Turkey: Impacts Of The Draft Turkish Commercial Code On Listed Corporations

The Turkish Commercial Code ("The Code") basically governs commercial relationships and establishment and governance of companies. The Code which was enacted in 1956 has been amended on several occasions in response to urgent needs and changed circumstances, but an overall revision which is deemed as necessary to meet the demands of the contemporary commercial and corporate life has not been made until now. However, a draft commercial code ("the Draft") has been in the agenda of the Turkish Grand National Assembly and is expected to be enacted in 2010.

The Draft adopts a reformist approach and covers a multitude of fundamental changes in relation to the legal infrastructure of commercial life. However, this article intends to draw attention to the fundamental effects of the Draft on ISE listed companies, especially in relation to their publicly held nature.

Share Buy-Back

The Draft envisages a relatively liberal structure concerning a joint stock company's buy-back of its own shares. According to the Draft, a joint stock company may pledge a right over or buy-back its own shares up to 10% of its entire share capital. In order for a joint stock company to conduct a share buy-back programme (i) its board of directors shall be authorized by its general assembly, (iii) value of shares to be acquired has been fully accounted for as paid in capital, and (iii) net value of company assets, excluding value of shares to be acquired, must at least be equal to the total value of share capital and statutory reserves. However, should there be a crucial and imminent risk of loss, board of directors may, without any authorization, initiate a buy-back process provided that the reason and purpose of the acquisition, the amount of acquired shares together with its ratio to the entire share capital and payment conditions with respect to such acquisitions are disclosed to the shareholders during the first general assembly meeting to be held. The maximum period for which board of directors is authorized to implement a share buy-back programme is 18 months. General assembly, while authorizing board of directors, shall also determine the amount of shares to be purchased and maximum and minimum price limits to be applied.

The Draft also governs specific exceptions to the prohibition of acquisition or pledging of the remaining 90% of the share capital. Such exceptions may, inter alia, arise from statutory purchase obligations, mergers or collection of receivables, and require resale of those shares under certain conditions.

Buy-back programmes create new opportunities for listed companies. First of all, by conducting the programme, a listed company may act as a market maker and support the market price especially when there's a serious downturn or undervaluation in its shares. A listed company may also acquire its own shares for the implementation of management and employee incentive plans including stock options and stock purchase plans which may positively affect overall performance of the company personnel and which may enlarge and diversify its shareholder base. In addition, by repurchasing its own shares, a listed company will reduce the number of shares outstanding and such a move will boost earnings per share as there are smaller number of shares over which to distribute the earnings. Furthermore, buy-back programmes may be initiated to build a currency for potential acquisitions.

Squeeze Out

The Draft establishes a new mechanism called squeeze out which, under certain conditions, may pave way for converting a publicly held company into a private company. However, the Draft allows squeeze out applications only for certain purposes and does not grant the right to execute such a cash-out procedure under all circumstances.

According to the Draft, if a company directly or indirectly owns at least 90% of another company's share capital and voting rights, and if other shareholders (i.e. minority shareholders) act in violation of good faith principles and obstruct company activities by voting against general assembly resolutions and/or bringing actions, the controlling company may apply to the court in order to purchase minority shares in consideration of adequate compensation.

The Draft also grants merging companies the right to cash-out minority shareholders. In a merger process, the cash out procedure may be structured on a compulsory basis or alternatively shareholders may be granted the liberty to stay as a shareholder upon completion of the process.

Under the current legislation listed companies may go private by proving that the number of shareholders is fewer than 200 during the last two years. However, it is nearly impossible for a company, whose shares are traded on a daily basis, to prove that it has a limited number of shareholders during a specific period. Therefore, although limited in scope, squeeze out mechanisms governed in the Draft may be used by listed companies for going private provided that conditions set forth in the relevant provisions exist.

Restrictions Regarding Privileged Shares

The Draft adopts the basic principle of equality by stating that under equal circumstances, shareholders of a joint stock company shall be treated on an equal basis. However, the Draft also recognizes privileged shares and describes the same as an advantageous position with respect to fundamental rights such as the right to dividend, the right to liquidation proceeds or the right to vote. The Draft tries to balance the interests by both underlying the equality principle and recognizing certain privileges, and, unlike the currently applicable Code, set certain limitations for privileges that may be granted to certain type of shares. In this respect, the Draft limits the number of votes per privileged share to 15, unless required by the circumstances of institutionalization or a justified cause is proven. Nonetheless, the circumstances of institutionalization or the justified cause shall be inspected by the relevant court and a deviation from the limitation shall only be applicable upon court approval. The Draft also stipulates that voting privileges shall not be applicable for general assembly decisions regarding (i) amendment of articles of association, (iii) election of auditors charged for inspection of certain transactions and (iii) liability actions to be brought against company management.

