Several chambers of commerce throughout Turkey published a uniform announcement regarding dividend distributions on their websites, based on the information note of Turkish Union of Chambers and Commodity Exchanges dared April 1, 2020, numbered 34221550-045.02-3392, referring to the letter of the Ministry of Trade dated March 31, 2020 ("Announcement"). The Announcement informs companies to preserve their equities during the COVID-19 pandemic. As can be clearly understood from the Articles 408/II-d, 509/2, 519, 523 and 608 of the Turkish Commercial Code No. 6102 ("TCC"), dividend distribution is a matter that the general assembly of the company shall decide whether to distribute dividends by taking into consideration of interests of the company along with shareholders. In this respect, there were many arguments states that the advisory Announcement of the Ministry of Trade appears to arbitrary as to whether it has solid legal bases.
Nevertheless, the advisory Announcement was legalized with the addition of a provisional article to the TCC pursuant to Article 12 of the Law on Reducing the Effects of the Novel Coronavirus (COVID-19) Pandemic on Economic and Social Life and the Law on the Amendment of Certain Laws No. 7244 ("Law No. 7244") published in the Official Gazette No. 31102 and dated April 17, 2020.
II. What is regulated with the Law No. 7244?
The advisory Announcement emphasized on preserving the equity of the capital companies, except state-owned enterprises, due to Covid-19 outbreak and stated that capital companies shall not utilize profits from their previous financial years for dividend distributions and shall not distribute any profit that is more than 25% of their net profit for the 2019 financial year and shall not grant their boards of directors the authority to distribute advance dividends for General Assembly meetings for the 2019 financial year that will be held this year.
Pursuant to Article 12 of the Law No. 7244, the abovementioned Announcement was legalized as follows with the addition of a provisional article 13 to the TCC.
Accordingly, except for companies in which the state, special provincial administration, municipality, village or other public legal entity is a shareholder holding more than 50% of the shares of those companies, or companies in which a public fund owns 50% of the company, and the state owns 50% of the public fund, until September 30, 2020:
- a company cannot distribute dividends that are more than 25% of their net profit for the 2019 financial year;
- a company cannot distribute retained earnings and free reserve funds;
- a company's general assembly cannot grant its board of directors the authority to distribute advance dividends; and
- even if the general assembly adopted a dividend distribution resolution for the 2019 financial year before the enforcement of the Law, but the payment was not yet made or only partially made, companies must postpone dividend payments for more than 25% of their net profit for the 2019 financial year.
The President is authorized to extend and reduce the mentioned period for three (3) months. In addition, the Ministry of Trade is authorized to determine the exceptions on the provisional article added to the TCC, and the principles and procedures for the application of the limitation by consulting with the Ministry of Treasury and Finance.
III. What Is the Purpose of the Restriction Introduced by Provisional Article 13 of the added to the TCC by Law No. 7244?
As per the preamble of this amendment, the novel coronavirus (Covid-19) poses a serious threat to economic life as well as to public health and therefore, various precautionary programs have been implemented in order to eliminate the negative effects of the epidemic on economic activities. Since the economic impact of this pandemic has not been revealed clearly, decrease in companies' resources that resulted from cash dividend distributions; it was aimed to avoid companies' current equities; and to avoid any additional finance needs within the context of the prudence policy.
This provisional article 13 of the TCC regarding restriction of dividend distribution until September 30,2020 is a mandatory provision. If the General Assembly adopted a dividend distribution resolution against this provision, it is possible to mention cancellation and/or nullity of this decision.
Please also note that the right of filing a dissolution lawsuit of the Ministry of Trade may come into a question as per the Article 210 of the TCC. Pursuant to aforementioned Article, "the commercial companies that are determined to have been involved in transactions in violation of the public order or the subject of business or in preparations in this direction or fictitious business and activities, a lawsuit for dissolution could be brought in by the Ministry of Customs and Commerce within one (1) year from getting the knowledge of this type of transactions, preparations, or activities without prejudice to the provisions in the special laws".
Additionally, we would like to note that since dividend distribution resolutions are not subject to registration, independently of the Trade Registry practices, it is the board of directors and shareholders' responsibility to adopt resolutions complying with the law.
Having noted the foregoing, we advise the capital companies which are not under the scope of exception that if the general assembly adopted a dividend distribution resolution for the 2019 financial year before the Law No. 7244 passed, but the payment was not yet made or only partially made, companies should adopt a new resolution to postpone the payments regarding any dividend more than 25% of their net profit for the 2019 financial year until September 30, 2020.
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.