Determining the limits of the capacity to have rights and obligations of a joint-stock or limited liability company ("Company") is very crucial since it directly affects the validity of a transaction that a Company performs.
As per the former Commercial Code No. 6762, acts attempted by a Company that are beyond its scope and field of activity were legally deemed void (the "Ultra Vires Principle" or the "Principle"). In other words, the capacity to have rights and obligations of Companies were limited to their fields of activity, which are specified in their articles of association, as published in the Trade Registry Gazette of Turkey. This Principle led Companies to provide very detailed explanations as to their fields of activity in their articles of association and also in their trade names. Furthermore, an ultra vires transaction could not have been ratified by the board of directors or the shareholders of a Company even if they wished such transaction to be binding for the Company. As a result, none of the parties to the relevant transaction acquired any rights or incurred any debts.
The problem was that bona fide third parties would incur losses due to the Principle and it affected the reliability of transactions and markets.
This Principle has been abandoned with the new Turkish Commercial Code No. 6102 ("TCC"), which came into effect on July 1, 2012. This means that a transaction outside the scope and field of activity of a Company is deemed valid and binding for the parties to such transaction, as of the date of entry into force of the TCC. Hence, Companies' capacity to have rights and obligations is no longer limited to their scope and field of activity, as set forth in their articles of association.
Although in principle such a transaction shall bind the Company, in case it is proven by the Company that the third party was aware of the transaction being outside the scope and field of activity of the Company or that they were capable of being aware given the circumstances, the Company shall not be bound by and liable for the said transaction. It should be noted that announcement of the articles of association of a Company in the Trade Registry Gazette of Turkey shall not serve as sufficient evidence alone, to prove such knowledge of a third party, according to Article 371/2 of the TCC. This provision reflects the legislators' view that third parties are not obliged to know the limits of the scope and field of activity of Companies and that only the courts are entitled to make a judgment on this issue.
Article 371/2 of the TCC suggests that the new system protects bona fide third parties and places the burden of proof on the Company.
For example, purchase of a holiday resort by a Company operating in the mining sector could be deemed non-binding for such Company and the seller, since the said transaction is not at all related to the field of activity of the Company. Undoubtedly, the relevant court would evaluate the foregoing scenario in case a conflict arises between the parties and decide whether the Company is bound by such a purchase or not.
To sum up, following the entry into force of the TCC on July 1, 2012, Companies are entitled to enjoy all rights and assume all liabilities of their activities, regardless of whether those activities are listed in their articles of association, and transactions outside the scope and field of activity of Companies are deemed valid and binding for such Companies. The main aim of this reform is to protect the bona fide third parties. The only exception to this rule arises when a third party knew or should have known that the act was beyond the scope and field of activity of the Company. In such a case, the third party will not be protected by the TCC and its rights arising from such an act will not be enforceable under the law. However, the burden of proof regarding the knowledge of a third party with respect to the scope and field of activity of the Company falls on the Company.
* An act "beyond the powers".
This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in March 2017. A link to the full Legal Insight Quarterly may be found here.
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