A Q&A guide to corporate governance law in Turkey.
The main corporate entities most commonly used for business in Turkey are limited liability companies and joint stock companies (JSCs). Only JSCs may be publicly held.
A limited liability company is founded by at least two individuals or entities, up to the maximum of 50. The minimum capital requirement is TRL5,000 (as at 1 April 2011, US$1 was about TRL1.5) and the maximum term of the company is 99 years. Limited liability companies are managed by its partners or the appointed managers.
A JSC is founded by at least five shareholders. There is no upper limit on the founding shareholders. The minimum capital requirement is TRL50,000. JSCs are managed by the board of directors (board), composed of at least three directors.
The answers below relate mainly to JSCs.
The Turkish Commercial Code (Law N. 6762, 29 June 1956) (TCC) provides the regulatory framework for corporate governance and directors' duties. The TCC will be abolished by the new Turkish Commercial Code (Law N. 6102, 13 January 2011) (New TCC), which will become effective on 1 July 2012. The New TCC will introduce important new rules and concepts to the corporate governance principles in Turkey (see Question 37). As the New TCC will not be applicable until July 2012, this chapter is prepared in accordance with the TCC. References to certain crucial changes are provided.
In addition, publicly held JSCs are subject to the Capital Markets Law (Law N. 2499, 28 July 1981) (CML). Publicly held companies are companies whose shares have been offered to the public or which are considered to have been offered to the public. The shares of publicly held companies with more than 250 shareholders are considered to have been offered to the public and such companies are subject to the provisions applicable to publicly held companies (Article 11, CML). The Capital Market Board (CMB) is the regulatory body established under the CML.
What is the name of the code? What areas are covered by it (for example, board composition and committees, remuneration, audit and risk)?
How is the code structured (for example, a set of rules or principles and provisions)? What type of companies must comply with the code?
Is the code based on the comply or explain principle? How are companies required to report their application and compliance with the code (for example, in their annual report)?
What are the consequences of non-compliance with the code?
What has been the general response of companies, regulators and shareholder groups to the comply or explain approach? Has it been popular or controversial? Are there plans to reform it?
The CMB issued the first draft of the Corporate Governance Principles, based on the OECD's Corporate Governance Principles, on 4 July 2003. The CMB revised the Corporate Governance Principles in accordance with the OECD's revisions and amended the document on 7 February 2005.
The Corporate Governance Principles focus mainly on five issues:
Equal treatment of shareholders.
Function of the shareholders.
Public disclosure and transparency.
Obligations imposed on the board.
A corporate governance committee should be established to:
Monitor a company's compliance with the corporate governance principles.
Perform improvement studies and offer any suggestions to the board.
The said committee should also establish a transparent system for determination, evaluation, training and rewarding of the members of the board of directors and the management (Corporate Governance Principles).
The holders of preferred shares should not have the privilege to nominate the members of the board in a way that would distort a fair representation of the holders of publicly traded shares (Corporate Governance Principles). Practices that would hinder shareholders to freely transfer their shares should be avoided (Corporate Governance Principles).
The Corporate Governance Principles apply only to publicly held companies (see Question 1).
The Corporate Governance Principles adopt the comply or explain approach. Therefore, the Corporate Governance Principles are not binding and only provide recommendations of best practice. However, companies listed on the Istanbul Stock Exchange (ISE) must provide a report on the company's compliance with the Corporate Governance Principles in their annual reports (CMB decision N. 48/1588, 10 December 2004). The compliance report must contain the main sections set out in the CMB decision. An authorised rating agency's evaluation or a certain rate of compliance with the principles is not required.
Non-compliance with the obligation to prepare a report may be fined under the general provisions of the CML. For the year of 2011, the fine may range from TRL18,492 to TRL123,278 (Article 47, CML).
The general response to the Corporate Governance Principles is positive if not fully satisfactory. Most of the companies comply with the basic principles, such as concerning public disclosure and shareholders' rights.
Is there a unitary or two-tiered board structure?
Who manages a company and what name is given to these managers?
Who sits on the board(s)?
Do employees have a right to board representation?
Is there a minimum or maximum number of directors or members of the managerial and supervisory bodies?
Structure. In principle, there is a unitary board/management structure. However, in practice a JSC can establish a two-tiered board structure by introducing an executive board.
Management. The activities and transactions of a limited liability company are carried out by the partners or managers, who may be appointed from among partners and non-partners. Each partner has the authority to represent and bind the company acting together with the other partners, unless stated otherwise in the articles of association. However, the partners may also appoint a manager among partners or non-partners. If more than one manager is appointed, they work as a board of managers, constituting the managerial body of the company, unless they are granted individual representation rights by the partners.
