LIABILITY FOR DEFECTS UNDER SHARE TRANSFER AGREEMENTS

ABSTRACT

Share assignment agreements, are agreements that change the shareholder structure of companies and produce significant legal and economic consequences for both the buyer and the seller. Defects, namely deficiencies in the legal or economic characteristics of the assigned shares, may lead the parties to disputes. Although the liability for defects provisions regulated under the Turkish Code of Obligations Numbered 6098, in principle, are applicable to all sales contracts, their applicability to share transfer agreements is a matter of debate in legal doctrine. In this article, the legal essence of share transfer agreements is examined first, followed by an analysis of the types of contracts to which liability for defects provisions may apply and lastly, the applicability of these provisions to share transfer agreements is evaluated alongside with a review of recent perspectives and practical examples.

Keywords: Share, Share Transfer Agreement, Company, Joint Stock Company, Liability for Defects, Share Transfer

I. INTRODUCTION

The share transfer agreement is one of the fundamental legal acts that result in changes in the distribution of shareholdings in companies and, from time to time, may lead to a shift of executive control. Through the transfer of shares, not only the possession of the share but also the economic rights, the management rights attached to the shares, and an indirect economic influence over the company are transferred. Therefore, the legal and factual attributes of the transferred shares, the financial condition of the company, and the scope of the rights conferred by the shares have significant importance for the parties.

In practice, share transfer agreements are generally treated as a sale of rights. However, depending on the scope and character of the transfer, it is acknowledged that the provisions on liability for defects may also apply in certain cases1. In this regard, the scope and conditions of application of liability for defects may differ depending on the legal essence of the agreement as well as the extent and content of the transfer. The absence of a clear statutory regulation on this matter has led to divergent interpretations in doctrine and judicial decisions, thereby creating significant uncertainty in practice.

II. LEGAL SCOPE OF USUFRUCTUARY LEASES AND THEIR APPLICATION WITH RESPECT TO COVERED COMMERCIAL PREMISES

A. Subject Matter of the Agreement

In general, the subject matter of sales agreements may consist of goods, rights, economic benefits with monetary value, or groups of goods and rights2. Since a share is regarded as a right in terms of its legal nature3, it is argued that share transfer agreements are primarily considered within the scope of a sale of rights4. In a share transfer agreement, the seller’s obligation is to transfer the company share, along with the rights arising therefrom to the buyer. Within this framework, the fact that a share confers corporate governance and property rights, constitutes part of the capital, has market value, and its assignability renders it an economic asset capable of being the subject matter of an agreement of sale.

B. Subject Matter of the Agreement

There are two main approaches regarding the legal nature of a share transfer agreement. Pursuant to the first view, a share transfer is, as a rule, the sale of a right. In these terms, with respect to liability for defects, the provisions of Articles 219 et seq. of the Turkish Code of Obligations Numbered6098 (“TCO”) on the sale of movables do not apply; instead, Articles 191- 193 of the TCO, which are exclusive to the sale of rights, should be applied5. The second view argues that the evaluation should be made depending on the scope and nature of the transfer6. In particular, where the shares assigned grant control over the company or nearly the entire company is assigned, it is accepted that the subject of the transfer is effectively the company itself, and therefore, the provisions on the sale of movables should be applied by analogy7. Finally, there are also Court of Cassation decisions defining the concept of “share” as “movable property8.” In this context, whether a share transfer can be associated with the sale of movables, and thus whether Articles 219 et seq. of the TCO are applicable, is evaluated based on the scope and nature of the transfer, and this issue continues to be a matter of debate in doctrine.

These two main approaches lead to different outcomes in terms of applicable provisions. The first view emphasizes the legal nature of the share and argues the application of the rules specific to the sale of rights, while the second view focuses on the economic and practical effects of the transfer and maintains that, under certain conditions, the provisions on liability for defects in the sale of movables should be applied by analogy. Within this framework, especially in share assigns of an executive nature, the approach adopted becomes decisive for the scope of parties’ rights and obligations and the applicability of liability for defects.

III. APPLICABILITY OF LIABILITY FOR DEFECTS TO SHARE TRANSFER AGREEMENTS

A defect is generally defined as a deviation in a negative sense from the qualities that the sold item should have or has been promised to have; in other words, a deficiency in quality. The institution of liability for defects is fundamentally based on the warranty of conformity theory; according to this theory, the absence of defects in the item sold is an inseparable part of the seller’s duty of delivery. The seller’s primary obligation is to deliver the sold item free from defects or deficiencies in quality. If the seller breaches this obligation, the provisions on liability for defects become applicable.

In this context, Articles 219–231 of the TCO regulate the seller’s obligation to deliver the item sold in accordance with the agreed terms and free from defects. For liability to arise, the item must have been delivered, the defect must be essential, it must not have been known by the buyer, it must have existed prior to delivery, it must not be an obvious defect, and liability must not have been excluded by contract. In addition, the buyer must not have accepted the item in its defective condition.

The institution of liability for defects is not limited solely to sales contracts; the legislator has introduced special provisions for some contracts and accepted the application of sales rules to others by analogy. For instance, in contracts for work, the contractor is obliged to deliver the work free from defects, and in barter contracts, liability for defects arises from the mutual obligations to deliver. Similarly, in share transfer agreements, especially where the transfer ceases to be merely a transfer of rights and effectively takes on the nature of an undertaking of a company, it is argued that Articles 219 et seq. of the TCO may be applied by analogy. Whether liability for defects is applicable to share transfer agreements depends essentially on the approach adopted concerning the legal nature and scope of the transfer. As explained above, since a share is legally characterized as a right, as a rule, Articles 191–193 of the TCO should apply to such contracts. However, if the shares transferred are sufficient to confer control over the company or comprise nearly the entire company, the transaction may be considered economically as a transfer of enterprise, and in such cases, the provisions of Articles 219 et seq. of the TCO on the sale of movables may be applied by analogy9.

Although the transfer of executive shares does not legally amount to a direct transfer of enterprise, it effectively results in decisive influence over the company’s assets, activities, and organizational structure. Since the close connection between company shares and the company’s economic existence turns the transfer of such shares into more than a mere transfer of abstract rights, it becomes an act conferring indirect management over the company as a whole. In many cases, the buyer ties the economic benefit to be gained from the shares directly to the existing or expected value of the company’s assets10. For this reason, in the transfer of executive shares, defects arising from the enterprise that disrupt the company’s economic integrity or organizational structure directly affect the value of the share and the benefit expected by the buyer.

