4 December 2014

Illegal Use Of Dominance In Corporate Groups

The New Turkish Commercial Code ("TCC") which is in force since July 1st, 2012 introduced a comprehensive reform in company law.
Turkey Corporate/Commercial Law
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The New Turkish Commercial Code ("TCC") which is in force since July 1st, 2012 introduced a comprehensive reform in company law. Provisions on corporate groups are important part of the novelties presented with the TCC, as the relationship between the parent company and the subsidiaries as well as the results arising out of the transactions with each other are explicitly regulated in the Turkish law system for the first time. This article deals with parent companies' illegal use of dominance over its subsidiaries and its legal consequences as set forth in the TCC.

The TCC makes the definition of a parent company and subsidiary under Article 195. Accordingly;

  1. If a commercial company directly or indirectly, (i) holds the majority of the voting rights of another commercial company, or (ii) has the right to ensure the appointment of members forming a decision quorum in the management body of another commercial company in accordance with articles of association, or (iii) has the majority of the voting rights of another commercial company by itself or with other shareholders based on a contract, in addition to its own votes;
  2. If a commercial company is able to hold another commercial company under its control via contract or through other means;

the former company shall be identified as the parent company whereas the latter shall be identified as the subsidiary.

Companies affiliated to the parent company directly or indirectly are also part of the corporate group and therefore regulations on corporate groups in the TCC are applicable to such companies.

According to Article 202 of the TCC, parent company shall not exercise its control in a way that would cause a loss for the subsidiary. The article stipulates some examples for the illegal use of the dominance. In this sense, a parent company shall not direct or force its subsidiary to;

  • carry out legal transactions such as the transfer of business, assets, funds, staff, debts and receivables;
  • decrease or transfer its profit;
  • implement restrictions over its assets with real or personal rights;
  • assume liabilities such as providing guarantee or surety;
  • make payments;
  • adopt decisions or take measures which affect its activities negatively such as avoiding the renovation of its facilities, limiting or suspending its investments without any reasonable ground;
  • refrain from taking measures that would ensure its development.

The above list is not numerous clausus, hence the cases of illegal use of dominance can be extended to other several acts and transactions. However, it is important to emphasize that the parent company shall be discharged from the liability for damages, if the loss of the subsidiary company is compensated within that financial year, or a right to claim of equivalent value is granted to the subsidiary no later than the end of that financial year, with a specific explanation of how and when such loss will be recovered.

i. Loss

The concept of "loss" that subsidiary company suffers should be interpreted differently from but also broadly so as to cover the concept of "damages". A decrease in the assets or preventing its increase, losing a business opportunity, having a detrimental effect on the subsidiary, losing a source of income or a chance to generate income shall be considered as "loss" as well.

ii. Settlement of Loss

The concept of "settlement of loss" according to the TCC is an actual recovery of a loss, which is incurred by the subsidiary as a result of the parent company's illegal use of dominance and control, by way of providing opportunities, rights or claims that are equivalent to the loss.

Such recovery should be made, whether as an actual settlement or entitlement of a claim, within the same financial year that the loss is incurred.

iii. Shareholders' right to file a lawsuit in case of subsidiary's loss

In the event that the parent company causes loss on the subsidiary due to the illegal use of its dominance and control, each shareholder of the subsidiary is entitled to claim for damages of the subsidiary against the parent company and its board members who caused the loss, if the loss has not been settled within the relevant financial year or if a right to claim of equivalent value to the loss has not been granted to the subsidiary until the end of that financial year.

The settlement of such dispute is subject to alternative remedies. Hence, instead of indemnification of losses, the judge may rule for the purchase of the claimant shareholder's shares by the parent company or decide on an alternative solution which is appropriate to the concerned case. The judge gives such ruling either ex officio or shareholders may ask for the sale of their shares to the parent company over their stock-exchange value at minimum. If such value does not exist, shareholders may ask for the sale of their shares at their real value or at a value determined with a generally acceptable principle or else they may also claim a solution acceptable and appropriate to the concerned case. If the parent company and the members of its board of directors are ruled to pay damages, such amount will be paid to the subsidiary rather than the claimant shareholders.

iv. Affiliation Report

Finally, it is worth to mention the obligation of the subsidiary company to prepare an affiliation report. Pursuant to Article 199/1, within the first quarter of the activity year, the board of directors of the subsidiary company shall prepare a report concerning its relations with the parent company and other subsidiaries. The transactions conducted, the losses and benefits incurred as a result of the transactions made within the corporate group, the decisions made and the measures taken or refrained from being taken with the guidance of the parent company and the settlements should be included into such report.

The conclusion part of the affiliation report should also be included into the annual activity report of the board of directors, so that all shareholders can be aware of the existing situation in the annual general meeting of shareholders. In its annual activity report, the board of directors shall explain the benefits and losses incurred by the (subsidiary) company and the settlement of losses, if any, considering all legal transactions and measures taken or refrained from being taken in such financial year. This report will play an important role in the abovementioned lawsuit that could be filed to claim the indemnification of losses.

As a final remark, it should be considered that, along with the civil liability, failure in preparing the affiliation report as required in the TCC would also cause criminal liability of the persons who are responsible for requesting the preparation of and/or preparing the report.

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.

4 December 2014

Illegal Use Of Dominance In Corporate Groups

Turkey Corporate/Commercial Law


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