The Turkish Commercial Code No. 6102 has founded the incorporation of joint stock companies on the principle of a declaration of intention. The document in which that intention is committed to writing and rendered legally recognisable is the articles of association. Drawn up by the founders and embodying their common intention to form a company, this text must, as the Code requires, contain certain elements without fail. Formal rules governing how the text is to be drawn up have also been laid down for joint stock companies.
The preamble to the Turkish Commercial Code No. 6102 describes the articles of association as the "constitution of the company". The analogy is apt; this is the text that forms the legal basis of the transactions concerning the company. All of the fundamental headings — such as the principles on which the company is to be managed, the position of the shareholders and the capital structure — are settled in this document.
Below we address, in turn, the formal requirements of the articles of association, their mandatory elements, the consequences of the absence of those elements, the limits of optional provisions, the registration process and the quorums for amendment.
What Are the Articles of Association?
The articles of association of a joint stock company are an agreement that contains the mandatory elements laid down in the Turkish Commercial Code No. 6102, in which the founders set out their intention to form a company, and which is drawn up in accordance with the formal requirements imposed by the Code.
The most fundamental step to be taken on the incorporation of a company is the preparation of this text. Since the articles of association bind both the board of directors and the shareholders, they must be drafted with care. For a detailed examination of the stages of incorporation, our study entitled "The Incorporation of Joint Stock Companies" may be consulted.
The Formal Requirements of the Articles of Association
Under Article 339 of the Turkish Commercial Code No. 6102, the articles of association must be drawn up in writing and the signatures of all the founders must be certified by a notary. The Code recognises a second route for satisfying this requirement: signature of the text in the presence of the trade registry director or deputy director.
The purpose of the provision is a practical one: by preventing the founders from subsequently denying their signatures, it seeks to avoid the operations of a company that has commenced business being disrupted and commercial life being adversely affected.
Elements That Must Appear in the Articles of Association
The legislation requires the articles of association to contain certain elements without fail. The legislature’s reason for making these mandatory is to forestall disputes that may arise in the future and to ensure that the activities of the company are carried on within a foreseeable framework.
The mandatory elements that must appear in the articles of association are the following:
- The trade name of the company and the place where its headquarters is to be situated
- The business purpose, set out in defined terms with its essential points indicated
- The amount of the capital, the nominal value of each share and the form and conditions in which those amounts are to be paid
- Whether the share certificates are to be issued in registered or bearer form, the privileges to be attached to particular shares and the restrictions relating to transfer
- The rights and assets in kind contributed as capital other than cash and the values placed on them; the number of shares to be issued in return; where a business or an asset in kind is to be taken over, the price of the same; the prices of the goods and rights purchased by the founders for the account of the company; and the amount of the fee, allowance or reward to be paid to those who render services on incorporation
- The benefits to be conferred out of the profits of the company on the founders, the members of the board of directors and other persons
- The number of members of which the board of directors is to consist and which of those members are to be authorised to sign on behalf of the company
- The procedure for convening the general assembly and the voting rights
- Where the activity of the company is limited to a fixed term, that term
- The method by which announcements relating to the company are to be made
- The types and amounts of the capital shares subscribed for by the shareholders
- The accounting period of the company
- The members who are to form the first board of directors
Where a Mandatory Element Is Missing
All of the items listed above are elements that must be present in the articles of association. Should even one of them fail to appear in the text, it will not be possible for the company to be lawfully incorporated.
In such a case the registry director returns the text to its founders so that the deficiencies may be remedied or a correction made. So long as the text has not been registered by the Trade Registry, the company will not acquire legal personality and will accordingly be unable to carry on commercial activity.
Optional Elements That May Be Included in the Articles of Association
The Turkish Commercial Code No. 6102 does not give the founders the power to determine the content of the articles of association freely. The founders may not, relying on the principle of freedom of contract, carry into the text whatever matters they wish. Under the statutory provision, departure from the Code on matters covered by the articles of association is possible only in the cases in which the Turkish Commercial Code No. 6102 expressly permits it.
This structure shows that the provisions relating to joint stock companies are as a rule mandatory in character; departure from them depends on an express possibility being afforded by the Code.
By way of example: Art. 411 of the Turkish Commercial Code No. 6102 provides that minority shareholders holding one tenth of the capital may request the board of directors to convene the general assembly. The remainder of the article states that this right may also be conferred by the articles of association on shareholders holding fewer shares. The flexibility thus afforded by the Code is an example of the cases in which mandatory provisions may be departed from.
In the same way, a provision may also be inserted into the articles of association raising the voting quorums for their amendment.
Beyond these, even where the Code affords no express permission, if departure from the statutory provision may be regarded as appropriate having regard to the principle of equity or to the balance of interests, a provision differing from the statutory rule may be inserted into the articles of association.
Registration and Announcement
Once the articles of association have been prepared so as to contain the mandatory elements explained above and to satisfy the necessary formal requirements, they are registered with the Trade Registry of the place where the company’s headquarters is situated. Following registration, the text is announced by publication in the Trade Registry Gazette.
Since, as the Code requires, the company acquires legal personality at the moment the articles of association are registered, it becomes able to carry on commercial activity only upon the completion of this stage.
Amendment of the Articles of Association
Amendment of the articles of association depends on a decision being taken by a majority of the votes present at a general assembly at which at least half of the capital is represented. The quorums required here may be raised by the articles of association; they may not, by contrast, be lowered.
Where the prescribed quorum is not attained at the first meeting, a second meeting may be held within a period not exceeding one month. The quorum required at that second meeting has been set at one third of the capital.
The Code also prescribes heavier quorums according to the subject matter of the amendment. Decisions to amend the articles of association concerning the following matters must be taken unanimously by the holders, or the representatives of the holders, of the shares constituting the whole of the capital:
- Decisions to move the headquarters of the company abroad
- Decisions imposing obligations or secondary obligations for the purpose of covering balance-sheet losses
For certain amendments the affirmative vote of the holders of the shares or of their representatives is required, the threshold being taken here as at least seventy-five per cent of the capital. The decisions falling within this scope are the following:
- Imposing a restriction on the transfer of registered shares
- Creating privileged shares
- Changing the business purpose in its entirety
As will be seen, rather than making amendments to the articles of association subject to a single quorum, the legislature has adopted a graduated system. The aim is to provide protection proportionate to the weight that the matter being amended carries for the shareholders. For a detailed examination of the subject, our study entitled "Amendment of the Articles of Association of a Joint Stock Company" may be consulted.
Independent Legal Assessment
In practice articles of association are often prepared from standard templates, without regard to the company’s actual shareholding structure or to the balance between the shareholders. Although that choice lends speed to incorporation, it may give rise to serious costs later on; for the subsequent addition of protective arrangements such as aggravated quorums, privileges or transfer restrictions depends on the consent of the other side. We recommend that the text be reviewed not only for its capacity to be registered but also for the sustainability of the shareholding relationship:
- Ensuring that the mandatory elements are satisfied in full and eliminating from the outset the risk of the text being returned by the registry
- Defining the business purpose broadly enough to cover the planned activities without falling into uncertainty
- Settling transfer restrictions and privileges on incorporation, having regard to the heavy quorums that will otherwise be required later
- Regulating the procedure for convening the general assembly and the meeting quorums according to the balance in the shareholding structure
- Grounding every provision that departs from the Code on a statutory basis expressly permitting it
Independent Legal advises on the preparation of articles of association in joint stock companies, the review of existing texts for compliance with the legislation, and the conduct of processes for the amendment of articles of association.