In such cases, due to this direct relationship between the enterprise and the shares, it would be both legally consistent and equitable for the parties to treat defects in the enterprise as defects inherent in the shares themselves, thereby justifying the applicability of Articles 219 et seq. of the TCO. In conclusion, where a defect in the enterprise disrupts its economic integrity or organizational structure, it should be regarded as a defect in the share itself, and the provisions of Articles 219 et seq. of the TCO should apply to such share transfers, to the extent appropriate.

IV. ADAPTATION OF DEFECT CONDITIONS TO SHARE TRANSFER AGREEMENTS

The provisions of the TCO on liability for defects are essentially intended to apply to the sale of tangible goods, and their direct applicability to transactions involving the sale of rights is limited11. Since in share transfer agreements concerning capital companies, the subject matter is the shareholder status along with the rights and obligations attached to it, these contracts are generally considered as sales of rights. The absence of material defects in sales of rights is the main reason why the applicability of defect liability provisions to share transfer agreements is debated.

A. Types of Defects in Share Transfer Agreements

Deficiencies as the source of defects may arise in different ways12. As with tangible goods, the concept of material defect here acquires meaning through the company’s physical assets. Deficiencies, defects, or breakdowns in the company’s machinery, production facilities, or inventory that significantly reduce value may be considered material defects insofar as they directly affect the economic value represented by the share transferred.

A legal defect arises when the rights represented by the share are legally restricted or extinguished. The lack of necessary permits for the company’s activities, the invalidation of intellectual or industrial property rights, the existence of encumbrances such as pledges or usufruct rights over the share, or the share’s failure to have the attributes stated in the transfer are examples of this.

An economic defect arises in cases such as misstatements in the company’s financial statements, excessive indebtedness, liquidity shortages, or the failure to achieve promised profits. When such deficiencies directly affect the economic value of the share and the benefit expected by the buyer, the defect originating from the enterprise is considered inherent in the share itself.

Through this adaptation, although fundamentally designed for movables, Articles 219 et seq. of the TCO, can be applied by analogy to controlling share transfers, thereby clarifying the liability regime for both buyer and seller.

B. Types of Defects in Share Transfer Agreements

For Articles 219 et seq. of the TCO to apply to share transfer agreements, the conditions for liability for defects must be adapted to the subject and nature of the contract. Although the direct application of defect provisions designed for tangible goods is limited, deficiencies in a company’s assets and operations can directly affect the value of shares. Therefore, the conditions for liability for defects under the TCO may be adapted to share transfers as follows:

  1. Transfer of the share to the buyer: Liability for defects in share transfer agreements generally arises only after the transfer has been legally completed. The transfer occurs upon fulfilment of the formal requirements stipulated by law (e.g., endorsement and delivery of a registered share certificate, registration in the share ledger for uncertificated registered shares, delivery for bearer shares13). Until transfer is completed, the seller cannot be held liable for defects.
  2. Existence of a substantial defect in the transferred share: By substantial defect, it is meant that there are deficiencies in the company’s assets or in the legal status of the share that significantly eliminate or diminish the economic purpose of the transfer. Such deficiencies may include defects in the company’s physical assets (material defect), legal deficiencies in permits or intellectual rights (legal defect), or inaccuracies in financial statements (economic defect).
  3. Unawareness of the defect by the buyer: If the buyer knew of the defect at the time of transfer or could have detected it through reasonable inspection, the buyer cannot hold the seller liable. In share transfers, this often becomes evident during the due diligence14 process; deficiencies that remain undiscovered despite this process may be treated as defects.
  4. Existence of the defect prior to completion of the transfer: The defect must have existed before the transfer was completed. Deficiencies arising after the acquisition due to the buyer’s actions or external factors should not fall within the seller’s liability.
  5. The defect not being obvious: Defects that can be easily detected by simple inspection cannot be invoked against the seller if the buyer fails to notify within the legal timeframe after the transfer. For example, if the company’s concordat status has been registered in the trade registry.
  6. Liability not excluded or limited by contract: The parties may limit or exclude the seller’s liability for defects in the share transfer agreement. However, such clauses must not contravene the principle of good faith15.
  7. The buyer not having accepted the defective condition: If the buyer knowingly and explicitly or implicitly accepts the defective condition of the share, they cannot later rely on the provisions regarding defects.

In conclusion, the above elements represent the adapted application of the liability for defects provisions of Articles 219 et seq. of the TCO to the nature of share transfer agreements. Although there is no explicit statutory regulation on this matter, given the characteristics of share transfers and the balance of interests between the parties, these conditions can reasonably be interpreted and applied in this way.

V. CONCLUSION

Share transfer agreements are significant legal transactions that change the equity ownership structure in joint-stock companies and often result in a shift of executive control. The nature of these agreements, the scope of the shares transferred, and their economic effects directly influence the applicable liability regime. Particularly where the transfer ceases to be merely a sale of rights and effectively becomes a transaction conferring control over the company’s assets, activities, and organizational structure, defects affecting the economic value of the shares should not be regarded merely as abstract deficiencies in rights but as deficiencies undermining the integrity of the enterprise.

Although the provisions of the TCO on liability for defects are, as a rule, applicable to the sale of tangible goods, doctrine and case law have advanced strong arguments that these provisions may be applied by analogy in controlling share transfers. This approach is both legally consistent and equitable in terms of maintaining the balance of interests between the parties. Since the buyer often ties the benefit expected from the shares directly to the existing and anticipated value of the company’s assets. Thus, defects originating from the enterprise directly affect the value of the shares and the economic purpose of the agreement.

This study has shown that the conditions for liability for defects under Articles 219 et seq. of the TCO can be adapted and applied to share transfer agreements. Although there is no explicit statutory regulation on this matter, considering the characteristics of share transfers and the legal-economic relationship between the parties, it is possible to apply by analogy the logic underlying the defect provisions for tangible goods. Such an approach will strengthen both contractual security and the principle of commercial good faith. In conclusion, in share transfer agreements of an executive nature, deficiencies in the company’s assets and operations should be regarded as defects inherent in the shares themselves, and the provisions of Articles 219 et seq. of the TCO should be applied by analog to the extent appropriate. Clarification of this approach through future legislative regulations or consistent case law will be important for eliminating uncertainties in practice.

