The Business Judgment Rule In Turkish Law And Its Application Within Corporate Groups

Introduction

Business decisions inevitably involve a degree of risk. Expecting directors to be error-free is unrealistic; as taking informed risks often serves the company's interest. The business judgment rule, originating in Anglo-American law and later adopted in German and Swiss practice, limits directors' liability for decisions made in good faith, on an informed basis, and in the company's best interest (Smith v. Van Gorkom, Del. 1985). The rule serves as a liability-limiting mechanism that preserves managerial discretion and encourages entrepreneurial decision-making.

Core Elements of the Rule

For the business judgment rule to apply, several conditions must be met:

1. Existence of a business decision: A conscious and deliberate decision must have been made by the board of directors regarding company operations. Mere inaction or passivity falls outside the rule's scope.
2. No violation of mandatory provisions: The rule cannot protect directors where no discretion exists, such as breaches of law or the articles of association.
3. Decision based on adequate information: Directors must investigate and act on reliable data. The required depth of inquiry depends on the transaction's importance (Cede & Co. v. Technicolor Inc., Del. 1993; Siemens/Nold, BGH 2014).
4. Pursuit of corporate interest and independence: Directors must act in the company's long-term interests rather than for personal or third-party benefit.
5. Good faith and rationality: Decisions must be reasonable, rational, and made in good faith. Absent bad faith or arbitrariness, court should not subject the economic outcome of the decision to judicial review (Brehm v. Eisner, Del. 2000).

When these criteria are met, directors are not liable even if the company suffers loss as a result of their decisions, safeguarding their freedom to take informed risks within the limits of the duty of care.

Comparative Law Perspective

In the United States, the business judgment rule has evolved through case law since the 19th century (Percy v. Millaudon, 1829). Delaware courts grant directors broad protection, imposing liability only in cases of clear illegality or bad faith (Aronson v. Lewis, Del. 1984). This approach promotes reasonable risk-taking and limits judicial interference.

In Germany, the rule was codified through the 2005 UMAG reform following the ARAG/Garmenbeck decision (1997). Section 93 of the Stock Corporation Act provides that directors are not liable if a decision is based on adequate information and the company's interests.

In Switzerland, although there is no statutory provision, the prevailing view in doctrine and certain Federal Supreme Court decisions support the applicability of the rule.

In Turkey, the rule is not expressly codified; however, Article 369 of the Turkish Commercial Code (TCC) and its reasoning, supported by Articles 553/3, reflect similar principles. Article 369 requires directors to act in the company's interest and with the care of a prudent manager. Its reasoning clarifies that directors who decide after adequate inquiry and consultation cannot be considered negligent merely because results are unfavorable. Turkish Court of Cassation decisions (HGK, E. 2010/272, K. 2010/276, 02.06.2010; HGK, E. 2010/32, K. 2010/104, 24.02.2010) have also begun to apply similar reasoning under the notion of "business decision" (işletmesel karar).

Application within Corporate Groups

Corporate groups raise the most complex questions for the rule's application. Subsidiary directors often balance their own company's interests with those of the parent, challenging independence and impartiality.

Subsidiary company directors may rely on the business judgment rule only if they act for the subsidiary's benefit. Prioritizing the parent's interests over the subsidiary's invalidates the defense (Kahn v. Lynch Communication Systems Inc., Del. 1994).

However, Article 203 TCC provides an exception for wholly owned subsidiaries. Where a parent holds 100% of a subsidiary's shares and voting rights, the subsidiary's management bodies must comply with parent instructions, even if such instructions may cause loss, provided they reflect the group's established policies. In this case, directors' exemption from liability derives not from the business judgment rule but from statute.

Parent company directors may rely on the rule under Article 202/1(d) TCC, which removes liability for loss suffered by a subsidiary as a result of the parent company's direction, if a prudent and independent director of another company could reasonably have made the same decision. Nevertheless, this protection is not absolute. If the parent grants financial support to a subsidiary without adequate information or risk assessment and the loan is not repaid, directors cannot invoke the rule. By contrast, the exception set out in Article 203 of the TCC also applies to the board members of a parent company that directly or indirectly holds all shares and voting rights of the subsidiary.

Burden of Proof

The allocation of the burden of proof varies across jurisdictions. Under Turkish law, directors must demonstrate that their decisions were informed, reasonable, and made in good faith. However, Article 202/1(d) of the Turkish Commercial Code partially limits the liability of parent company directors by specifying that they are not liable if they can prove that the transaction causing the subsidiary's loss could also have been undertaken by a prudent and independent director under similar circumstances.

In U.S. law, there is a presumption that directors acted with due care, and the claimant must prove otherwise (Weinberger v. UOP Inc., Del. 1983). In German law, no such presumption exists, and directors must demonstrate the reasonableness of their decisions.

Functions of the Rule

The business judgment rule serves three main purposes:

1. Encouraging competent directors: Fear of liability may deter qualified individuals from management roles. The rule protects diligent and well-intentioned managers, promoting professional oversight (In re Walt Disney Co. Derivative Litigation, Del. 2006).
2. Facilitating risk-taking: It enables directors to take reasonable, informed risks essential to business success.
3. Limiting judicial interference: It prevents courts from substituting their judgment for that of corporate managers, preserving autonomy and market efficiency.

Conclusion

In Turkish law, the business judgment rule is not a directly applicable norm. However, Articles 369, 553/3, and 202/1(d) TCC reflect its rationale by protecting directors acting in good faith and on an informed basis. Accordingly, the rule functions not as an independent legal doctrine but as an interpretative principle defining the boundaries of the duty of care. It thus guides courts in balancing managerial accountability with entrepreneurial freedom and embeds a culture of informed risk-taking within a coherent legal framework.

References:

1. Efe Dündar, The Business Judgment Rule from a Corporate Governance Perspective, TBB Journal, 2024.
2. Begüm Yiğit, The Business Judgment Rule in Corporate Groups, 2023.
3. Kürşat Göktürk, The Business Judgment Rule in American, German, Swiss and Turkish Law, İnönü University Law Review, Vol.2, No.2, 2011.
4. Semih Sırrı Özdemir, Business Judgment Rule and Applicability in Turkish Law , On İki Levha Publishing, 2017
5. Sevgi Bozkurt Yaşar, Application of the Business Judgment Rule in Joint-Stock Companies, 2014

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.