A JSC company is managed by its board appointed by the general assembly of shareholders (general assembly). However, the board may also delegate the management to some of the board members or to an executive manager.
The directors of JSCs and partners or managers of limited liability companies are empowered and authorised to administer and represent the company in conformity with the articles of association and the decisions of the general assembly. They have the authority to resolve all matters relating to the company except for those reserved for the shareholders either by law or the articles of association.
Board members. In principle, there are no eligibility criteria applicable to directors/managers, except in certain types of company in the financial services sector such as banks, intermediary companies, real estate investment companies and so on. In addition, CML also requires certain companies to have independent board members, where independence is established by not being a related party and not receiving any revenue or income from the company. Members of the board of a JSC must be shareholders or representatives of the legal entity shareholders of the company.
Employees' representation. There is no regulation of employees' representation. It is not common for Turkish companies to have a member of the board that represents the employees. However, some companies opt to have employee committees that the management consults from time to time.
Number of directors or members. In JSCs, the board must have at least three members.
There are no age restrictions for directors/managers, except that they must have civil capacity (that is, they must be at least 18 years old and not incapacitated).
Currently, directors or managers are not required to be Turkish citizens or residents but the local presence of managers is certainly an advantage for the purposes of day-to-day representation and administration of the company. However, under the New TCC, at least one director of the company must be a Turkish citizen and must be residing in Turkey.
Are they recognised?
Does a part of the board have to consist of them? If so, what proportion?
Do non-executive or supervisory directors have to be independent of the company? If so, what is the test for independence or what makes a director not independent?
What is the scope of their duties and potential liability to the company, shareholders and third parties?
The board of directors may appoint certain of its members as executive directors, in which case the liability for the company management will be transferred to such executive director(s). In all other cases, the liability of board members is joint and several. The New TCC will introduce new liability rules, recognising supervisory and independent board members.
Currently, there is no requirement to appoint independent directors, other than in certain capital markets companies (see Question 3, Board members).
The roles of individual board members are not restricted, except that a board member cannot be the statutory auditor of the company. A director can be the chairman and the chief executive officer (CEO) of the company at the same time.
Directors can be appointed by a decision of the general assembly. In addition, should a vacancy occur on the board of a JSC, the board can appoint a new member with the prior approval of the general assembly. The articles of association of a JSC may provide that any member who has been appointed as the representative of a legal entity shareholder may be replaced by such shareholder on duly notifying the board.
Under Turkish Law, directors can be removed by a decision of the general assembly.
The maximum limit on a director's term of appointment is one year at the incorporation phase and three years after the expiration of the first year. Unless stated otherwise in the articles of association, the directors may be reappointed.
Directors of JSCs can be but do not have to be employees of the company. The managers of limited liability companies appointed from among non-shareholders must be employed by the company.
There is no requirement for companies to disclose to the shareholders the service contracts of any director who is also employed by the company.
Directors of JSC must own at least one share unless they are representatives of a legal entity shareholder. Managers of limited liability companies are not required to own shares in the company.
Directors' remuneration in JSCs must be determined by a decision of the general assembly. In limited liability companies, remuneration of directors is determined by a shareholders' resolution.
In JSCs companies, general assembly resolutions are registered with the relevant Trade Registry and published in the Trade Registry Gazette. Therefore, information on remuneration of directors is publicly available.
In limited liability companies, remuneration of managers does not have to be disclosed.
Remuneration of board members is determined by the general assembly. The minimum quorum for determining remuneration of the board members is the number of votes representing more than half of the capital present at the general assembly meeting.
The two principal sources of the regulation of a company's internal management are the:
Articles of association of the company.
The shareholders of a company can determine their own internal rules in the articles of association, provided these rules are consistent with the compulsory legal rules of the TCC.
The organisation of a board meeting and the convocation is effected by the chairman or the vice chairman. Unless stated otherwise in the articles of association, the notice of the board meetings does not have to be in any specific form.
The quorum for a board meeting is one member plus 50% of the total number of directors. The board may resolve with the affirmative votes of the simple majority of its members present at a duly convened meeting. Specific quorum and majority requirements for the board meeting may be provided in the articles of association. Proxies are not allowed but it is possible to pass a resolution in writing if all members waive their right to a formal meeting.
Directors can resolve all matters relating to the company except for those reserved for the shareholders either by law or the articles of association. The following matters fall within the exclusive authority of the general assembly and cannot be delegated to any other organ of the company (TCC):
Discharging and appointing the organs of the company (that is, the board and the statutory auditors).