References

  1. Av. Dr. Başak Başar, “Şirket Pay Devir Sözleşmesinde Ayıptan Sorumluluk”, Seçkin Yayınları, 2025, p.2 ↩︎
  2. Prof. Dr. Mustafa Alper Gümüş, “Borçlar Hukuku Özel Hükümler C-I”, Vedat Kitapçılık, 2013, p.16 ↩︎
  3. Doç. Dr. Tamer Bozkurt, “Şirketler Hukuku” Yetkin Yayınları, 2020, p.391 ↩︎
  4. Prof. Dr. Vedat Buz, “Ortaklık Paylarının Devrinde Ayıba Karşı Tekeffül Hükümlerinin Uygulanabilirliği Sorunu”, Banka ve Ticaret Hukuku Dergisi, 2019, p.66 ↩︎
  5. Başar, p.181 ↩︎
  6. Buz, p.84 ↩︎
  7. Zahide Altunbaş Sancak, “Anonim Şirket Özelinde Devralma İşlemlerinde Satıcının Ayıptan Doğan Sorumluluğu”, İstanbul Bilgi Üniversitesi, 2021 p.73 ↩︎
  8. İlker Demirtaş, “Anonim Şirket Pay Devrinde Ayıptan Sorumluluk” İstanbul Bahçeşehir Üniversitesi, 2024, p.21; Yargıtay HGK, E. 2013/13-1234, K. 2015/795, T. 28.01.2015; Yargıtay 13. HD., E. 2011/13353, K. 2011/12995, T. 22.09.2011; Yargıtay 11. HD., E. 2015/3775, K. 2016/2651, T. 09.03.2017 ↩︎
  9. İdil Alaeddinoğlu, “Anonim Ortaklıkta Pay Devri Sözleşmesi”, Ankara Üniversitesi, 2022, p.117-128; Demirtaş p.40 ↩︎
  10. Alaeddinoğlu, p.78 ↩︎
  11. Av. Beyza Aka, “Satıcının Zapttan ve Ayıptan Sorumluluğuna İlişkin Türk Borçlar Kanunu Hükümlerinin Anonim Şirket Pay Satışlarına Uygulanabilirliği”, Galatasaray Üniversitesi Hukuk Fakültesi Dergisi, 2021/2, p.2136 ↩︎
  12. Bkz. Başar p.122-127 ↩︎
  13. Turkish Commercial Law No. 6102 ↩︎
  14. Alaeddinoğlu, s. 69-70, Başar, p.151 ↩︎
  15. Turkish Civil Law No. 4721 ↩︎

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AN OVERVIEW OF FIDIC CONTRACTS FROM THE PERSPECTIVE OF TURKISH LAW

ABSTRACT

Due to their high costs, technical complexity and lengthy construction processes, international construction projects necessitate detailed and balanced contractual arrangements between the parties. In this context, the standard contract forms developed by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) (International Federation of Consulting Engineers) aim to reduce the risk of disputes by clearly and fairly defining the rights and obligations of the parties.

With the increasing presence of the Turkish construction sector in global markets, the applicability of FIDIC contracts in Türkiye and their compatibility with the Turkish legal system have gained significance. This study aims to evaluate the general characteristics of FIDIC contracts within the framework of Turkish law.

Keywords: FIDIC, FIDIC Contracts, Construction Contracts, Turkish Code of Obligations, Employer, Contractor

I. INTRODUCTION

FIDIC prepares standard construction contracts that regulate, in a uniform and equitable manner, the rights and obligations of all parties involved in the construction sector (employer, contractor, subcontractor, consultant engineer). Accordingly, such contracts published by FIDIC (“FIDIC Contracts”) have come to be applied in numerous countries and have been widely adopted by the stakeholders of the construction industry1.

In recent years, parallel to the general trend in the international construction sector, it has been observed that FIDIC Contracts have been increasingly used in Türkiye by both private and public sector employers and contractors. While FIDIC Contracts essentially reflect the characteristics of the Anglo-Saxon legal system, and particularly English law, Turkish law forms part of the Continental European legal system. Therefore, there exists the possibility of encountering problems in the interpretation of FIDIC Contracts under Turkish law due to the differences between these legal systems2.

According to the provision contained in all FIDIC Contracts, the parties are free to determine, by mutual agreement, the law governing the contract. The legal system chosen as the governing law will fill the gaps in areas not regulated by the FIDIC Contracts; however, the provisions of the FIDIC Contracts have no effect against the mandatory rules of the governing law3. Therefore, in projects based on FIDIC Contracts, it is necessary to determine the governing law with due care when drafting the particular conditions of the contract and to introduce provisions designed to minimize interpretative divergences in line with that legal system.

II. THE GENERAL FRAMEWORK OF FIDIC CONTRACTS

A. The History and Fundamental Principles of FIDIC Contracts

FIDIC (Fédération Internationale des Ingénieurs Conseils), established in Switzerland in 1913 with founding member countries France, Belgium, and Switzerland, refers to the “International Federation of Consulting Engineers.” Membership in FIDIC is limited to a single organization from each country, and today FIDIC has become an international professional association with members from more than 100 countries. In Türkiye, FIDIC has been represented by the Turkish Consulting Engineers and Architects Association (Türk Müşavir Mühendisler ve Mimarlar Birliği – TMMMB), which became a member of the Federation in 1987.

Since 1913, FIDIC and its members have played a significant role in supporting, guiding, and contributing to the advancement of the engineering, construction, and infrastructure sectors. FIDIC has not only represented the countries of its member associations but has also become the voice of the consulting engineering sector in an increasingly globalized world. For instance, FIDIC has established partnerships with the World Bank and other multinational development banks operating in different regions, and these lending institutions have required the use of FIDIC Contracts as a condition for extending credit to contracting parties.

Although FIDIC was initially established with the aim of creating an international association of consulting engineers and promoting global cooperation in the construction sector, over time its primary mission has evolved towards the development of international standard forms of contract across various branches of engineering.

The first FIDIC Contract was published in 1957, and over time, adapted versions have been developed for different types of projects. These contracts have subsequently undergone revisions by FIDIC to reflect changing circumstances, technological advances, and the evolving needs of the industry. At the “International Contract Users Conference” held in London in December 2017, the updated editions of the three contracts that had been in use since 1999 (namely, the Red Book, the Yellow Book, and the Silver Book, as discussed under Section B) were introduced. In the 2017 editions, significant amendments were introduced with respect to achieving a balanced allocation of risk, expanding the powers of the engineer, eliminating uncertainties concerning time provisions, and establishing a more hybrid system regarding the governing law. Finally, the revised versions of the 2017 FIDIC Contracts were published in November 2022 and entered into force as of 1 January 2023.

The most fundamental feature of these standard contracts published by FIDIC is that they allocate risk between the contracting parties in a fair and balanced manner. Accordingly, FIDIC has adopted as a core principle the implementation of its contracts in a more equitable, balanced, and predictable way.

