As per Turkish law, joint-stock companies are defined under the Turkish Commercial Code No. 6102 ("TCC" or “Law”) as "companies with a fixed capital and divided into shares, which are only liable for their debts solely with their assets". The management and representation of such companies are carried out by the board of directors, which is a mandatory corporate body. The absence of a board of directors constitutes a ground for the automatic dissolution (infisah) of a joint-stock company. Accordingly, the duties and responsibilities of board members in managing and representing the company are of critical importance.
The relevant provisions of the TCC not only provide guidance to board members regarding their management and representation duties but also impose significant legal liabilities in the event of any breach. Additionally, the TCC explicitly sets out certain transactions that are prohibited for board members and any violation of these prohibitions results in personal liability for the board members.
A. Duties and Prohibited Transactions of Board Members
i. Management and Supervision Duty
The management and administration of joint-stock companies fall under the core responsibilities of the board of directors. In this context, board members are expected to perform a wide range of duties, including attending board meetings, participating in discussions, overseeing the company's operations, and staying informed about the company's activities. Board members are not only responsible for the management of the company but also for ensuring that the company's operations comply with applicable laws, regulations and its articles of association.
It is important to distinguish between the delegable and non-delegable duties of the board. While the board of directors may delegate certain duties such as representation, which are transferable, to one or more board members or to third parties, it must retain and perform its non-delegable duties, particularly those related to overall management and supervision, as explicitly set out under Article 375 of the TCC.
In the case of delegation:
- If the representation authority is delegated to one or more board members, these individuals are designated as executive members (murahhas üye). Executive members are authorised to act on behalf of the company within the scope of the authority granted to them
- If the representation authority is delegated to individuals outside the board, they are referred to as executive directors (murahhas müdür) and they assume responsibilities related to the representation and management of the company under the scope of the delegated authority.
Delegation of authority may be stipulated either in the company's articles of association or effected through an internal directive prepared by the board of directors. However, even in such cases, the overall management and supervision of the company, which are non-delegable, must be fulfilled by all board members.
ii. Duty of Care
Board members are subject to a duty of care in the performance of their roles and responsibilities in managing the company's affairs. This duty stems from the agency relationship between the board members and the company. As in agency agreements, the agent, in this case, the board member is obligated to carry out their duties with the due diligence and attention.
The standard for the duty of care (Article 369 of the TCC) is defined as "the care of a prudent manager." As explained in the legislative rationale, this standard is to be interpreted in line with the "business judgment rule". According to this principle, board members must act in a good faith, on an informed basis, and in a manner they reasonably believe to be in the best interests of the company. So long as a board member's actions meet this standard, they should not be held personally liable for the outcome of a business decision, even if it proves unsuccessful.
iii. Duty of Loyalty
The relationship between a joint-stock company and its board members is based on mutual trust, and accordingly, board members have a duty of loyalty towards both the company and its shareholders. This means that, board members must always act in the best interests of the company and avoid prioritizing their personal interests over those of the company or its stakeholders.
A critical extension of the duty of loyalty is the duty of confidentiality. Board members must maintain the confidentiality of any sensitive and proprietary information obtained in the course of their duties, including trade secrets and other business-critical data. They are prohibited from disclosing such information to third parties or using it for their own benefit or for the benefit of others, in violation of their fiduciary obligations.
iv. Prohibition on Borrowing from the Company
Board members (Article 395/2 of the TCC) are prohibited from borrowing funds from the company. This prohibition extends not only to board members themselves—regardless of whether they hold shares in the company—but also to certain relatives of shareholder board members, as specified in Article 393 of the TCC. These include their direct and indirect descendants, spouses, and relatives by blood or marriage up to the third degree. In line with this restriction, the company is also prohibited from providing guarantees, collateral, or assuming any obligations on behalf of such individuals. The purpose of this provision is to prevent the misuse of company assets and to protect the interests of shareholders and creditors.
v. Prohibition on Transactions with the Company
Board members are not permitted to enter into transactions with the company on their own behalf or on behalf of third parties (Article 395/1 of the TCC). Although this prohibition is explicitly stated in the law, it is not of a mandatory nature and may be waived. Specifically, such transactions may be permitted if (i) the general assembly grants prior approval or (ii) the articles of association of the company explicitly allow them. This prohibition also applies to executive directors (murahhas müdürler) and aims to prevent self - dealing and the abuse of authority by individuals in management positions.
vi. Prohibition on Competing with the Company
The prohibition on competing with the company prevents board members from engaging in any commercial activity either in their own name or on behalf of third parties that falls within the business scope of the company. Also, board members are prohibited from becoming partners with unlimited liability in another company operating in the same line of business. Similar to the prohibition on transactions with the company, the non-compete prohibition may be lifted with the express approval of the general assembly.
vii. Prohibition on Participation in Discussions
Board members are prohibited from participating in certain discussions (Article 393 of the TCC) or decision-making processes where they have a personal interest conflicting with that of the company. This prohibition also applies when the interests of the board member's relatives—specifically direct or indirect descendants, spouses, or relatives by blood or marriage up to the third degree—are involved.
