Turkey: Establishment Of Joint Stock Companies And Limited Liability Companies In The New Turkish Commercial Code

I. Introduction

The new Turkish Commercial Code ("NTCC") No. 6102 shall enter into force as of July 01, 2012. In parallel with the harmonization process of Turkish Law with acquis communautaire, the NTCC has significantly changed the existing system and replaced the outdated provisions of the current Turkish Commercial Code ("TCC") with practical ones. As one of the aims of the NTCC is to boost investment, advanced provisions regarding the establishment of the companies have been introduced. In this article, brief information on the establishment of Joint Stock Companies ("JSCs") and Limited Liability Companies ("LLCs") in the NTCC is provided.

II. Provisions regarding the Establishment

It is specified in the preamble that the NTCC aims to minimize the differences between publicly-held and non-public JSCs. In this respect, contrary to the TCC, Article 332/1 of the NTCC allows non-public JSCs to be established with registered capital. Therefore, both private and public JSCs may adopt registered capital system. This system makes it easier to increase capital up to the registered capital limit, as it can be performed by the Board of Directors ("BoD") and the onerous procedure of holding a general assembly meeting is not necessary. In addition, the minimum capital requirement has remained same as TRY 50.000 for JSCs; however, it has been determined as TRY 100.000 for non-public JSCs which adopted the registered capital system. As specified in Article 580, the NTCC has also changed the minimum capital requirement of LLCs by increasing the minimum capital from TRY 5.000 to TRY 10.000. It is required in Article 585 that the capital in cash must be fully paid upon establishment.

The incorporation documents are set forth in Article 336. These documents are (i) articles of association ("AoA"), (ii) incorporators' statement, (iii) valuation reports, (iv) transaction auditor's report, and (v) the agreements, executed related to the incorporation of the company concluded by and between the incorporators, the new company, and with other persons related to the new company or take overs during incorporation. All the mentioned documents shall be placed in the registration file and the company is required to keep the copies of these documents for a period of 5 years. It is indicated in the preamble that the promotion of transparency and the prevention of secret agreements are the main purposes of this provision. For LLCs; the NTCC has made a distinction between mandatory and arbitrary entries indicated in the AoA. On the one hand, the mandatory entries which must be clearly specified in the AoA are laid down in Article 576. Article 577, on the other, determines the arbitrary entries and introduces a new system. It is on the incorporators' discretion whether or not to specify the arbitrary entries in the AoA; however, these entries shall be binding on condition that they are specified in the AoA.

Article 338/1 has introduced a significant change: JSCs may be established by one shareholder, differently from the TCC which requires at least 5 shareholders. This novelty introduces many advantages. For instance, small and medium sized enterprises do not need to bear unlimited liability. Moreover, the entities or foreign investors do not need to enter mandatory partnerships to establish a JSC. It is indicated in the preamble that, among others, this type of organization is an effective way for institutionalization and also saves the family businesses from failing. In order to increase transparency and reliability, Article 338/2 provides some notification requirements in case the company is established by one shareholder or all the shares are gathered in one shareholder. The situation is regulated in a similar manner for LLCs. Article 573 states that an LLC may be established by a single partner, unlike the TCC which requires at least 2 partners. It is also required in Article 574/2 that, in case the number of partners drops to one, the managers are obliged to register and announce the situation. Otherwise, they shall be liable for damages to be imposed. They shall fulfill the same obligation where the company is established by a single partner.

Moreover, the assets that can be contributed as capital in kind have been expanded. Pursuant to Article 342, intellectual property rights and virtual environments can be contributed as capital in kind. According to the preamble, the term of "intellectual property" is to be construed in a broad sense to include, among others, literary and artistic works, trade names, designs, patents and geographical signs. Web sites and domain names are also qualified. It is also specified in the article that (i) there must be no restricted real right, attachment or measure on the assets, (ii) they must be appraisable and transferable and (iii) service performances, personal labor, commercial reputation and undue receivables cannot be contributed as capital in kind. In addition, Article 343 states that the assets subject to capital in kind shall be appraised by the experts appointed by the commercial court of the first instance. Furthermore, it is stipulated in Article 344 that minimum 25% of the nominal value of the shares subscribed in cash must be paid before registration and the remaining shall be paid within 24 months from the registration.

The gradual incorporation, which has been rarely applied in practice, has been abolished. The NTCC has replaced this impractical mechanism with public incorporation. In this sense, Article 346 provides a simple and applicable method. Shortly, it is prescribed in the AoA that certain amount of shares subscribed in cash shall be offered to public by one or more subscribers within 2 months following the registration. In this situation, the subscribers do not need to pay the price of these shares to the bank, as they shall be paid from the income earned from the sale. The full price of the shares not sold within the specified period and 25% of the shares not offered to public within the specified period shall be paid by the subscriber within 3 days following the two months period. The public offering procedure is performed in conformity with the capital market legislation.

The NTCC has introduced the concept of transaction auditor and separated it from the auditor. On the one hand, the auditor is entrusted with auditing financial statements and annual reports. Transaction auditor, on the other hand, is an independent audit firm, sworn financial adviser or independent accounting financial adviser who audits certain transactions such as incorporation, capital increase and merger. In this sense, Article 351 requires the JSCs to obtain an audit report from a transaction auditor regarding the establishment of the company. In this report, the transaction auditor declares, among others, that all shares have been subscribed and that the minimum amount of the shares prescribed in law or in the AoA has been deposited into the bank. The main purpose of this report is to determine whether there is any kind of abuse. As stated above, this report is one of the incorporation documents.

The NTCC has introduced a provision in parallel with Articles 11 and 12 of the First Council Directive 68/151/EEC¹. Pursuant to Article 353, a JSC cannot be declared null and void. However, if the interests of the creditors, shareholders or public are significantly endangered or violated through unlawful actions during the incorporation of the company; upon the request of the (i) BoD, (ii) Ministry of Industry and Commerce, (iii) the creditor or shareholder in question, the nullity of the company can be ordered by the commercial court of first instance located at the company's registered office. The action must be filed within three months from the registration and announcement of the company.

III. Related Issues

Article 125/2 states that "commercial companies are entitled to enjoy all rights and undertake all obligations within the scope of Article 48 of Turkish Civil Code." Article 48 is as follows: "The legal entities are entitled to use all rights vested upon and the capacity to undertake all kinds of obligations other than the characteristics related to real persons such as sex, age, kinship etc." In this respect, the NTCC has annulled the ultra vires principle in order to provide legal protection to the third parties. Therefore, the companies shall be liable for their transactions even if such transaction does not fall within the company's scope of activities. However, the provision in the company's AoA which determines the scope of activity will still be important, as the NTCC provides special provisions regarding this matter. For instance, pursuant to Article 371/1, the authorized representative who exceeds his authority shall be liable to the company.

As the promotion of transparency is another focus of the NTCC, all companies are obliged to have a web site. According to Article 1524, the web site must be open to everyone and contain all necessary data including financial statements, declarations, and audit reports. Noncompliance with this obligation will not only cause the cancellation of the relevant decision, but may also give rise to legal and criminal liability of the BoD members and executives.

IV. Conclusion

The NTCC has simplified and modernized the establishment procedures of the companies. In this sense, it allows non-public JSCs to be established with registered capital, aims to promote transparency during incorporation, allows companies to be established by a single shareholder/partner, expands the assets that can be contributed as capital in kind and introduces new concepts such as transaction auditor.

Footnote

^{1. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31968L0151:EN:HTML}

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