B. TERMINATION OF USUFRUCTUARY LEASES

Each of the FIDIC Contracts has been drafted by taking into account the specific characteristics of different international construction projects, and the FIDIC Contracts, which have gained worldwide recognition, have been categorized under six main headings, each of which has over time evolved into a distinct book. The FIDIC Contracts are distinguished by the colors of their covers, and the fundamental differences among them arise primarily in the determination of the obligations of the employer and the contractor.

  1. Red Book (Conditions of Contract for Construction): It is used in projects where the design is carried out by the employer and the construction is undertaken by the contractor. The Red Book, which has the widest application in the field of construction in Türkiye, sets forth the fundamental principles of tendering and construction contracts.
  2. Yellow Book (Conditions of Contract for Plant – Design Build): It is preferred in projects where the contractor undertakes both the design and the construction.
  3. Silver Book (Conditions of Contract for EPC/Turnkey Projects): It is designed for projects in which the Contractor undertakes all engineering, procurement, and construction works and delivers a turnkey facility to the Employer. It imposes a high level of risk on the contractor. This form is typically used in complex construction projects such as infrastructure works—including highways and bridges—as well as power plants.
  4. Green Book (Short Form of Contract):  It is used for small-scale projects or projects where the works are simple or repetitive in nature. It is preferred for facilities with a contract price of less than USD 500,000 and an expected completion period of six months.
  5. Gold Book (Conditions of Contract for Design, Build and Operate Projects): It is preferred for investment projects requiring substantial capital. In contrast to the build-operate-transfer model under Turkish law, the contractor is not obliged to provide the financing necessary for the construction.
  6. White Book (Client/Consultant Model Services Agreement): It is preferred for employer/consultant service agreements.

An examination of FIDIC Contracts reveals that their content is generally structured upon a specific framework. FIDIC Contracts consist of 8 main sections and 2 principal parts. The first part sets out the general conditions of the contract, while the second part contains the particular conditions, which are drafted in consideration of the specific characteristics of each project. Nevertheless, the general and particular conditions of FIDIC Contracts are of a recommendatory nature for the parties to construction contracts and do not carry any binding legal effect. Accordingly, there is no obligation to apply the general conditions as they stand, and the contracting parties are free to regulate the provisions contained therein under the particular conditions.

In addition, the doctrine emphasizes that, as FIDIC does not possess a supranational character, the provisions of FIDIC Contracts should not be regarded as mandatory in nature. Accordingly, it is argued that specifying the governing law and the competent courts applicable to FIDIC Contracts would be beneficial4.

III. AN EVALUATION OF FIDIC CONTRACTS FROM THE PERSPECTIVE OF TURKISH LAW

A. The Position of Construction Contracts in Turkish Law

Although there is no specific regulation on construction contracts under Turkish legislation, in terms of their legal nature, construction contracts are considered one of the most common types of contracts for work, which are regulated under Articles 470–486 of the Turkish Code of Obligations No. 6098 (“TCO”). A contract for work is defined in Article 470 of TCO as a contract whereby the contractor undertakes to produce a work, and the employer undertakes to pay a price in return.

In recent years, very large and complex investments have been made in Türkiye across various sectors by both domestic and foreign investors. Foreign investors and international financing institutions tend to prefer contract forms that they have previously used in other projects, and in the field of construction, this form is generally encountered as the FIDIC Contracts. However, it should be noted that FIDIC Contracts are not only used in international projects but are also applied in smaller-scale, local projects5.

B. Some Distinctions Between FIDIC Contracts and Turkish Legal Practice

i.            Force Majeure

FIDIC Contracts have been developed on the basis of the Anglo-Saxon legal system and have been particularly influenced by the practices of the United Kingdom. While the principle of the sanctity of contract is recognized as a fundamental rule in the Anglo-Saxon legal system, Turkish law—belonging to the Continental European legal tradition—adopts the principle of pacta sunt servanda, which provides a comparatively more flexible approach. This structural divergence becomes particularly apparent in the assessment of circumstances affecting the performance of contractual obligations, such as force majeure. In this context, the determination of the legal system governing the contract may also have significant implications for the interpretation of concepts such as force majeure.

Although the effects of force majeure have been examined under various provisions of TCO, the concept itself has not been explicitly defined. Therefore, in Turkish law, the notion of force majeure has gained clarity only to the extent explained in doctrine and case law, and the parties are free to regulate it contractually within this framework. Under Turkish law, as a consequence of the principle of pacta sunt servanda, the parties are obliged to perform their contractual obligations in accordance with the agreed undertaking. However, in circumstances such as force majeure, it cannot be expected that the parties will remain strictly bound by the contract. Accordingly, it may be stated that situations like force majeure constitute an exception to the principle of pacta sunt servanda6.

On the other hand, the FIDIC Red Book contains more detailed provisions regarding force majeure compared to the TCO and prescribes stricter and clearer rules for such circumstances. Indeed, pursuant to the principle of sanctity of contract, it is assumed that the parties accept all risks arising from the contract before entering into it, and contractual obligations are regarded as absolute. For this reason, since a party cannot be released from its contractual obligations even when performance becomes onerous or even impossible, protective provisions addressing changing circumstances are incorporated into the contracts. In this context, the purpose of regulating the force majeure clause in such detail under the FIDIC Contract is to release one of the parties from its contractual performance in the event of unforeseeable consequences or an unexpected occurrence beyond the control of the parties7.

ii.            The Concept of “Engineer”

Unlike the classical contractual structure generally established between the employer and the contractor under the framework of the TCO in the Turkish legal system, FIDIC Contracts also involve a third party, namely the engineer. The engineer is appointed by the employer and, throughout the duration of the contract, holds the authority to supervise, inspect, and make decisions in technical, administrative, and financial matters on their own behalf. Although not a party to the contract, the engineer plays an active role in its implementation.

