In a joint stock company, whose capital is fixed and divided into shares and which is liable for its debts only with its own assets, the task of management and representation is conferred upon the board of directors under Article 365 of the Turkish Commercial Code No. 6102. The Act requires certain qualifications of the persons to be elected to that board; the company’s articles of association may, in addition to the statutory conditions, prescribe further qualifications. Persons joining the board must satisfy all of these conditions.
Membership of the board of directors brings with it a large number of duties and obligations. Some of these duties and powers may be delegated; others are closed to delegation because of the weight they carry. As regards those that may be delegated, the board may leave its powers to a delegated director or to a delegated manager.
The power to represent the company belongs to the board of directors and is, as a rule, exercised by two signatures. Where the articles of association provide otherwise, or where the board consists of a single person, that rule does not come into play. Those authorised to represent the company may carry out, on the company’s account, every item of business and every legal transaction falling within the company’s purpose and line of business, and may use the company’s trade name while doing so. Members may incur liability on account of the business and transactions they carry out; that liability runs essentially along two lines, civil and criminal.
In this briefing note we address, in turn, every link in the regime of management and representation, from the conditions for election to membership to the termination of membership, and from the board’s meeting and decision-making arrangements to the leaving of the power of representation to third parties.
The Board of Directors of a Joint Stock Company
A joint stock company must have a board of directors composed of one or more persons appointed by the articles of association or elected by the general assembly. Article 365 of the Turkish Commercial Code No. 6102 sets out expressly that the organ competent for the management and representation of the company is the board of directors.
Qualifications Required for Board Membership
The company’s first board members are appointed by way of the articles of association. Members taking office in subsequent periods are elected by resolution of the general assembly. The election of members is among the non-transferable powers of the general assembly.
The conditions that the Turkish Commercial Code No. 6102 requires for membership may be grouped under the following headings.
Capacity Requirement
Not only natural persons but also legal persons may be elected to the board of directors. Where a legal person is a member, a natural person to represent it on the board must be designated. The Act requires the natural persons to be elected to the board to have full legal capacity. The same condition applies to the natural person to be registered on behalf of a legal person member.
Absence of Grounds Terminating Office
The Act regulates the circumstances in which membership comes to an end. Since it is not desired that a member be affected by a circumstance leading to the termination of office, persons in that position are also not permitted to be elected in the first place. For that reason the legislature has listed the grounds terminating office as being at the same time impediments to election. Those grounds are bankruptcy, restriction of legal capacity, and the subsequent loss of the conditions required by the Act and by the articles of association. Accordingly, just as persons who do not meet the necessary conditions and who do not have full legal capacity cannot be elected to membership, natural or legal persons in respect of whom a bankruptcy decision has been given cannot join the board either.
Conditions Arising from Special Statutes and from the Articles of Association
Alongside the conditions in the Turkish Commercial Code No. 6102, certain special statutes may impose additional conditions for membership. Regulations such as the Banking Act and the Insurance Act require special qualifications of the persons to be elected to the board of directors of joint stock companies operating in the relevant fields. Where such a special provision exists, the persons to be elected must hold those qualifications as well.
Since every joint stock company has its own articles of association, the qualifications required for membership may also be determined by the articles, provided that they do not run counter to the mandatory provisions of the Act. In that event, candidates are expected to satisfy those conditions too.
It should further be noted that under the repealed Turkish Commercial Code members were required to be shareholders. The Act in force has removed that condition; accordingly, there is today no impediment to the election to the board of directors of persons who do not hold the capacity of shareholder.
Persons who satisfy the conditions and are elected to membership are registered with the trade registry and announced in the Turkish Trade Registry Gazette. That step is, however, not constitutive but declaratory. For that reason the acts of the persons elected bind the company from the moment of election, without waiting for registration. For details concerning the articles of association, our article entitled Articles of Association in Joint Stock Companies may be consulted.
Duties and Powers of the Board of Directors
The board’s most fundamental duty and power is to manage and represent the company. Article 371 of the Turkish Commercial Code No. 6102 provides that those authorised to represent the company may carry out, in the company’s name, every kind of business and legal transaction falling within the scope of the company’s purpose and line of business.
