I. General Information
The persons who have the responsibility to manage a company are obliged to explain and account for their managerial activities throughout the year to the general assembly of shareholders at the end of each fiscal year. Such persons are defined as members of the board of directors, executives, and auditors under the Turkish Commercial Code No. 6102 ("TCC"). This article aims to illustrate the rules and procedures regarding the release of the members of the board of directors.
The board of directors is responsible for the preparation of balance sheets and financial reports, as well as their submission to the general assembly of shareholders for approval. The approval of the balance sheet results in the release of the members of board of directors, unless indicated otherwise in the general assembly resolution. However, if the balance sheet is not properly provided to the general assembly or intentionally obscures the company's actual conditions, the approval does not result in a release.
Only the general assembly of shareholders is authorized and responsible for releasing the members of the board of directors and this duty is non-assignable. The general assembly may release the board of directors either wholly (i.e., as a group) or individually. Likewise, the general assembly may release the board of directors for specific points (e.g., such as release for a specific period of time of the accounting period).
By a duly-issued release resolution of the general assembly, all acts and transactions made by the members of the board of directors are approved. Accordingly, the company and the shareholders shall not subsequently claim any further compensation.
Once the release resolution is issued by the general assembly, it shall not be withdrawn by the general assembly. Shareholders who have acquired the shares of the company with full knowledge of the release resolution of the general assembly and who have approved the release, lose the right to initiate a lawsuit against the members of the board of directors before the courts. Other shareholders, who have not approved the release, have the right to initiate a lawsuit before the courts within 6 months as of the date of the release resolution.
II. Revocability of the Release Resolution
The law allows certain claims to be advanced regarding the revocability or invalidity of the release resolutions.
As the release resolution is issued by the general assembly, it shall be subject to the TCC provisions regarding the revocation of the general assembly resolutions. According to the relevant provisions of the TCC, the release resolutions can be revoked on the grounds of contradicting the law, the articles of association and the objective good faith principle. The revocation process must be set in motion by the persons stated under the TCC, by initiating a lawsuit at the commercial court of first instance where the headquarters of the company is located and within 3 months of the date of the general assembly resolution.
III. Invalidity of the Release Resolution
If the release resolution is based on intentionally missing or incorrect information in the balance sheets and financial reports, such resolution shall be deemed as invalid and shall not have any effect. The key element for proving an allegation of invalidity is whether or not the members of the board of directors acted intentionally in providing missing or false information during the preparation of company's balance sheets and financial reports. A lawsuit for the determination of invalidity of the release resolution may be initiated by anyone without any time limitation. However, it should be noted that not every missing and incorrect piece of information in the balance sheets or financial reports of the company would be sufficient to invalidate the release of the members of the board of directors.
On the other hand, it should be emphasized that there are no explicit provisions on how to prove the intentional acts of the members of the board of directors. The preparation of balance sheets and financial reports is one of the essential duties of the board of directors and the members of the board of directors shall comply with such duties. Otherwise, the contrary situation would cause the liability of the board of directors.
This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in June 2017. A link to the full Legal Insight Quarterly may be found here.
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.