Within the systematic framework of FIDIC Contracts, the role of the engineer is not limited to supervising the implementation of the works, but also encompasses functions such as preparing progress payments and contributing to the resolution of disputes. However, since the engineer is appointed by the employer and acts on its behalf, this raises certain debates concerning the principle of impartiality, particularly in disputes that may arise with the contractor. From the perspective of the Turkish legal system, if the Contractor has not been previously informed about the acts carried out by the engineer, such acts are deemed binding on the employer. In this regard, the scope of the engineering function extends beyond a purely technical role and carries the potential to produce legal consequences.

iii.            Time Limitations

In FIDIC Contracts, where the contractor fails to complete the works within the period stipulated in the contract, the contractor is required to pay the employer compensation for delay; however, there is no explicit definition as to whether such compensation -under Turkish law- constitutes liquidated damages or a penal clause.  On the other hand, since penal clauses and liquidated damages are regulated separately under Turkish law and entail different legal consequences, it is important, when drafting the particular conditions of FIDIC Contracts, to include clear provisions that take this distinction into account and that are in conformity with the parties’ intentions and the purpose of the contract.

iv.           Language of the Contract

The original language of FIDIC Contracts is English. Although TMMMB has translated the 1999 editions of the Red Book, the Yellow Book, and the Silver Book into Turkish, the 2017 editions and subsequent versions have not yet been translated. Nevertheless, since the terminology used in FIDIC Contracts is predominantly derived from the Anglo-Saxon legal system, it is difficult to expect the Turkish translations to fully reflect the essence of certain legal terms. Therefore, it is advisable to conduct a detailed examination of the English text of the FIDIC Contract to be used for a specific project.

Another important aspect with respect to the language of the contract arises from Law No. 805 on the Mandatory Use of Turkish in Economic Enterprises (“Law No. 805”). Pursuant to Law No. 805, where both parties to the contract are Turkish, the contract must be drafted in Turkish, and even if it is prepared in two languages, the Turkish text shall prevail. Under Law No. 805, contracts concluded in violation of this law are not recognized in favor of the contracting parties, which may create problems in projects where financing is provided by foreign investors8.

IV. CONCLUSION

FIDIC Contracts are an important instrument in the international construction sector, ensuring standardization and balancing risks between the parties. With the growth of the Turkish economy, the number of large-scale and technically complex projects undertaken by both domestic and foreign investors across various sectors has been increasing. Within these projects, the construction sector has been gaining an increasingly larger share in terms of investment volume; in this context, FIDIC Contracts have become a frequently preferred framework for both investors and institutions providing project financing. Consequently, the widespread use of FIDIC Contracts in Türkiye necessitates a detailed analysis of their provisions from the perspective of Turkish law and the adaptation of conflicting regulations to the local legal system through particular conditions.

In light of the foregoing, a FIDIC Contract subject to Turkish law will be assessed under Articles 26-27 of the TCO. Accordingly, although the principle of freedom of contract applies, where Turkish law is the governing law, the FIDIC Contract must not contravene mandatory rules of the law, morality, public order, or personal rights, nor may it have an impossible subject matter. Otherwise, the partial or entire invalidity of the provisions of the FIDIC Contract may arise9.

For FIDIC Contracts to be effectively implemented in Türkiye, it is necessary to increase training programs for lawyers, engineers, and project managers. In order to ensure consistency in translation and interpretation, official Turkish versions of FIDIC texts should be prepared, and Turkish-language resources providing a detailed explanation of FIDIC contractual documents should be expanded. Furthermore, the wider use of adapted versions of FIDIC Contracts in public projects would be beneficial.

References

  1. Ogeday Çuhadar, The Fundamental Obligations of the Employer in FIDIC Conditions of Contracts for Construction, August 2010, p. 2 ↩︎
  2. Aslı Budak, Türk Eser Sözleşmesi Hukuku Işığında FIDIC Sözleşmesi, Uluslararası İnşaat Sözleşmeleri ve Uyuşmazlık Çözüm Yolları, April 2018, p. 92 ↩︎
  3. Çuhadar, p. 121 ↩︎
  4. Budak, p. 91 ↩︎
  5. Budak, p. 89 ↩︎
  6. Mahmut Alper Kılıç, Effect of Force Majeure on Wage Payment Obligation in Construction Contracts under the FIDIC Red Book 1999 and the Turkish Code of Obligations, Terazi Hukuk Dergisi, Volume 17, Issue 186, February 2022, p. 66 ↩︎
  7. Kılıç, p. 66 ↩︎
  8. Budak, p. 101 ↩︎
  9. Budak, p. 93 ↩︎

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EVALUATION OF TERMINATION AND EVICTION PROVISIONS REGARDING THE RENTAL OF COVERED COMMERCIAL PREMISES UNDER A USUFRUCTUARY LEASE

ABSTRACT

Pursuant to Article 357 of the Turkish Code of Obligations1 numbered 6098 (“TCO”), a usufructuary lease is a type of bilateral agreement under which the lessor grants the lessee both the right to use and the right of usufruct, with rent directly tied to the revenue generated. This study examines the concept of “product,” the rights and assets that may constitute the subject matter of such a lease, and the significance of transferring elements such as operating licenses, fixtures, and commercial reputation to the lessee. Additionally, pursuant to Articles 362 and following of the TCO, the study explores termination, renewal, and extraordinary termination in usufructuary leases, including special termination events such as the lessee’s bankruptcy or death. In light of legislation, doctrinal perspectives, and leading Court of Cassation rulings, this study seeks to clarify the boundaries of the usufructuary lease regime as applied to commercial premises.

Keywords: Usufructuary Lease, Revenue Lease, Covered Commercial Premises, Lease, Lease Agreement, Termination, Eviction

I. INTRODUCTION

The TCO classifies lease agreements into three principal categories: ordinary leases, residential and covered commercial premises leases, and usufructuary leases. Articles 357–378 of the TCO, addressing usufructuary leases, have historically been applied in areas such as agricultural production mining operations, or fishery leases However, with the development commercial life, they have also become applicable to covered commercial premises with high turnover potential, such as restaurants, cafés, tourism businesses, and shopping mall stores.

Particularly, the leasing of covered commercial premises within the scope of a usufructuary lease entails not only the physical premises of the business but also elements such as the operating license, fixtures and the customer base, this results in a more complex legal structure compared to classical lease agreements.  In this context, the relationship between product leases and the protective provisions specific to residential and covered commercial premises leases, the balance of power between the parties, and the limits of termination possibilities gain significance.

II. LEGAL SCOPE OF USUFRUCTUARY LEASES AND THEIR APPLICATION WITH RESPECT TO COVERED COMMERCIAL PREMISES

Pursuant to Article 357 of the TCO, a usufructuary lease is an agreement whereby the lessor undertakes to grant the lessee the use of a thing or a right that yields products, together with the products obtained therefrom, in return for a fixed or determinable consideration. The definition set forth in this provision reveals two essential elements for understanding the legal scope of a usufructuary lease the transfer to the lessee not only of the right of use but also of the right of usufruct and the linking of the rent directly to the products obtained. Accordingly, it is possible to state that the usufructuary lease is a fully bilateral agreement.

The product which is the subject of a usufructuary lease may be defined, in an economic sense, as any yield obtained through the use of a thing in accordance with its purpose. The subject matter of a product lease may consist of rights and assets that yield legal products, as well as land and businesses that produce agricultural products2.

In the specific context of businesses classified as covered commercial premises, a usufructuary lease entails the transfer to the lessee not only of the premises themselves, but also of the fixtures and furnishings of the premises, the operating right, the customer portfolio, the elements constituting the commercial goodwill and, in particular, the operating license. The operating license constitutes an indispensable requirement, as it enables the lessee to conduct the business in their own name and on their own account, to benefit from the products independently, and to render the business fully operational3. In examining whether a business has been leased under a usufructuary lease, the Court of Cassation applies the criteria of (i) delivery of  the leased premises together with the fixtures and the operating license, (ii) agreement of the rent as a certain proportion of the monthly turnover4. The Court of Cassation’s consistent position is that determining the rent solely on the basis of turnover is not sufficient to establish the existence of a usufructuary lease relationship. An examination of the Court of Cassation’s precedents reveals that, in cases where the operating license has not been transferred, the agreement cannot be classified as a usufructuary lease even if the rent is indexed to turnover.

The requirement, in practice, that the transfer of the operating license be a prerequisite for applying the provisions on revenue leases to lease agreements has been subject to criticism in the legal doctrine, as under the TCC, the existence of an operating license is not an essential element to carry out business activities. In such a case, an element not provided for in the legislation is being introduced into the concept of a usufructuary lease agreement through case law. Within the scope of this study, we take the view that the Court of Cassation’s well-founded and consistent approach in taxi plate leasing cases 5, where the factual relationship constitutes a usufructuary lease, and the absence of license transfer alone does not render that relationship as something other than a usufructuary lease, should likewise be applied in the context of commercial premises leases.

III. TERMINATION OF USUFRUCTUARY LEASES

ITermination of usufructuary lease agreements is regulated under Articles 362 and the following of the TCO, distinguishing between fixed-term and indefinite-term agreements. In both cases, if the lessee fails to pay rent or ancillary charges post-delivery, the lessor may, by giving the lessee a written grace period of at least sixty days, notify the lessee that the agreement will be terminated if the payment is not made within that period. Fixed-term leases expire automatically upon term completion, without need for notice. Unless the usufructuary lease agreement is expressly or tacitly renewed, it terminates automatically6. Article 367/2 of the TCO stipulates that renewal is deemed valid for one year rather than for an indefinite term, contrary to the general provisions. Accordingly, the lessor’s claims regarding the tacit renewal of the agreement may only be valid for a period of one year, and in this respect it may be said that the lessor’s ability to obtain eviction is considerably strong.

If the parties have not specified a term when concluding a usufructuary lease agreement, the agreement is considered to be of indefinite duration. Pursuant to Article 368 of the TCO, unless a different termination notice period has been agreed in the agreement or established by local custom, either party to an indefinite-term usufructuary lease may terminate the agreement by giving at least six months’ prior notice. Such notice must be served at least six months before the end of the lease year. In addition, under the heading of extraordinary termination in usufructuary leases, the legislator has provided under Articles 369 and the following provisions of the TCO that extraordinary termination may take place in the presence of significant reasons.  It then addresses the cases of lessee’s bankruptcy and death as specific instances of extraordinary termination7.  Pursuant to Article 370 of the TCO, in the event of the lessee’s bankruptcy, the agreement terminates automatically upon the opening of bankruptcy proceedings, without the need for any termination notice from either the lessee or the lessor. However, if the lessee provides sufficient security for the current rent and for the property recorded in the inventory, they may continue the agreement until the end of the lease year. In the event of the lessee’s death, both the lessee’s heirs and the lessor may terminate the agreement by complying with the statutory six-month termination notice period.

IV. OPINIONS ON THE APPLICABILITY OF THE TERMINATION AND EVICTION PROVISIONS GOVERNING THE LEASE OF RESIDENTIAL AND COVERED COMMERCIAL PREMISES TO USUFRUCTUARY LEASES

Pursuant to Article 347 of the TCO, in the lease of residential and covered commercial premises, unless the lessee gives notice at least fifteen days prior to the expiry of a fixed-term agreement, the agreement is deemed to have been renewed for one year under the same terms. As can be seen, in the lease of residential and covered commercial premises, the legislator, has provided for the extension of the agreement in a protective approach of the lessee, making such extension contingent upon the lessee’s failure to give notice, whereas in a usufructuary lease the agreement terminates automatically at the end of the term.

Pursuant to Article 352 of the TCO, in the lease of residential and covered commercial premises, , in the case of leases with a term of less than one year, the lessee, fails to pay the rent within the lease term, or, in the case of leases with a term of one year or longer, fails to pay the rent within a lease year or within a period exceeding a lease year, thereby causing the lessor to serve two justified written notices, the lessor may terminate the lease agreement through legal action within one month following the end of the lease term or, in the case of  agreements longer than one year , within one month after the end of the lease year in which the notices were served. In usufructuary leases, however, while the agreement may be terminated at the end of each lease year subject to compliance with the applicable notice periods, both parties retain the right to extraordinary termination at any time if the lease relationship becomes intolerable.

In addition, in the lease of residential and covered commercial premises, the partners of a deceased lessee, or the heirs of such partners who engage in the same profession or trade, as well as those who resided with the deceased lessee in the same dwelling, may continue the lease as parties to the agreement, provided that they comply with the terms of the agreement and the relevant legal provisions. However, as noted in this study, in usufructuary leases, upon the death of the lessee, both the lessor and the heirs may terminate the lease agreement by complying with the applicable notice periods.

Where covered commercial premises are leased under a usufructuary lease arrangement, the applicability of termination and eviction provisions requires a separate assessment. One view in the legal doctrine maintains that such agreements should be governed entirely by the provisions on usufructuary leases, and that the restrictive provisions set forth in Articles 346 and the following of the TCO for residential and covered commercial leases should not apply8. The opposing view argues that, due to the nature of covered commercial premises, certain lessee-protective provisions should be applied by analogy9.

Within the scope of this study, we agree with the view that where covered commercial premises are leased under a usufructuary lease arrangement, the agreement should be governed entirely by the provisions applicable to usufructuary leases. This is because the lessor undertakes additional commercial and organizational responsibilities, prepares the premises for operation in terms of fixtures and even transfers the operating license to the lessee, thereby assuming obligations that are significantly more burdensome than those in a standard covered commercial premises lease. The protective provisions for the lessee under the TCO in relation to residential and covered commercial leases are premised on the assumption that the lessee occupies a weaker position than the lessor and therefore requires protection. However, in the case of covered commercial premises leased under a usufructuary lease, it cannot be said that the lessee is in a weaker position vis-à-vis the lessor. The Court of Cassation likewise holds the view that, the lessee does not occupy a disadvantaged position in usufructuary leases10.

V. CONCLUSION

The leasing of covered commercial premises under a usufructuary lease arrangement creates a complex legal relationship, in which the lessor transfers not only the physical premises but also elements that directly affect the operation of the business, such as operating licenses, fixtures, and customer base, to the lessee. In terms of termination and eviction, different regimes apply depending on whether the agreement is fixed-term or indefinite term, and in special situations such as the lessee’s bankruptcy or death, the rules on extraordinary termination apply.

We are of the opinion that the lessee-protective provisions specific to residential and covered commercial leases should not be applied to usufructuary lease agreements, since the legal relationship between the parties is more balanced and the lessee cannot be regarded as the weaker party. In such cases, contractual freedom should be respected in the parties’ commercial dealings. Considering the additional obligations and commercial responsibilities assumed by the lessor, the legal framework of usufructuary leases allows the parties to determine the terms freely, thereby providing flexibility in commercial life.

References

  1. ↩︎
  2. Gözdenur Güllü İmamoğlu, Ürün Kirası, 2025, p. 27-28 ↩︎
  3. Mustafa Koca, Türk Hukukunda Ürün Kirası, 2016, p. 16 ↩︎
  4. Court of Cassation, 6th CC., Decision No. 2014/12899, Case No. 2014/11996, dated November 24, 2014 ↩︎
  5. Court of Cassation, GACC., Decision No. 2023/419, Case No. 2022/583, dated May 3, 2023 ↩︎
  6. Şeyhmus Darcan, Ürün Kirası Sözleşmesi, 2020, p. 194 ↩︎
  7. İmamoğlu, op. cit., p. 192 ↩︎
  8. İmamoğlu, op. cit., p. 91 ↩︎
  9. Darcan, op. cit., p. 196 ↩︎
  10. Court of Cassation, GACC., Decision No. 2004/222, Case No. 2004/11-222, dated April 14, 2004 ↩︎

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THE THEORY OF PIERCING THE CORPORATE VEIL IN CAPITAL COMPANIESLIMITATION OF PRE-EMPTIVE RIGHTS IN JOINT STOCK COMPANIES

ABSTRACT

A legal personality is a structure that emerges in areas where individual effort falls short and is defined as a legal existence independent of the person. In capital companies, the principles of limited liability and separation apply; within this framework, shareholders are liable only to the extent of the capital they have committed and only toward the company. However, despite these principles, legal personality is sometimes abused and instrumentalized in a manner that harms third parties.

In such cases, pursuant to Article 2 of the Turkish Civil Code1 numbered 6427 (“TCC“), the principle of good faith and the prohibition of abuse of rights come into play, and the corporate veil is pierced to hold the real persons behind the personality directly liable. In this study, the concept of legal personality will be explained, and the procedures for piercing the corporate veil, as well as how and under what circumstances it occurs, will be examined in detail together with the theory of organic connection and its differences.

Keywords: Legal Personality, Principle of Limited Liability, Principle of Separation, Piercing the Corporate Veil, Abuse of Rights, Principle of Good Faith, Organic Connection

I. INTRODUCTION

In modern legal systems, the concept of personhood includes not only real persons but also legal personalities that are established for specific purposes and recognized as independent legal existences. Real personality is an important legal tool that enables the collective execution of economic and commercial activities. However, this structure may sometimes be abused by shareholders or managers to serve the purpose of harming third parties.

In such cases, it becomes possible to circumvent the boundaries of separation and non-liability recognized by the legal order and to avoid responsibility by hiding behind the corporate personality. In situations that constitute an exception to the principle of separation and non-liability between the legal personality and its shareholders, namely, when the structure of the legal personality is abusively used in violation of the legal order or when the distinction between the company and the shareholders clearly contradicts the principle of good faith, the theory of “piercing the corporate veil” is invoked.

II. THE CONCEPT OF LEGAL PERSONALITY

When evaluated from a legal standpoint, the concept of “person” refers to entities that have the capacity to hold rights and assume obligations. Although real persons come to mind at first in line with this definition, due to the inadequacy of individual effort in achieving certain goals and the compulsion of social needs, some groups of persons and assets have also been recognized as “persons” by the legal order. These collectives, referred to as legal persons, are entities formed through contracts and are defined as legal personalities separate and independent from the real or legal persons who execute such contracts2.

Legal personality can be defined by reference to the first paragraph of Article 47 of the TCC. A legal person is a group of persons or assets that is organized to achieve a specific and continuous objective, and is independent from the individuals who have established it3.

III. CERTAIN PRINCIPLES GOVERNING LEGAL PERSONALITY

A. The Principle of Limited Liability

In general, what is meant by limited liability in partnership law is the limitation of partners’ liability to creditors for partnership debts4. The principle of limited liability in capital companies expresses that shareholders are liable only to the extent of the capital they have committed or actually brought into the company; third parties may resort solely to the assets of the company to satisfy company debts. For joint stock companies, it is explicitly regulated that shareholders are liable only with their committed share capital and only towards the company5.

Additionally, due to the company’s debts to third parties, a shareholder bears no liability whatsoever toward the company’s creditors; nor does the shareholder have any obligation to fulfill these debts. In other words, since companies are liable for their debts only with their own assets, company creditors may not make any personal claim against shareholders, whether directly or indirectly. A shareholder is deemed to have fulfilled their obligation by paying the committed share capital to the company, and upon such payment, their liability toward the company ceases.

B. The Principle of Separation

The principle of separation refers to the legal personality’s possession of capacity to hold rights and undertake obligations independently from both its members and third parties, and in this context, to its ownership of a distinct and separate estate. In this regard, capital companies are liable for partnership debts only with their own assets. Accordingly, real or legal persons who come together under the roof of a legal personality are not held liable for the debts of the partnership, thanks to the principle of separation6.

In this respect, the principle of separation can be examined under two subcategories. Under the scope of personal separation, legal personalities are permanent organizations that are distinct from their founders, members, and shareholders, and are unaffected by the lifespan of those individuals meaning that the persons forming the legal personality and the legal personality itself are different from one another.

Asset separation means that the legal personality possesses a property that is separate and independent from the persons who constitute it. Thanks to the principle of asset separation, the legal personality becomes directly liable for the legal transactions to which it is a party, and in principle, the individuals forming the legal personality do not bear liability. Accordingly, legal personalities are liable only to their own creditors and are fully liable with all of their assets. As a rule, shareholders cannot be held liable for the debts of the legal personality, and likewise, the debts of shareholders cannot be claimed from the legal personality7.

The principle of separation establishes a legal distinction and distance between the legal person and the real persons who constitute it. This is a natural consequence of the separation principle and essentially aims to limit the personal liability of shareholders toward third parties. However, in certain exceptional circumstances, this distinction may be breached, and the individuals behind the legal personality may be held directly liable.

IV. PIERCING THE CORPORATE VEIL

Piercing the corporate veil, in its most basic sense, refers to the disregard of the principle of separation of the legal person in a concrete case, thereby allowing third-party creditors of the legal personality to hold the individuals constituting that legal personality liable8.

Circumventing legal rules to commit fraud against the law; individuals using a separate legal personality as a shield to avoid fulfilling contractual obligations they are party to through that legal personality, or causing harm to third parties and subsequently hiding behind such a structure, these are incompatible with the principle of good faith and the prohibition of abuse of rights and cannot be protected by the legal order. In such cases, as the second paragraph of Article 2 of the TCC stipulates that the abuse of a right shall not be protected, the corporate veil must be pierced, and the real persons behind the personality must, where necessary, be held directly liable.

Circumstances such as the mixing of the legal personality’s assets and organizational structure with those of the shareholders, the shareholders acting as if there is no legal separation between them and the legal person, or failing to observe a boundary between their personal property and the company’s property, or continuing operations with insufficient capital, especially when the legal personality is intentionally used in a manner that causes harm to third parties, are among the primary grounds for piercing the corporate veil.

In legal doctrine, the theory of piercing the corporate veil is addressed in three distinct forms: direct (straight), indirect (reverse), and lateral (cross) piercing. In the case of direct piercing, the controlling or sole shareholder who abuses the legal personality to avoid liability is held personally liable toward the creditors of the legal personality. The Court of Cassation decisions also acknowledge and apply the concept of direct veil piercing9. In reverse piercing, however, the creditors of a shareholder are permitted to pursue claims against the legal personality over which the shareholder exercises control, holding both the shareholder and the legal personality jointly liable10. Cross piercing of the veil arises not only between parent and sister companies but also among sister companies within a corporate group or holding structure.

If a decision is made to pierce the corporate veil, the legal personality and those who constitute or control it are treated as if they were the same person. In the case of direct veil piercing, the debts of the legal personality are extended to the shareholders, making them personally liable for satisfaction of such debts11.

V. THE THEORY OF ORGANIC CONNECTION

Alongside the theory of piercing the corporate veil, another theory that must be discussed is the theory of organic connection. In corporate law, the term organic connection refers to relationships between different companies. It can be said that the term denotes the execution of commercial transactions and dealings among related persons, such as in cases of ownership or creditor relations, without establishing a formal company partnership or corporate group structure, thereby concealing the actual owners and transactions behind different companies, persons, or representatives and disguising the economic and commercial activities accordingly12. Organic connections reveal that although companies appear to be independent personalities, they are in fact part of a network managed by the same individuals or organizations.

The concept of organic connection is not regulated under Turkish law by statute, but has emerged through customary practice and case law of the Court of Cassation. It may be said that proving the existence of an organic connection requires a lesser evidentiary burden compared to piercing the corporate veil13. The Court of Cassation recognizes that organic connection can be identified through similarities in companies’ addresses, fields of activity, shareholders, and representatives, as well as by establishing the legal relationships between them14.

The concepts of piercing the corporate veil and organic connection are closely related but nonetheless distinct theories within corporate law. Both theories ultimately aim at broadening the scope of liability. Piercing the corporate veil typically enables a creditor to reach beyond the company to the real person shareholders behind it and to hold them liable. By contrast, the theory of organic connection allows different legal personalities to be held jointly and severally liable if a relationship between them exists. The fundamental difference between the two theories is that piercing the veil targets the liability of real persons, whereas the organic connection theory assigns liability to another legal personality.

VI. CONCLUSION

The concept of legal personality is a fundamental building block in the regulation of complex economic and social relations within modern legal systems. Legal persons, which are recognized as legal personalities independent of real persons, operate as collectives organized for a specific purpose; and thanks to the inherent principles of separation and limited liability, the personal assets of shareholders are protected and risks are confined within defined limits.

However, particularly in cases where legal personality is abused with the intent to harm third parties, such conduct is clearly contrary to the principle of good faith, and in such circumstances, the piercing of the corporate veil comes to the fore. Although the principles of limited liability and separation constitute the foundational elements of legal personality, when these principles are abused, the legal order may pierce the corporate veil and impose direct liability on the real persons behind it. This mechanism serves the administration of justice by preventing the abuse of rights.

References

  1. Official Gazette dated 21.11.2001 and numbered 24607 ↩︎
  2. Prof. Dr. Hasan PULAŞLI, Şirketler Hukuku Şerhi Volume I, Edition 4, Adalet Yayınevi, Ankara, 2022, p. 169 ↩︎
  3. Fahri Erdem KAŞAK, Tüzel Kişilik Kavramı ve Tüzel Kişilik Perdesinin Kaldırılması, Marmara Üniversitesi Hukuk Fakültesi Hukuk Araştırmaları Dergisi, Edition 26, December 2020, p. 1243 ↩︎
  4. Dr. Emrullah KERVANKIRAN, Sermaye Ortaklıklarında Sınırlı Sorumluluk İlkesine Karşı Önemli Bir İstisna: Tüzel Kişilik Perdesinin Kaldırılması, Erzincan Üniversitesi Hukuk Fakültesi Dergisi, Edition 11, Issue 3-4, December 2007, p. 456 ↩︎
  5. Turkish Commercial Code (TTC), Article 329 ↩︎
  6. PULAŞLI, p. 175 ↩︎
  7. KAŞAK, p. 1250 ↩︎
  8. KAŞAK, p. 1251 ↩︎
  9. Court of Cassation. 9th Chamber, Dated 04.07.2008, Numbered 2008/12981, Decision 2008/18875 (www.legalbank.net); Court of Cassation. 23rd Chamber, Dated. 11.10.2012, Numbered. 2012/4160, Decision. 2012/5938 (www.lexpera.com.tr). ↩︎
  10. KAŞAK, p. 1258 ↩︎
  11. KAŞAK, p. 1260 ↩︎
  12. Dr. