In accordance with Article 365 of the Turkish Commercial Code No. 6102 (“TCC”), the joint stock company is managed and represented by the Board of Directors. In other words, the Board of Directors is the body authorized to administer and represent the legal entity.
Within the framework of the provisions of the TCC and other relevant legislation, the broad authorities of the Board of Directors at joint stock companies have been tried to be balanced with liability provisions. This article will explain the powers and liabilities of members of the Board of Directors in Turkish joint stock companies by taking into consideration TCC, Tax Procedure Law No. 213 (“TPL”), Social Security Law No. 506 (“SSL”), Law on the Procedure for the Collection of Public Receivables No. 6183 (“PCPR”) and other relevant regulations.
The joint stock company under Turkish Law has imposed a duty of care to the members of the Board of Directors. Pursuant to this duty, the members of the Board of Directors are required to act as a prudent joint stock company manager while carrying out their company’s business. The member of the Board of Directors, who does not fulfill her/his duty of care, shall be liable to the company, the shareholders and the creditors of the company (For instance, if it can be expected from a prudent joint stock company manager, it may be a reason to be held liable to not insure the goods in the warehouses of the company, to not dispose of the goods at the most appropriate time by monitoring the market situation, to not have the necessary raw material stock etc.).
Besides to duty of care, in general terms, the joint stock company imposes an obligation on the members of the Board of Directors to always prioritize the interests of the company in all their activities. The duty of loyalty forms the basis of the obligations of keeping secrets and taking care. Membership in the Board of Directors is a duty that is closely tied to the person of the member. With this qualification, a member of the Board of Directors cannot have herself/himself represented by a proxy, neither to attend the meeting nor to vote, nor can she/he authorize a representative from within the Board of Directors.
Considering the general duties of Board of Directors’ members explained above (Duty of care and duty of loyalty), in accordance with Article 375 of the TCC, the non-delegable and inalienable duties and authorities of the Board of Directors are as follows:
Members of the Board of Directors who act in violation of these provisions stated above, and members who do not object to the participation of the relevant member’s action while knowing that there is a conflict of interest, and the members of the Board of Directors who decide to attend the meeting of the member in question, are liable and therefore are obliged to compensate the loss suffered by the company.
Provisions regarding legal liabilities of board members in joint stock companies are regulated between Article 549 and Article 553 of the TCC. Within the framework of these articles, such legal liabilities are as follows:
Any liability arising from the losses due to inaccurate, forged, fake or untrue documents, issue prospectuses, warranties, statements and guarantees relating to certain transactions such as establishment of the company, capital increase and reduction, merger, division, changing the type of the company and issuance of securities or due to disguise of facts or other irregularities shall be incumbent on the issuers of such documents or statements, and if acted negligently, their accomplices.
If the capital has not been fully subscribed or it has not been paid up in accordance with the articles of association or law; those who have pretended that it has been subscribed or paid up, and if acted negligently, the authorized persons of the company shall be deemed to have subscribed these shares and therefore, be jointly liable to pay their prices and the losses incurred therefrom, together with the interest thereon.
Board members who overvalued the contributions in-kind or acquisition of real rights or enterprises as against their peers; disguised the characteristic or position of the real right or enterprise; or made falsification in any other manner shall be liable for the losses arising therefrom.
Without prejudice to the provisions of the Capital Market Law, raising money from public by way of calling on people in any manner whatsoever so as to increase the capital of the company or establish a new company is prohibited.
If board members negligently breach their obligations stipulated by law and the articles of association, they shall be liable both to the company and to the shareholders as well as the creditors of the company for the damage incurred therefrom.
According to Article 553/2, organs or persons, who have assigned a duty or an authority, with which they are entrusted by law or the articles of association, to other persons, shall not be liable for the acts and decisions of such persons who have taken over these duties and authorities, unless it is proven that organs and persons have not acted with reasonable diligence when selecting these persons.
Ultimately, no one can be held liable for frauds or breaches of the law or the articles of association to the extent these are beyond their control; this non-liability may not be revoked based on the duty of care and supervision.
It should be noted that the Board of Directors may delegate all of its duties and powers, other than the non-delegable and inalienable duties and authorities listed in Article 375 of the TCC and detailed above, and the transferee also assumes all liabilities if the relevant board member has shown reasonable care. The duty and power to be transferred here must be a delegable and alienable authority of the Board of Directors recognized in the law or in the articles of association, and the transferor board member becomes irresponsible in terms of the duties and authorities she/he has delegated.
