The rules and procedures regarding corporate governance principles and related-party transactions for public companies are set forth in the Capital Markets Board's ("CMB") Communiqué on Corporate Governance numbered II-17.1 ("Communiqué")1.

A. Corporate Governance Principles for Public Companies in Turkey

Within the scope of the Communiqué, the following are the essential obligations that public companies must comply with after a public offering:

  1. appointment of independent board members;
  2. establishment of the required committees;
  3. establishment of an investor relations department to ensure communication between investors and the company;
  4. publication of compliance reports on corporate governance principles.

In the Communiqué, corporate governance principles are regulated under four main headings: shareholders; public disclosure and transparency; stakeholders; and board of directors. Some of the corporate governance principles are mandatory whereas rest of the principles as listed in the Communique are not.

In the Communiqué, corporate governance principles are regulated under four main headings: shareholders; public disclosure and transparency; stakeholders; and board of directors. Some of the corporate governance principles are mandatory whereas rest of the principles as listed in the Communique are not.

  1. Structure of the board of directors:
    • the board of directors must consist of at least five members;
    • the majority of the members must not have any executive duty in the company other than being a member of the board of directors and must not interfere with the company's ordinary activities;
    • the number of independent board members must not be less than one-third of the total number of members of the board of directors2;
    • in any case, the number of independent board members must not be less than two.

The Communiqué also includes details regarding the qualification of the independent member to be appointed to the board of directors.

  1. Committees:

An audit committee, early detection of risk committee, corporate governance committee, nomination committee and compensation committee, each of which must have (i) at least two members, and (ii) an independent board member as the chairman, must be established within the board of directors3.

01. Implementation of corporate governance principles

Public companies are categorised into three groups as described below, according to their market values and the market value of shares in free float and according to which they may be exempt from some of the mandatory corporate governance principles:

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The CMB identifies to which group public companies belongs and announces this through its bulletins.

Companies that plan to offer shares in an initial public offering are in the third group until the CMB announces the groups of companies. Companies are obliged to comply with the mandatory corporate governance principles as of the date of the first general assembly to be held after its shares start trading on the stock exchange.

02. on-compliance with corporate governance principles

The CMB is authorised to make decisions and directly carry out the relevant procedures in case of non-compliance with mandatory corporate governance principles. In this regard, if a company does not comply with corporate governance principles, the CMB may:

  • request an interim injunction for the determination or cancellation of the non-compliance; or file a lawsuit;
  • directly appoint the necessary number of independent board members, if the board of directors or the general assembly do not take the required actions to ensure compliance with mandatory corporate governance principles.

03. Prohibition of collateral, pledge, mortgage and sureties

According to the Communiqué, it is prohibited for a public company or its subsidiaries to give collaterals, pledges, mortgages or sureties in favour of third parties, with the following exceptions:

  • collaterals, pledges, mortgages and sureties granted in favour of its own legal entity or corporations that are fully consolidated in its financial statements;
  • collaterals, pledges, mortgages and sureties granted in favour of third parties for the purpose of conducting its own ordinary commercial activities;
  •  collaterals, pledges, mortgages and sureties granted in favour of subsidiaries and business partners in which there is a direct capital contribution by the company, in the proportion of the directly contributed capital

In addition, the approval of the majority of independent members is required in the board of directors' resolution to grant collaterals, pledges, mortgages and sureties in favour of other third parties for the purpose of carrying out the public company's ordinary business activities.

B. Related-party transactions

Within the scope of the Communiqué, in the case of transactions that are (i) similar to the purchase of assets and services, (ii) obligation transfers, and (iii) similar to the sale of assets and services to be carried out by public companies and their subsidiaries with related parties, if the ratio of the transaction amount to the total asset or the amount of revenue or the value of the company is more than 5% according to the latest publicly disclosed financial statements, a board of directors' resolution determining the principles of the transaction is required before undertaking such a transaction.

If the above-mentioned ratio exceeds more than 10%, the approval of the independent members' majority is required in the board of directors' resolution.

In addition, (i) the scope of common and continuous transactions between a public company and its subsidiaries and their related parties; and (ii) the conditions related to these transactions are required to be decided by the board of directors with a resolution. Common and continuous transactions are defined as a public company's transactions having the same qualification and that is made or will be made at least twice in a yearly accounting period, within the scope of ordinary activities. In cases where it is foreseen that the ratio of a common and continuous transaction (i) to the cost of sales in a purchase transaction, or (ii) to the revenues in a sale transaction in the latest annual financial statements will exceed 10%, the board of directors, in addition to a resolution, must issue a report and publish it on the Public Disclosure Platform.

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Footnotes

1. Public companies that do not trade shares on the stock exchange are exempt from the corporate governance principles stipulated in the Communiqué.

2. According to the Communiqué, having two independent board members is sufficient for companies that are going public for the first time

3. If a separate nomination committee and compensation committee cannot be established due to the structure of the board of directors, the corporate governance committee shall assume the duties of these committees as well.

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.