In addition, the Draft sets forth a restriction regarding representation of certain shareholders or group of shares at corporate boards. According to the Draft, articles of association of a joint stock company may envisage representation of (i) shareholders forming a particular group (i.e. corporate personnel, distributors of the corporation etc.), (ii) certain share groups (i.e. shares with particular privileges) and (iii) minority shareholders at corporate boards. However such representation shall not exceed two thirds of the total number of board members. The Draft considers shares granting the right of appointing or nominating board members as privileged shares.

Existence of privileged shares in listed corporations is one of the major weaknesses of the corporate governance practices in Turkey. As there is no limitation in regards to the privileges under the current Commercial Code, a shareholder can control a listed corporation with only a small portion of shares representing corporate capital. This is considered to interfere with the fair representation of holders of publicly traded shares in the management of the relevant corporation. Capital Markets Board of Turkey ("CMB") exerts pressure on listed corporations with articles of associations allowing unfair representation and rejects corporations' requests to create additional privileges after initial public offerings. However, CMB's authorization is limited to the publicly held companies, and private companies, preferring to be listed, create such privileges during the period just before the beginning of the registration/listing process in which CMB has no authority to intervene. Therefore, restrictions envisaged by the Draft with respect to multiple voting rights and representation at corporate boards could be considered as a positive step for limiting the power of controlling shareholders.

Online General Assembly Meetings

The Draft allows general assembly meetings conducted through audio and video conference and foresees that online participation and voting in shareholders meetings shall have the same legal effect with physical participation and voting.

The Draft authorizes Ministry of Trade and Industry to enact a bylaw which will regulate terms and conditions of online general assembly meetings and envisages that, with the enactment of the bylaw, listed corporations will be obliged to conduct online general assembly meetings and on a parallel scale shareholders will have the chance to vote through electronic communication means.

Minority shareholders of listed companies, in general, have limited interest in general assembly meetings. This attitude arises from the formal requirements for the appointment of proxies as well as share blocking mechanism which requires holders of bearer shares to deposit their shares at least one week before the general assembly. Another factor affecting the attitude of shareholders other than the controlling shareholders is their limited capability of influencing the decisions taken at the general assemblies. The opportunity to vote online may not solely solve the inherent problem of low-level general assembly participation of minority shareholders, but could be considered as an encouraging step in the establishment of shareholder democracy.

New Mechanisms for Proxy Voting

The Draft has treated the representation of shareholders at the general assemblies with an institutional view. In addition to the classical proxy mechanism based on appointment of representatives to vote on shareholders' behalf at the general assembly meetings, the Draft envisages three different types of representatives, namely the corporate representative, the independent representative and the institutional representative.

As per the provisions of the Draft, a company may propose its shareholders to appoint a board member or a person affiliated with the corporation (i.e. corporate personnel) to act as a proxy at the shareholders' meeting. However, a corporation planning to submit such a proposal shall, at the same time, determine and announce another person that has the capacity to act as a proxy on behalf of shareholders. Such person, namely the independent representative, shall be presented as an alternative to the corporate representative and shall not have any affiliation with the company. Also, the company, by way of an announcement which shall be made at least 40 days before the general assembly date, shall invite shareholders to submit identification and contact details of the persons whom they would like to see acting as institutional representatives. The same announcement shall also include an invitation to persons who would like to act as institutional representatives. Upon submissions and applications, the company would be obliged to announce the contact details of institutional representatives through the general assembly notice in order for shareholders to make the necessary voting arrangements.

The Draft authorizes corporate representatives, independent representatives and institutional representatives to prepare a memorandum with respect to the agenda of the general assembly and announce the same through radios, televisions, newspapers and other communication means. In the memorandum, the representative shall explain content of the proxy document, direction of the vote that will be cast for each agenda item and reasons of such voting.

