -numerous clauses-.

Limitation of the Liberty of Action

According to Article 395 of the Draft TCC, no loans shall be provided by the company to the director's or loans to other companies where the director or any of its relatives hold at least 20% of the shares of such company or to sole proprietorships owned by such director or his relatives. In such a case, the BoD members can be held liable by the creditors of the company for the amount of the debt. Please be aware that the Draft TCC, reserves the provisions of the Banking Code.

Responsibilities of Directors

According to the Turkish doctrine, there is a representation relationship between the BoD members and the company in light of Turkish Code of Obligations Law No. 818. As a consequence, the BoD members acting in light of the representation relationship may be held liable unless they can prove that they are not in fault.

Pursuant to Article 336 of the Current TCC, the BoD members are jointly and severally responsible to the company as well as the shareholders and creditors with their actions in the following circumstances; (i) if the payments distributed to the shareholders on account of the value of shares are not exact, (ii) if the dividends distributed and paid are fictitious; (iii) if the books to be kept in accordance with the law are non existent or kept irregularly; (iv) if the resolutions of the GA are not executed with no reason; (v) if the other duties in accordance with the law or AoA are not fulfilled intentionally or in negligence. In such circumstances the BoD members shall be personally responsible for their actions.

Article 553 and 557 of the Draft TCC; addresses the responsibilities of the BoD members. According to Article 553 of the Draft TCC; directors entrusted with the management may be held liable to the company as well as the shareholders and creditors for damages caused by violation of their duties arising from the laws and the AoA unless they can prove that they are not in fault. This liability extends to damages caused by those to whom managerial responsibility has been delegated, unless it can be shown that the designation, instruction and supervision has been carried out with due care.

Notwithstanding the lack of advocates, the Turkish doctrine and the Current TCC accept absolute solidarity. The company as well as the shareholders and the creditors may make a claim for losses from one or all of the members (absolute solidarity). However, Article 557 of the Draft TCC proposes a different system of solidarity which eliminates absolute solidarity and introduces "differentiated solidarity". The responsibility of a BoD member shall be determined according to its actions and with the causal connection. Accordingly a BoD member who is not connected with the circumstance of a loss of the company (shareholders and the creditor) shall not be held liable and the BoD member who acts negligently shall be held liable only in proportion with its part.

Footnotes

1. BoD members shall also be referred to as "directors" in the article.

2. Pursuant to the Draft TCC joint stock companies are obliged to set up websites.

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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