Deciding on dissolution of the company.
Amending the articles of association.
Approving annual accounts.
Deciding on profit distribution.
Deciding on any changes to the share capital. However, in publicly held companies, if the company has accepted the registered capital system, the board can increase the issued capital up to the authorised capital limit.
The board decides on who has the power to sign on the company's behalf and this power of the board members must be registered and announced with the relevant Trade Registry (Article 323, TCC). Therefore, the power of certain board members may be restricted and this limitation is enforceable against third parties (Articles 319 and 321(II), TCC).
The board can delegate responsibility for specific issues to individual directors or a committee of directors. The board is not required to delegate any such responsibilities and even if it does delegate, the ultimate liability of the board remains intact (other than upon appointment of an executive director(s) (see Question 5)).
The following duties of directors are non-transferable and, therefore, the directors remain liable irrespective of the delegation:
Non-transferable duties and responsibilities under the TCC, such as:
keeping the company books;
preparing the balance sheet and profit and loss accounts;
calling the general assembly meetings;
initiating legal proceedings for the cancellation of shareholders' resolutions that are against the applicable laws or the articles of association;
requesting information about the company's business and operations from the managers;
certain tasks related to bond issues.
Non-transferable fiduciary duties and responsibilities, such as:
duty of care, diligence and prudence;
monitoring duty: directors must monitor the business and operations of the company and whether such operations are conducted in compliance with the law and the articles of association, and in a manner beneficial to the company;
management obligations: directors must participate in the activities regarding the management of the company. In particular, they must attend the board meetings, make proposals, express views and vote in such meetings, in accordance with the specific corporate governance structure employed by the company;
duty of loyalty: directors must be loyal towards the company while performing their duties. In essence, this duty is aimed at ensuring that directors act in the best interests of the company and make sure that the company's transactions are in compliance with the applicable laws and the articles of association.
In any event, the duties and responsibilities of the directors set out in law and the articles of association cannot be transferred to the managers and the directors will remain liable for such activities, even if delegated to a manager.
Theft and fraud.
Health and safety.
General duties. The directors are liable towards the company, its shareholders and its creditors, jointly and severally:
if the payments by the shareholders for the share certificates are incorrect;
for inaccuracy in the distribution of dividends (for example, if the dividends are distributed when there is no profit available, or if there is no general assembly resolution approving the distribution of dividends);
for failure to keep the statutory books of the company in an orderly manner;
for failure to take actions which were approved by the general assembly without any justified ground;
for failure to fulfil the duties and responsibilities imposed specifically as directors' primary duties by applicable laws (see Question 14) or the articles of association.
In addition, the directors have the following duties and responsibilities specifically stated in the TCC:
the first directors of the company must control whether any irregularity has been committed during the incorporation of the company (Article 308, TCC). If it is ascertained that the directors have acted negligently and that it is not possible to collect any compensation from the founders of the company to cover resulting losses, the directors will be jointly liable;
the director(s) who performed the transaction which is beyond the scope of their authority will be held liable for any resulting losses.
Directors are not responsible from losses caused by managers of the company. However, if the directors are informed of any activity of a manager which later leads to losses, the directors giving consent to this activity can be held liable for the losses (Article 346, TCC).
In transactions entailing joint and several liabilities of the directors, those directors who can prove that they are not at fault can recover reimbursement from the guilty directors. In addition, a director will be freed from liability if he (Article 338, TCC):
voted against the envisaged transaction, had his dissenting vote and opinion recorded in the minutes of the board meetings and immediately informed the internal auditors of the company of the situation in writing; or
could not participate in the particular board meeting by reason of a valid excuse. However, if a director does not attend the board meeting without any valid excuse, he will still be liable for the decision(s) taken at the meeting.
Theft and fraud. The relationship between the company and its directors is based on trust relationship and all directors are subject to the duty of loyalty towards the company (see Question 14). Theft and fraud are punishable under Articles 141 and 157 of the Turkish Criminal Code (Law N. 5237, 12 October 2004) respectively.
Directors who give materially misleading information regarding the company in their public declarations or in their reports or offers submitted to the general assembly, which causes losses to related persons, shall be sentenced to imprisonment of between six months and three years or a judicial penalty up to 1,000 (Article 164, Turkish Criminal Code).
In addition, any director who, in any manner whatsoever, deceives third persons in relation to the actual state of the company's affairs by delivering false statements will be liable for creating a wrong impression and will be personally liable for losses caused by his actions (Article 339, TCC).