As mentioned earlier minority shareholders' limited interest in general assemblies of listed corporations is a major issue of Turkish corporate governance. The Draft is trying to overcome this problem by creating new proxy mechanisms which may secure efficient participation of minorities to corporate affairs. In addition to this, although Turkish listed companies, to a great extent, have dominated by controlling shareholders, some companies have dispersed shareholding structures which, in turn, brings about the danger of minority control. It is argued that the envisaged proxy mechanisms may facilitate shareholder representation in an effective manner and may hinder potential minority domination. In this respect, whether new proxy mechanisms will pave way for large numbers of shareholders to reflect their ideas in general assemblies remain to be observed.

Board Committees

Companies may establish internal committees to supervise and/or oversee the operations of corporate boards and executives. As per the Capital Markets Legislation, listed companies are obliged to set up audit committees in order to strengthen the supervision of their financial and operational activities. In addition, the Corporate Governance Code (the "CG Code") advises listed corporations to establish corporate governance committees in order to monitor compliance with corporate governance principles, perform any improvement studies, and offer any possible suggestions to the board of directors. The CG Code also put an emphasis on the formation of other committees, in accordance with the conditions and the necessities of companies, so as to enable corporate boards to execute their tasks in an efficient manner. However, establishment of board committees other than the audit committee has been left to the discretion of listed companies and only some of the listed companies have chosen to set up various board committees in line with the corporate governance principles.

The Draft adds a new dimension to the committee-based supervision and requires listed companies to set up a new committee called "Committee for Early Inspection of Risks". The main logic behind the formation of such a committee lies in the need to detect current and potential risks at an early stage in order to protect the integrity and the viability of the listed company. The committee is expected to serve as an early warning system which may help listed companies in coping with instabilities and economic downturns. The existence of such a committee along with the audit committee is also expected to boost investor confidence which may well be deemed in a declining trend due to the current global economic crisis.

Prohibition on Financing Shareholders

Economic relations between shareholders and companies constitute a prominent concern in Turkish commercial life. Such relations have the potential to infect governance structure of companies since related party transactions could be used in misusing corporate assets. The Draft puts a specific emphasis to this issue by stipulating that apart from the contractual relationships based on commercial transactions falling within the ordinary activities of the company and executed on an arm's length basis, shareholders shall not borrow money or any other asset from the company.

The principle stipulated by the Draft redefining the limitations on related party transactions is especially important for listed companies. Vast majority of Turkish listed companies have a relatively centralized shareholder structure and are controlled by a dominant shareholder or a group of shareholders acting in concert. As it could be observed from CMB bulletins published on a weekly basis, mistreatment of corporate assets by controlling shareholders is a widespread practice in Turkey. Under the currently applicable Capital Markets Legislation, shareholders may enter into a commercial transaction, or borrow money or any other asset from a listed corporation as long as an adequate consideration is provided to the company. Thus, the current regulatory regime does not put any limitation on related party transactions in terms of the type of transaction involved. However, with the enactment of the Draft, the type of transactions that controlling shareholders may enter into with listed companies will be limited which may positively affect the struggle against the abuses of controlling shareholders.

The Draft also adopts a similar approach for transactions of joint stock companies with its board members, board members' certain relatives and certain affiliated companies controlled by those persons, and thereby broadens the scope of prohibition on financing related parties.

Corporate Groups

The Draft presents a new concept called corporate groups which, according to the Draft, is formed when a company, directly or indirectly, controls the majority of voting rights, or is in a position to vote for the appointment of sufficient number of members to establish a majority in the management body, or has the capability to exercise the majority of voting rights on its own or with other shareholders due to a contractual relationship entered into with the same, or keeps another corporation under control through a contract or in any other manner. Moreover, the Draft envisages that if a real person or a legal entity or a business enterprise (that is not a legal entity), regardless of whether its residence is in Turkey or abroad, is at the head of the corporate group, provisions of the Draft governing corporate groups will still be applicable. The reason of governing corporate groups is stated as achieving transparency, accountability and balance of interests in intra group transactions.