This regulation is designed to prevent conflicts of interest and protect the company's competitive position.
B. Legal Liabilities of Board Members
The legal liability of board members is principally governed by Article 553 of the TCC, while additional liability provisions regarding specific situations are addressed in various other articles of the TCC.
i. General Liability under the TCC
Board members may be held liable for damages caused to the company, its shareholders, or its creditors as a result of any breach of their statutory or contractual obligations, provided such breach is attributable to their fault. The term "law" as used in this context is not limited to the TCC but also includes other applicable legislation, including but not limited to the the Banking Law, Capital Markets Law, and Tax Legislation. Accordingly, board members must ensure compliance with all regulatory frameworks.
However, for liability to arise, three cumulative elements must be present:
- A breach of the law or the articles of association,
- Fault attributable to the board member,
- Damage resulting from such breach.
In the event that the company, shareholders, or creditors suffer damage as a result of a negligent or wrongful act, board members may be held personally liable to the extent of their individual fault.
The Role of the Duty of Care
The duty of care (Article 369 of the TCC) plays a pivotal role in assessing board members' liability. If a board member has acted with the level of care expected from a prudent executive, and the decisions were made in line with the business judgment rule, no liability arises even if the company incurs a loss afterwards.
According to this principle, liability will generally not be imposed if the board member:
- Conducted appropriate due diligence,
- Obtained relevant information from competent sources,
- Made decisions in good faith aligned with the company's best interests,
In such cases, losses arising from unforeseen circumstances will not trigger personal liability.
Causal Link (Causal Connection)
Another critical element in establishing liability is the existence of a causal link (illiyet bağı) between the board member's action (or omission) and the damage incurred. In the absence of a direct and proximate causal connection, even if damage has occurred, liability does not arise. This ensures that board members are not held accountable for outcomes unrelated to their conduct.
Liability During Company Formation
Board members may also incur liability for actions taken during the incorporation phase of the company. From the moment of the company's formation, board members are expected to act in accordance with the law, the articles of association, and the principles of good faith and fiduciary integrity. Any deviation from these principles—whether during the company's establishment or throughout its operations—may result in personal liability.
Legal Liability Arising from the Delegation of Duties and Authorities of the Board of Directors
As previously stated under the section "Management and Supervision Duty", the board of directors may delegate certain duties and powers to one or more board members or third parties. In such cases, the legal validity of the delegation of authority and the liability of the board members must be carefully assessed.
For a delegation of authority to be valid, it must comply with the requirements set out under the TCC. Once a valid delegation is in place, board members are generally not held liable for the actions of the delegated party, provided that they have exercised due care and diligence in selecting the individual to whom the authority was delegated (Article 553 of the TCC). However, if board members fail to exercise the necessary care when selecting the person to whom duties and authority are delegated, the board members may still bear personal liability for any resulting damage.
ii. Specific Liability Cases Provided Under the TCC
In addition to general liability, the TCC foresees specific liability scenarios arising from the breach of statutory duties and prohibited transactions, as outlined in the section “Duties and Prohibited Transactions of Board Members.”
1. Legal Liability for Unlawful Documents and Declarations
Board members may be held liable if any documents or statements submitted during the incorporation of a joint-stock company, capital increases or decreases, mergers, demergers, or changes in legal form are found to be misleading, inaccurate, or non-compliant with legal requirements.
2. Legal Liability Arising from Misstatements About Capital and Knowledge of Insolvency
Board members are personally liable if they falsely declare that the company's capital has been subscribed or paid in, when in fact it has not, or if they are aware that capital contributors lack the financial capacity to fulfill their commitments but approve the process regardless.
3. Legal Liability for Corrupt or Inflated Valuations
The liability of board members arises if the in-kind capital contributions are intentionally overvalued, or if the actual condition of a business or asset being acquired is misrepresented. This applies particularly to valuation reports submitted during incorporation or capital increases involving in-kind contributions.
4. Legal Liability for Unlawful Fundraising from the Public
The concept of "raising funds from the public" is aligned with the public offering rules under the capital markets legislation. Any public fundraising activities that are not conducted in compliance with such rules are strictly prohibited and may result in civil and regulatory liability for board members.
5. Other Types of Specific Liability
Violations of the prohibited transactions outlined under “Duties of Board Members and Prohibited Transactions” may also result in direct liability:
- Transactions with the Company / Borrowing: Creditors may claim directly against board members or their relatives for amounts wrongly borrowed or owed to the company.
- Competing with the Company: Any benefits gained through unauthorized competition are presumed to belong to the company. Under Article 396 of the TCC, the company may claim both compensation and unjust enrichment.
- Participation in Conflicted Discussions: If a board member participates in decisions despite a clear conflict of interest, they may be held personally liable. Moreover, board members who knowingly permit such participation without objection may also be held jointly liable for any resulting damage to the company.
Conclusion
The legal liability of board members is of critical importance in corporate governance and accountability and can give rise to serious personal consequences in the event of non-compliance. As both general and specific liability provisions apply across various stages of a company's lifecycle—from incorporation to capital structuring and operational management—board members must approach their duties with a high level of vigilance, diligence, and legal awareness.
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.