Securities law. The directors are criminally liable for benefitting or eliminating a loss so as to compromise equal opportunity among the participants operating in capital markets with the aim of gaining benefit for himself or third parties by making use of non-publicly available information which will be able to affect the values of the capital market instruments.
Insolvency law. Persons with legal or de facto management authorisation in commercial companies subject to bankruptcy proceedings or composition of debts who deliberately cause losses to creditors by not paying the debts, may be sentenced to imprisonment ranging from six months to two years and judicial penalty up to 5,000 days following the complaint of the creditor concerned (Article 333(a), Bankruptcy and Enforcement Law (BEL)). If the mentioned crime is committed by negligence, the persons in breach may be sentenced to judicial penalty up to 2,000 days.
The penalty under this crime may be imposed on legal representatives, proxies, president or members of the board or auditors of the company who have committed the breach (Article 345, BEL).
Health and safety. As part of their duty of care (see Question 14), the board members must ensure that appropriate health and safety measures are adopted.
Environment. As part of their duty of care, the board members must ensure that appropriate environmental measures are adopted. All persons concerned are responsible for the environmental damage and must restrain it and take any other necessary measures (Article 8, Environmental Law (Law N. 2872, 11 August 1983)).
Anti-trust. Directors can be fined up to 10% of the fines imposed on a company that violates the procedural provisions of the Competition Law (Turkish Competition Law). The directors are not subject to fines for hard-core competition law infringements. However, if directors caused these infringements by their own initiative, the shareholders may hold them liable under the general company law provisions.
The competitors or the consumers can also initiate claims against a company that infringes competition law, in which triple damages may be awarded. Any compensation that the company has to pay can also be claimed from the directors that are responsible for the infringement.
Other. Directors may be subject to imprisonment ranging from 18 months to three years if they make fraudulent changes or arrangements in the company's books and records or open accounts in the name of fictitious persons (Article 359, Tax Procedural Law).
As legal representatives of a tax payer entity, directors may be held liable if they have not fulfilled their legal duties in relation to tax (Article 10, Tax Procedural Law).
Public receivables such as social security payments, which cannot be collected partially or wholly from the assets of a legal entity, will be collected from personal assets of the legal representatives of the legal entity concerned (Article 35, Law on the Procedure of Collection of Public Receivables). Enforcement proceedings for unpaid taxes by the company are brought at first against the company. If tax payments and public receivables cannot be collected from the company, a second enforcement proceeding is initiated against the legal representatives of the company for the collection of the outstanding amount.
The directors' liability cannot be transferred, except in the case of appointing an executive director or an executive directors committee.
The general liability of a director can be limited and/or restricted if his ability to make binding decisions on behalf of the company is removed by a decision of the board or the general assembly. Such limitations are not enforceable against bona fide third parties, except in the following circumstances:
If the representation authority of the directors is limited to the works of the head office or a specific branch of the company.
If the representation authority of the directors is limited to joint signatures of two or more directors, provided this limitation is registered and announced.
A company cannot indemnify its directors against their liabilities towards the company. However, a company can indemnify its directors against liabilities towards third parties, provided the directors act in accordance with the articles of association and the general assembly's decisions.
There is no explicit provision regarding insurance against personal liability. However, the New TCC provides for a non-mandatory insurance for directors.
The principle of lifting the corporate veil is accepted by Turkish jurisprudence, although only in exceptional circumstances. Under the TCC, every person must exercise his rights and fulfill his obligations in relation to the company according to the principles of good faith (Article 2). This provision is accepted as a ground for lifting the corporate veil. Therefore, shareholders may be held liable as de facto directors in exceptional circumstances.
Under the New TCC, the parent company can be liable for the actions of its subsidiaries.
Directors cannot, without the permission of the general assembly (Article 335, TCC):
Enter into any commercial transaction which falls within the scope of the activities of the JSC, whether on their account or on a third person's account.
Be partners with unlimited liability in any company engaged in commercial activities similar to those of the JSC.
The JSC can either:
Claim the damages from the director(s) who has infringed this provision.
Demand that the transaction be deemed to have been made on behalf of the JSC and that the benefits arising from this transaction accrue to the company.
Directors, other than the director(s) in breach, decide which option to use. However, the general assembly can waive this prohibition and such waivers are very common in Turkish companies.
Directors cannot, without the permission of the general assembly, enter into, directly or indirectly, a commercial transaction with the company in their name or on behalf of a third person (Article 334, TCC). If the director breaches this provision, the company can claim that the transaction is null and void. However, the general assembly can waive this prohibition and such waivers are very common in Turkish companies.
There is no restriction on the purchase or sale by a director of the shares and other securities of the company he is a director of. However in publicly held companies, at public offerings, the number of shares purchased by directors must be disclosed.
Publicly held companies must disclose to the public matters which may significantly affect the company's share price. Closed companies are not subject to any specific disclosure requirement. However, the shareholders have the right to obtain information in relation to the company's balance sheet and books in general assembly meetings. The board must also present an activity report at ordinary general assembly meetings.
Specific laws regulate certain industries such as financial services and electronic communications. These laws contain certain requirements relating to the disclosure to be made to the regulatory bodies.
The general assembly must hold an annual shareholders' meetings once a year. This meeting must be held within three months from the end of the accounting period (TCC). The agenda must include the following items:
Reading, discussion and approval or refusal of the balance sheet and the profit and loss statements for the fiscal year.
Reading, discussion and approval or refusal of the activity report of the board and the statutory auditor's report for the fiscal year.
Determination of remuneration to be paid to board members and auditors.
Appointment of new board members and auditors, if their term has expired.
Extraordinary general assembly may convene whenever the business of the company so requires.
Shareholders holding 10% of the share capital can apply to the board of stating their reasons to convene the general assembly. If the request is refused, the shareholders concerned can ask the auditors to convene the general assembly. If this request also remains unsatisfied, the shareholders can go to court.
The minority shareholder(s) holding 10% in limited liability companies or 5% in JSCs of the principal share capital (a lower figure can be accepted in the articles of association) have some special rights. In relation to company mismanagement, they have the following types of actions, among others:
Sue the board of directors even if the general assembly has not accepted to sue them.
Demand the appointment of a special auditor.
Submit complaints to the auditors. The auditors must analyse the situation and convene the general meeting if necessary. They may also demand to add a new topic to the agenda of next general meeting.
There are no formal requirements or guidelines relating to the internal control of business risks.
The board must keep the accounts and records of the company. The newly appointed directors must notify the internal auditors of the company of any unlawful actions of their predecessors of which they become aware. Otherwise, they can be held liable for such actions together with their predecessors.
Statutory auditors of JSCs must:
Investigate the books of the company at least every six months.
Make unannounced visits to the company at least every three months.
Inform the chairman of the board or the general assembly if they discover a disorder.
In publicly held JSCs, company's accounts must also be audited on a quarterly basis by an independent audit firm.
In relation to limited liability companies, a statutory auditor must be appointed only if the company has more than 20 shareholders.
In publicly held JSCs, the general assembly appoints the independent audit firms which audit the accounts.
Statutory auditors are appointed in the articles of association upon incorporation of the company and subsequently by the general assembly.
Both shareholders and non-shareholders can be statutory auditors. More than half of the auditors must be Turkish citizens. A statutory auditor cannot be a director of the company and cannot be employed by the company. Spouses, children, parents or relatives up to the third degree of a director cannot be elected as a statutory auditor. The statutory auditors do not have to have any qualifications and they do not need to be registered with any professional body.
The New TCC will abolish the statutory auditor system and will introduce independent professional auditors for all JSCs and limited liability companies.
A statutory auditor cannot be employed by the company. However, under TCC, a statutory auditor can freely enter into business transactions with the company.
Statutory auditors' liability is joint and several, unless they prove their innocence. Their liability cannot be limited or excluded.
It is not common for companies to report on social, environmental and ethical issues. However, many large companies report on these issues on their websites.
Turkish law does not recognise the office of the company secretary.
The institutional investors are very weak in Turkey. Private pension funds have been established very recently and represent only a small proportion of the investors in Turkey. Most of the institutional investors are foreign funds and they are not traditionally very active in enforcing corporate governance in Turkey. Therefore, there is no credible pressure from institutional investors to force the companies to comply with good corporate governance principles.
There is no statutory general protection for whistleblowers under Turkish law. However, in the field of anti-trust and tax laws, certain immunities are granted. In practice, whistleblowing is very rare.
The New TCC will introduce stricter corporate governance rules. The following are some of the changes:
Electronic voting at board meetings will be permitted.
Turkish Accounting Standards will be identical to the International Financial Reporting Standards (IFRS).
Disclosure of the audited accounts and the audit reports on the company's website will be mandatory.
Comprehensive disclosure of transactions with group companies will be required.
All companies will have to have a website disclosing the information prescribed.
Qualified. Istanbul Bar, 1999
Areas of practice. Mergers and acquisitions; private equity transactions; privatisations; capital markets; and anti-trust law in sectors including fast moving consumer goods (FMCG), manufacturing and telecommunications.