The Draft imposes various duties and liabilities on board members of the affiliates, such as the requirement to prepare a report within the first three months of each operational year concerning all transactions executed with the parent company and other affiliates, any actions taken or not taken for the benefit of the corporate group, as well as the losses of the affiliate, if any, and whether the loss has been compensated or not. Moreover, members of the board of the parent company may request a detailed report pertaining to the related party transactions of the corporate group, and may also request that report to be included in the annual reports of the parent company. In addition, shareholders of the parent company are also entitled to request detailed information on related party transactions of the corporate group at the general assembly meetings.

The Draft also provides that a parent company shall not use its controlling power to the detriment of its affiliates unless it compensates the losses or grant affiliates a right to demand compensation until the end of the operational year. In case of any failure in compensating the affiliate, each shareholder of the affiliate is entitled to ask for the reimbursement of the losses incurred by the affiliate. In addition to the parent company, board members of the parent responsible for the loss shall be jointly liable against the affiliate.

The right to sell out is another tool provided by the Draft for shareholders of affiliates. As per the provisions of the Draft, in case of any restructuring (i.e. merger, divestiture, dissolution or amendment of articles of association) of the affiliate which is initiated with the decision of the parent company and which has no justification from the perspective of the affiliate, the dissenting shareholder may require the parent company to compensate its losses or purchase its shares in consideration of an adequate amount.

Since the current listed corporate environment mainly consist of companies controlled by holding companies owned by families, the current Code and the Capital Markets Legislation have already taken certain measures, against potential abuses of controlling shareholders, including appraisal of related party transactions by independent institutions, disclosure of related party transactions and holding board members liable for any misuses. However, with the enactment of the Draft, the parent company and its board members could also be held responsible for the losses of the affiliate, and shareholders of the affiliate will have the right to require compensation from the parent or will have the chance to sell out its shares to the parent in return for a fair consideration which could be considered as additional protection mechanisms for minority shareholders of listed corporations.

The Draft also requires companies to disclose the amount of their shareholdings in other companies when those holdings exceed or fall below certain thresholds. A similar requirement, arising from the relevant provisions of the Capital Markets Legislation, is already in place for shareholders of listed companies. However, the Draft foresees a new measure in order to secure the applicability of the requirement by stating that the rights arising from shareholder status (i.e. voting rights, the right to dividend etc.) shall not be exercised by the company unless the relevant disclosure requirement is fulfilled. This measure, an additional one to the administrative fines imposed by CMB, may strengthen the compliance regarding disclosure of shareholdings. Nevertheless, the measure is only limited to the shareholders of the corporations that could be considered within the context of corporate groups and shall be extended to include other types of shareholders of listed corporations for the sake of efficiency.


The Draft abolishes the traditional system of statutory auditors totally and foresees a new audit structure based on independent audit companies.

In practice, financial statements of listed companies are already being audited by independent audit companies in conformity with the existing regulations. Nonetheless, with the enactment of the Draft, the scope of audit will be extended to encompass the annual management report which will be a new issue for listed companies. Also, in addition to the traditional inspection, auditors shall inspect corporate financial statements and annual management reports with a view of their compliance to the articles of associations and to the provisions of the Draft governing financial statements and statutory and voluntary reserves.

Insurance against Potential Damages Arising from the Acts of Board Members

The Draft envisages that, if a listed company is insured for an amount exceeding one fourth of its share capital against the damages that may be caused by its board members, such practice shall be disclosed to the public and taken into account in the corporate governance assessment of the relevant company. It is generally believed that existence of an ongoing insurance practice directly affects the quality of the persons selected for the corporate boards, in a positive manner which, in turn, may boost the governance level of listed companies. Nonetheless, such insurance, envisaged by the Draft, is not mandatory. As a consequence, the impact will remain to be seen until listed companies decide to insure themselves voluntarily against potential damages that may arise from the acts of their board members.


The world has experienced a severe economic crisis which makes competition even stiffer for emerging markets to attract foreign investment. Every country is taking certain steps in order to cope with the adverse effects of the global economic downturn. In this respect, the Draft Turkish Commercial Code, which is currently in the agenda of the Turkish Parliament, could be considered as a prominent move towards adaption to the new economic environment.

The Draft confers specific emphasis on corporate governance, transparency, accountability and responsibility, and is expected to create important implications for listed corporations. The new mechanisms foreseen by the Draft together with fundamental changes in the currently applicable mechanisms may pave way for a well established shareholder democracy in listed corporations which in turn may strengthen the competitiveness of the Turkish Capital Markets.

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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