The duties and powers of members are spread across various provisions of the Act. Some of them may be delegated, while the delegation of others is not legally possible.
The non-transferable duties and powers are listed in Article 375 of the Turkish Commercial Code No. 6102:
- Managing the company at the highest level and giving instructions in that regard
- Determining the company’s management organisation
- Establishing the arrangements required by financial planning
- Appointing and dismissing persons holding signature authority and managers
- Ultimate supervision of whether the persons charged with management act in conformity with their obligations
- Keeping the share ledger, the board of directors’ resolution book and the book of general assembly meetings and deliberations
- Preparing the annual activity report and the corporate governance statement and submitting them for the approval of the general assembly
- Preparing general assembly meetings
- Implementing the resolutions adopted by the general assembly
- Notifying the court in the event of over-indebtedness
Rights of Board Members
The rights granted to members are examined in two groups: managerial rights and financial rights.
Managerial Rights
Three rights principally fall under this heading: the right to obtain information, the right of representation and the right of management.
Managing and representing the company is, for members, not merely a duty but also a fundamental right. Within that framework, members hold the power to conclude, in the company’s name, all business and legal transactions falling within the scope of the company’s purpose and line of business.
Another of the managerial rights is the right to obtain information and to examine. Under this right, members may request information on all of the company’s business and transactions, put questions and carry out examinations. A member’s request that a document be brought before the board, that a matter be discussed in the board or among the members, or that information be given on a point may not be refused. Where the chairman of the board of directors turns down such a request, the matter is carried onto the board’s agenda within two days. If the board cannot convene or refuses the request, the member concerned has the opportunity to apply to the commercial court of first instance at the place of the company’s registered office; the court’s decision is final. The right to obtain information may be extended by the articles of association, but it may not be narrowed. That is because the right is mandatory in character; it may not be restricted or removed.
Financial Rights
Article 394 of the Turkish Commercial Code No. 6102 provides that members may be paid attendance fees, salary, bonuses, premiums and a share of the annual profit. The type and amount of those payments must, however, either be shown in the articles of association or determined by resolution of the general assembly.
The attendance fee is the payment made in consideration of attending a meeting.
Salary is an item paid periodically upon the expiry of set intervals of time and having the character of a wage.
A bonus denotes a payment made after the completion of a given period and mostly calculated in proportion to salary.
A premium is paid on the basis of the member’s performance, where predetermined targets are reached.
Payment out of the profit share, on the other hand, depends on the company having made a profit at the end of the period and on a dividend of 5% having previously been distributed to the shareholders.
Termination of the Capacity of Member
Membership of the board of directors ends essentially in four situations: removal from office, resignation, loss of the conditions of eligibility and expiry of the term of office.
Removal from Office
Whether members have been appointed by the articles of association or elected by resolution of the general assembly, they may be removed from office by a resolution adopted in the general assembly.
Removal is always possible. However, if the removal is not based on just cause, the company may find itself obliged to compensate the loss suffered by the removed member.
The power of removal is among the non-transferable powers of the general assembly; the removal of members may therefore be effected only by resolution of the general assembly. For such a resolution to be adopted, the rules on meetings and decision-making must be observed. The fundamental principle here is adherence to the agenda. In other words, the general assembly’s ability to adopt a removal resolution depends on an express item on that matter appearing on the agenda. There are two exceptions to the rule.
The first exception is found in Article 413(3) of the Turkish Commercial Code No. 6102. Under that provision, the agenda item on the deliberation of the year-end financial statements is deemed to relate to the removal of members. Accordingly, even where there is no item on the agenda concerning removal, a removal resolution may be adopted if there is an item on the deliberation of the year-end financial statements. The reason for this is that the deliberation of the financial statements is connected with the members’ obligation to account to the general assembly. For the same reason, since discharge is likewise connected with the obligation to account, removal may also be resolved where there is an item on the agenda concerning discharge.
The second exception is the existence of just cause. Where just cause exists, a removal decision may be taken even if there is no agenda item directly or indirectly connected with removal. A member’s inadequacy in the performance of their duties, holding board membership in a great many companies at the same time, remaining abroad for a lengthy period, breaching the non-competition prohibition or becoming involved in corruption may be given as examples of such just causes.
Resignation
A member may resign from office. Resignation is a unilateral act and produces its effect upon reaching the other party. It is always open to a member to resign. However, if the resignation is not based on just cause, it is treated as a case of fault-based liability; where the company has suffered loss because of an untimely resignation, the resigning member may be required to make that loss good.
Loss of the Conditions of Eligibility
We addressed above the fact that certain conditions must be held in order to be eligible for election to membership. Where those conditions are lost after the election, the capacity of member comes to an end.
Expiry of the Term of Office
The term of office of members may be fixed in the articles of association; that term may not, however, exceed three years. The Act provides on a mandatory basis that the term of office may be no more than three years. The starting point of the term varies according to how the member came to office: where appointment is made by the articles of association, the date of registration of the company is taken as the basis; where election is by resolution of the general assembly, the date of the resolution is taken. The capacity of a member whose term of office expires comes to an end; nevertheless, unless the articles of association provide otherwise, the same person may be elected again.
Obligations of Board Members
Duty of Care
Members are obliged to show the requisite attention and care in performing their duties. The measure of care sought is the care expected of a prudent manager in a company operating in a similar field. For a member to be regarded as having acted in accordance with the duty of care, the transaction must have been carried out according to certain criteria: having been sufficiently informed before the decision was taken, the matter having been discussed at a sufficient level, the opinion of specialists in the field having been obtained where needed, and conduct incompatible with the duty of loyalty having been avoided.
Duty of Loyalty
The duty of loyalty requires the member to place the company’s interests first. Accordingly, the member is expected to refrain from conduct that would give rise to a conflict between their personal interests and the interest of the company. The scope of the duty of loyalty includes protecting the company’s assets, refraining from acts that would diminish those assets, and making efforts in pursuit of the aim of generating profit.
Prohibition on Transacting with the Company
Article 395 of the Turkish Commercial Code No. 6102 prohibits a member from transacting with the company on their own behalf or on behalf of another without the permission of the general assembly. Otherwise, the company may assert that the transaction is void. The member who concluded the transaction, by contrast, may not raise a claim of invalidity. Because of this prohibition a member may not, for example, sell their own immovable property to the company. Since the purpose of the prohibition is to prevent a conflict of interest between the member and the company, the prohibition does not apply where there is no conflict of interest and no risk of loss to the company. Indeed, it is possible for a member to donate their immovable property to the company without obtaining the permission of the general assembly.
Prohibition on Competing with the Company
Article 396 of the Turkish Commercial Code No. 6102 prohibits members from carrying out, on their own account or on the account of another, a transaction of a commercial nature falling within the company’s line of business without the permission of the general assembly. The remainder of the article further provides that a member may not join, as a partner with unlimited liability, a company engaged in the same type of commercial business.
The statutory non-competition prohibition is limited to the member’s term of office and ceases when that office comes to an end. Nevertheless, a non-competition agreement covering the period after the office as well may be concluded between the company and the member. Where such an agreement exists, the member remains bound by the prohibition arising from it even after their office has ended.
Where the prohibition is breached, the remedies open to the company are as follows:
- Bringing an action asserting that the benefits arising from contracts concluded on the account of third parties belong to it
- Treating the transaction in question as having been made in the company’s name
- Claiming damages from the member concerned
These remedies are alternative; the company may choose only one of them. The board of directors decides which is to be used, without the participation of the member who breached the prohibition. The exercise of the rights is subject to a time limit: the statute of limitations runs upon the expiry of three months from the date on which the other members learned that the commercial transactions in question had been carried out or that the member had joined another company, and in any event of one year from the occurrence of those circumstances.
Prohibition on Participating in Deliberations
Under Article 393 of the Turkish Commercial Code No. 6102, a member may not take part in deliberations on matters in which the personal interest of the member, of their descendants and ascendants, of their spouse, or of their blood relatives and relatives by marriage up to and including the third degree, conflicts with the interest of the company. The same result applies where the member’s participation in the deliberations would be incompatible with the rule of good faith. If doubt arises as to whether a member is subject to the prohibition, the board of directors takes a decision on that point; the member concerned may not attend the meeting at which that decision is deliberated.
