Turkey: A New Type Of Lawsuit For Group Companies - Controllıng Company And Its Board Of Dırectors' Lıabılıty For Compensatıon In Case Of Unlawful Abuse Of Control

Introduction

Group companies consist of a main "controlling company" exerting dominance over one or more "controlled companies", either by way of holding the controlled company's majority shares or concluding contracts or otherwise having de facto control over the controlled company. In order to ensure accountability and the balance of interests, the new Turkish Code of Commerce numbered 6102 ("TCC") has subjected the relationship between a controlling company and its controlled companies to certain rules. According to the TCC, all acts contrary to these rules will result in the controlling company and its directors' liability for compensation.

As a result of these rules regarding controlling companies and directors, numerous types of claims have been introduced. Among these claims, the liability lawsuit regarding "Unlawful Abuse of Control", set forth in Article 202 of the TCC, comes up as the most prominent one. There are two different forms of liability provided for by the Article: (1) the lawsuit for liability arising from the controlling company's intervention in the management of the controlled company (202/1) and (2) the lawsuit for liability of the controlling company for the controlled company's general assembly or some major decisions of the board of directors (202/2).

Protection of the Controlled Company from the Controlling Company

According to the rule set forth in the first paragraph of Article 202, a controlling company must take into account the interests of the controlled company when exercising its control and shall not cause any losses for the controlled company. Should any loss result for the controlled company, such loss shall be offset by the controlling company. Since the examples of loss cited in the Article result from actions within the authority of the board of directors of the controlling company, the Article mainly regulates the liability arising from interventions by the controlling company on the controlled company's board of directors. It is therefore intended to direct the liability upwards to the controlling company's board of directors'.

Article 202 provides examples of situations of loss, which can be defined as the diminishment of assets or the putting of assets under the risk of diminishment. In particular, it mentions the "inducement" by the controlling company of the controlled company: (1) to conclude legal transactions, such as the transferring of a business, assets, funds, personnel, credits and debts; (2) to reduce or transfer profits; (3) to limit its assets with rights in rem or in personam; (4) to restrict or cease its investments and (5) to undertake sureties, warranties and guarantees. Any material damages arising as a result of these abovementioned instances are not decisive. Rather, it is sufficient that a transaction was concluded in a manner that results in a "loss" of any type to the controlled company.

If the controlled company suffers any losses as a result of the intervention of the controlling company, then the controlling company will be under the duty to offset such loss suffered by the controlled company. According to this rule, the controlling company will either compensate the loss of the controlled company or undertake to compensate the loss of the controlled company, both to be within the relevant activity year.

Therefore, the provision both ensures the controlled company's recovery of its losses which may arise from the controlling company's interventions, and also leaves an open door to the exercise of the controlling company's policies over the controlled company by way of offsetting, which bars the controlled company from filing a lawsuit against the controlling company.

Compensation Lawsuit against the Controlling Company and the Members of Its Board of Directors

If, as a result of the inducement by the controlling company and a top-down order, an act or transaction is concluded that would breach the controlled company's board of directors' duty of care resulting in a loss by the controlled company, and no offset is made against this loss in that activity year, the controlled company's shareholders or creditors can file a compensation claim against the members of the board of directors of the controlling company, and claim for compensation for the controlled company's losses.

The controlling company and its board of directors' members may be relieved of liability only if they can prove that the transaction, which resulted in a loss by the controlled company, could have been concluded or avoided by members of an independent company's board of directors, who would observe the company's interests in good faith and act with a prudent director's care under the same or similar circumstances.

Coercion into Purchasing Shares by Court Decision

Besides the compensation lawsuit, the TCC entitles the shareholders of the controlled company to another alternative right. According to the relevant provision, the court can decide that the controlling company purchases the shares of the claimant shareholders of the controlled company instead of paying compensation, provided that such decision is equitable. Even if there is no request by shareholders to have their shares purchased, the court can deliver a coercion decision per se for the purchase of the shares by the controlling company.

This provision of the TCC would also apply if the controlled company had been suffering a loss as of the date of the TCC's entry into force. According to the rule, a controlled company's loss in existence at the time of the TCC's entry into force, which would cover losses before 01.07.2012, must be offset or undertaken to be offset by the controlling company within two years after the TCC enters into force. Otherwise, if a controlling company fails to rectify such loss within this time frame, the controlled company can file a claim against the controlling company at the end of the two year period, namely after 01.07.2014.

Right to File Cases against Foreign Shareholders of Foreign Capital Companies

Group companies with foreign shareholders are also subject to these provisions. The TCC allows for the extension of these provisions to group companies of such structure, and the right to file liability cases in Turkey, provided that the registered address of either the controlling company or the controlled company is in Turkey. Therefore, this provision paves the road for local shareholders or creditors to file cases in Turkey against the foreign controlling company (TCC Art. 202/1-e).

In conclusion, this new type of lawsuit introduced by the TCC aims to prevent the abuse of the controlling company's control against the controlled company, and repositions the controlling company to be accountable to the controlled company's shareholders and creditors. The breach of the rules results in important consequences and may lead to compensation liability of both the controlling company and members of its board of directors.

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.