A board member may not participate in discussions relating to conflicts between the personal and non-company-related interests of her/his own or her/his relatives’ (one of her/his lineal consanguinity or spouse or blood or in-law relatives up to and including third degree) and the interests of the company. This prohibition also applies when a board member may not participate in a discussion in consideration of the principle of honesty. In case of doubt, the board shall render the final decision. The board member concerned may not participate in the voting thereof. Even if the board is not aware of the conflict of interests, the board member concerned has to disclose her/his interest and abide by the prohibition.
A board member acting contrary to these provisions; board members who did not object to her/his participation in the meeting despite the fact that the conflict of interest was objectively existing and known; and board members who cast affirmative votes approving her/his participation in the meeting are liable for any damage incurred by the company in connection therewith.
Important to note that the reason why she/he did not participate in the discussion, which is subject to the prohibition, and the relevant measures should be recorded in the board resolutions.
Without the consent of the general assembly, no board member may enter into transactions with the company either on her/his own behalf or on behalf of a third person; otherwise, the company may claim nullity of such transaction. The other party to the transaction may not make such a claim.
Non-shareholder board members and non-shareholder relatives of the board members (one of her/his lineal consanguinity or spouse or blood or in-law relatives up to and including third degree) may not borrow money from the company. The company may not stand surety or provide guaranty and security or undertake liability for these persons or it may take over their debts. Otherwise, for collection of the amounts undertaken by the company, the creditors of the company may take legal action directly against these persons limited to the amounts they owe to the company.
Without the consent of the general assembly, a board member may not engage in activities, which fall within the company’s field of activity, on her/his behalf or on behalf of a third party and may not become a partner with unlimited liability in another company engaging in the aforesaid activities. Otherwise, the company may demand compensation from the breaching board member or, alternatively, it may consider these transactions as having been performed on behalf of the company and file a lawsuit claiming that the company must enjoy the benefits arising from the contracts concluded on behalf of third parties.
Article 10 of the TPL has stipulated that uncollectible taxes and related receivable from the company will be collected from the assets of the "legal representatives". According to paragraph 2 of the said Article, taxes and related receivables that cannot be fully or partially collected from the assets of the obliged party due to the failure of the representatives to fulfill these duties are taken from the assets of the legal representatives.
In accordance with Article 367 of the TCC and its subsequent articles, the members of the Board of Directors hold the title of legal representatives, unless the authority of representation is left to executive members or directors who are not required to be shareholders.
Under a communiqué published by the Ministry of Finance, it is stated that if, as a result of the determination to be made, it is understood that the authority to represent the company is left to the executive member or members and the (executive) managers who are not shareholders in the company, the public receivables should be followed up and collected from them, and in this case, no action should be taken against the other members of the Board of Directors. In other words, members of the Board of Directors who do not have the capacity to represent and bind the company are beyond the scope of such liability.
In order for the members of the Board of Directors to be held liable in accordance with Article 10 of the TPL and Article 35 of the PCPR, it is not necessary to prove that they are at fault. However, members of the Board of Directors may be relieved of their liability by proving that the fulfillment of the public obligation is not the result of their own will or negligence, or that there is no causal link. For instance; member of the Board of Directors, who proves that the company does not have the fund to pay, for reasons not caused by her/his own fault, at the time the public liability is due, is released from responsibility.
Important to note that the liability of representatives for public debts is secondary. The public administrations are obliged to follow the legal entity of the company before applying to the responsible members of the Board of Directors. Members of the Board of Directors can only be followed for receivables that cannot be obtained from the assets of the joint stock company.
If the company has more than one legal representative, the liability of the legal representatives will be considered in accordance with the relevant laws, and a separate payment order will be issued for each of them for the entire uncollectible public receivables for those jointly and severally liable.
The legal representative, who has to make a payment in accordance with Article 10/III of the TPL, has the right of recourse to the main taxpayer (the company). In addition, the member of the Board of Directors who has to pay but is not at fault (with the conditions of TCC art. 338) would also have the opportunity to recourse to other faulty members.
According to Article 88 of the SSL, managers and officials of employers including members of the Board of Directors shall be held jointly and severally liable with the employer if they do not have a justifiable reason for not paying the premiums of employees.
The legal memorandum herein is prepared for the informational purposes only, based on general principles of Turkish Law and relevant regulations. In the event of occurrence of any individual circumstance, it will be crucial to conduct a detailed examination specific to the concrete event in question.
Att. Burak Yöney
Ozay Law Firm