Even if the board is unaware of the conflict of interest, the member must disclose their position of their own motion and comply with the prohibition.
A member who breaches the prohibition through fault is obliged to compensate the loss suffered by the company. Beyond that, where the conflict objectively exists and is apparent and the other members of the board have not objected to the participation of the member subject to the prohibition in the deliberations, those persons who failed to object also face liability to compensate. For liability in damages to arise, however, the general conditions must also be satisfied: an unlawful act (breach of the prohibition on participating in deliberations), fault, loss and a causal link between the act and the loss must all be present together.
Prohibition on Becoming Indebted to the Company
Article 395(2) of the Turkish Commercial Code No. 6102 prohibits members who are not shareholders, and those relatives of members listed in Article 393 who are not shareholders, from becoming indebted to the company in cash. The remainder of the provision closes off the company’s giving of surety, guarantees and security in favour of the said persons, its assumption of liability and its taking over of their debts.
The prohibition operates in one direction only. That is to say, while it is not possible for the member and their relatives to borrow from the company, there is no impediment to their lending to the company.
Where the prohibition is breached, the company’s creditors may proceed directly against the member or their relatives, limited to the amount owed to the company.
Obligations Where the Company’s Financial Position Deteriorates
If it appears from the last annual balance sheet that half of the sum of the capital and the legal reserves is unmet as a result of losses, the board of directors must call the general assembly to a meeting without delay. The board must at the same time submit for the general assembly’s consideration the remedial measures it deems appropriate.
Where signs emerge giving the impression that the company may be over-indebted, an interim balance sheet must be drawn up. In that interim balance sheet the assets must be shown both on a going-concern basis and at their probable sale prices. If the balance sheet demonstrates that the assets are not sufficient to meet the claims against the company, the board of directors must notify the commercial court of first instance at the place of the company’s registered office and request the company’s bankruptcy.
Duty of Equal Treatment
Article 357 of the Turkish Commercial Code No. 6102 provides that shareholders are to be subject to equal treatment in equal circumstances. Accordingly, members of the board of directors are under a duty to act equally in transactions concerning shareholders.
Duty to Attend Meetings in Person
Just as members are not permitted to vote on one another’s behalf, nor are they permitted to be represented at a meeting by sending a proxy. Members must therefore be present in person at meetings.
Board of Directors Meetings
The board of directors operates as a collegiate body and adopts its resolutions by holding meetings. Meetings may be held in a physical setting or in an electronic environment. In addition, resolutions may also be adopted by the circular method; under that method, a proposal submitted in writing by one of the members is approved, likewise in writing, by the other members. Whichever method is preferred, the resolution adopted must be entered in the resolution book and the members’ intentions must be ascertainable from that book.
Quorum for Meetings
Under Article 390 of the Turkish Commercial Code No. 6102, the quorum for a meeting is a majority of the total number of members of the board of directors. That quorum may be made more onerous by the articles of association; it may not, by contrast, be relaxed.
Quorum for Decisions
Under the same article, the quorum for a decision is a majority of the members present at the meeting. This quorum too may be increased by the articles of association, but it may not be reduced. Each member has a single vote at meetings.
Exercise of the Power of Representation
The board of directors exercises the power of representation, as a rule, by the affixing of two signatures together. Where the articles of association contain a different arrangement, or where the board consists of a single member, that rule does not apply.
A notarised copy of the resolution showing the persons authorised to represent the company and the manner of their representation must be submitted to the trade registry directorate so that registration and announcement may be effected.
Those authorised to sign in the company’s name must affix their signatures beneath the company’s trade name.
Limits of the Power of Representation
Persons authorised to represent may carry out, in the company’s name, every kind of business and legal transaction falling within the scope of the company’s purpose and line of business, and may use the company’s trade name.
