For companies, the requirement to prepare an annual activity report was first stipulated under the former Turkish Commercial Code No. 6762 ("Former TCC"). Even though a general definition was included in the Former TCC, Article 516 of the subsequent Turkish Commercial Code No. 6102 ("TCC") broadened the scope of the annual activity report and underlined its importance.
In this respect, Article 516/3 of the TCC granted the Ministry of Trade the authority to determine the minimum required content of the annual activity report. As a result, the Regulation on the Minimum Content of Annual Activity Reports of Companies, prepared by the Ministry of Trade, was published in the Official Gazette No. 28395, dated August 28, 2012 ("Regulation").
II. General Principles
Annual activity reports are prepared by the directors of the companies for each fiscal year, in order to describe and explain the past activities of the company in all aspects and to identify any possible risks, as per Article 3/1 (g) of the Regulation.
Pursuant to Article 1/2 of the Regulation, managing bodies of joint-stock companies, limited liability companies, limited partnerships divided into shares (i.e., the board of directors or the board of managers), and parent companies of group companies are obliged to prepare annual activity reports. The duty to prepare annual activity report is a nondelegable duty of the managing bodies of joint-stock and limited liability companies, as per Articles 375/1(f) and 625/l(f) of the TCC. Thus, the managing body is not allowed to authorize third parties to prepare the annual activity report. However, it is possible to get assistance from third parties.
When preparing the annual activity report, managing bodies are required to reflect the activities and financial status of the company accurately, fully directly, truthfully and honestly, as per Article 516/1 of the TCC. In addition, Article 4 of the Regulation also emphasizes the importance of avoiding terms or definitions that may be too complex and/or ambiguous, and of providing detailed explanations for ease of understanding of any technical terms used.
III. Preparation of the Annual Activity Report
Pursuant to Article 16 of the Regulation, the annual activity report should be prepared within 2 (two) months following the end of the relevant fiscal year, and it should include the minimum content stipulated under the Regulation.
a. Sections of the Annual Activity Report and the Required Minimum Content
According to Articles 7-14 of the Regulation, the sections and minimum content prescribed for the annual activity report are as follows:
i. General information: This section should identify the relevant fiscal year, set out the company's trade name and trade registry information, organizational, capital and shareholding structures and any changes thereof in the relevant fiscal period, any privileged shares and the related voting rights, the managing body and personnel, among others.
ii. Financial benefits provided to the managing body and executives: This section should include the relevant information regarding remuneration, salary, bonus, dividends, travel and accommodation expenses, insurance, etc., granted to the members of the managing body and to other senior executives.
iii. Research and development activities of the company: This section should include the research and development activities of the company and the results of such activities.
iv. Activities of the company and important developments: This section should comprise information regarding the investments made in the relevant fiscal year, internal control systems, internal audits and assessments of the company (including comments of the managing body regarding the same), subsidiaries of the company and its shareholding ratio in such companies, audits by public authorities or special auditors, lawsuits filed against the company that could affect its financial status and activities, any administrative or judicial fines imposed on the company or members of its managing body due to any acts in breach of law, any extraordinary general assembly meetings held in the relevant fiscal year, donations and disbursements made with respect to social responsibility projects, and other information pertaining to the transactions between group companies.
v. Financial status of the company: This section should include the managing body's analysis on the financial status of the company, the rate of actualization for the activities that had been planned for the period, the details of the company's sales, efficiency, capacity to generate revenue, profitability, debt-to- equity ratio, in comparison with previous years, a determination as to whether the company is insolvent and any measures to be taken in such case, dividend distribution policy, among others.
vi. Risks and assessment of the management body: This section should contain information on risk management policies of the company for any risks that can be foreseen, work and report of the early identification and management of the risks committee, if any, the prospective risks regarding sales, efficiency, revenue generation capacity, profitability, and the debt-to-equity ratio.
vii. Other issues: This section should set forth any event that occurs after the end of the relevant fiscal year which could materially affect the rights of the shareholders, creditors, other relevant persons and institutions, as well as any information deemed appropriate by the managing body.
In the event that it is a parent company that is preparing the annual activity report, the managing body will include the following additional information in the annual activity report, as per Article 15 of the Regulation:
i. Information regarding the companies, where the parent company directly or indirectly owns shares representing 5%, 10%, 20%, 25%, 33%, 50%, 67% or 100% of the capital, or if its shares fall under such percentages, including explanation regarding the reasons for such decrease,
ii. Information regarding the shares that the enterprises in the group hold in the share capital of the parent company,
iii. Explanation regarding internal audit and risk management systems of the group, with respect to preparation of the consolidated financial tables,
iv. If requested by a board member, final part of the report stipulated under Article 199/4 of the TCC.
b. Signing and presentation of the Annual Activity Report
Following completion of the annual activity report, the chairman of the board of directors and all board members will approve the annual activity report by signing it. Any board members who disagree with the content should include their objections in the annual activity report along with their reasoning, as per Article 16 of the Regulation.
Moreover, if the company is subject to independent audit, the independent auditor is required to review the annual activity report in terms of its consistency with the financial tables, and as to whether it is realistic in accordance with Articles 397/1 and 402/2 of the TCC. In such cases, if an independent auditor does not review the annual activity report, such report will be deemed nonexistent, as if it had never been drafted, as per Article 397/2 of the TCC.
Once the annual activity report has been signed and approved, it should be made available in the headquarters and branches of the company, at least 15 (fifteen) days before the general assembly meeting to be held pursuant to Article 437 of the TCC, in order to enable the shareholders to review the annual activity report. Finally, the annual activity report should be discussed between the shareholders in the general assembly meeting in accordance with Article 409/1 of the TCC.
The annual activity report is a significant source of information for the shareholders of a company, since it provides detailed information regarding its financial status and activities. For this reason, the managing body should exercise the utmost care when preparing the annual activity report and ensure that it properly and accurately reflects the actual status of the company.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in March 2020. A link to the full Legal Insight Quarterly may be found here
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