Transactions of those persons falling outside the company’s purpose and line of business also bind the company as a rule. However, if the third party on the other side of the transaction knows, or is in a position to know, that the transaction falls outside the line of business, the company is not bound by it. The fact that the articles of association have been announced is not by itself sufficient to prove that the third party knew of the position. This arrangement reflects a choice that gives priority to the security of transactions and to the protection of third parties acting in good faith; the company’s ability to assert that it is not bound depends on the other party’s state of knowledge being established by concrete evidence.
Delegation of the Power of Representation
Article 370(2) of the Turkish Commercial Code No. 6102 provides that the board of directors may delegate the power of representation to one or more delegated directors or to a delegated manager. A delegated director is one of the board’s own members, whereas a delegated manager is a person outside the board. Accordingly, the power of representation may also be left to persons who do not hold the capacity of member. The Act has drawn a limit at this point, requiring that at least one member of the board of directors hold the power of representation.
As regards matters falling within the board’s non-transferable duties and powers, delegation of the power of representation is not possible. Put differently, delegation is valid only in respect of areas that the Act has not reserved to the board; an authorisation made in relation to non-transferable powers produces no legal effect, however it may be labelled within the company’s internal arrangements.
Delegation of Management to Delegated Directors and Division of Powers
The board of directors may leave management, in part or in whole, to one or more members or to a third party. Two conditions are required for this: a provision to that effect in the articles of association, and the drawing up of an internal directive by the board of directors. The internal directive must regulate the management of the company and must show clearly who is subordinate to whom and who is obliged to report to whom.
Liability of Board Members
Members may incur liability on account of the business and transactions they carry out. That liability is addressed essentially under two headings: civil liability and criminal liability.
Civil Liability
Civil liability comes into play where members breach the obligations arising from the Act and from the articles of association by failing to show the requisite attention and care.
This liability is fault-based liability. For recourse to be had against members it is therefore necessary that the obligations arising from the Act or from the articles of association have been breached through fault. A culpable breach is not by itself sufficient; the other conditions sought under the general provisions must also be satisfied. Where all of the conditions are present together, members are held liable for the losses suffered by the company, by the shareholders and by the creditors. Liability comes to an end upon the expiry of the limitation period or upon the general assembly adopting a resolution of discharge.
For the detail of this subject, our study entitled Civil Liability of Board Members in Joint Stock Companies may be examined.
Criminal Liability
Criminal liability arises, in accordance with the principle of legality in offences and penalties, where acts defined in various statutes are committed.
Since joint stock companies are legal persons and criminal liability is not accepted in respect of legal persons, only security measures may be applied to such companies. The persons who will face a penalty for an offence committed within the company are, for that reason, the board members holding the power of management and representation. The criminal liability of members is regulated in different statutes, with fines prescribed for some offences and imprisonment for others.
For detail on this heading, our article entitled Criminal Liability of Board Members in Joint Stock Companies may be consulted.
Independent Legal’s Assessment
In practice, the most frequent error in establishing the management and representation arrangements is that the signature circular does not correspond with the company’s actual decision-making mechanism. Where the two-signature rule is relaxed by the articles of association without the scope of the power of representation being sufficiently defined, the limits of the transactions that bind the company only begin to be debated once a dispute has arisen. A similar problem is seen in structures where management authority has been left to delegated directors but the internal directive has never been prepared or updated.
When the management and representation structure is being designed, we recommend that the following points be clarified:
- That the scope and limits of the power of representation and the signature groups be shown expressly in the board of directors’ resolution
- That, if management authority is to be delegated, the existence of the enabling provision in the articles of association be verified and the internal directive be set down in writing
- That it be checked after each delegation that at least one member of the board of directors retains the power of representation
- That members’ terms of office be scheduled with regard to the three-year upper limit and that re-election resolutions be adopted in good time
- That conflicts of interest giving rise to the prohibition on participating in deliberations be recorded in the meeting minutes
- That indicators of capital loss and over-indebtedness be monitored regularly so that delay in the notification obligations is prevented
Independent Legal provides advisory services on the structuring of boards of directors in joint stock companies, the arrangement of signature and representation powers, and the preparation of internal directives.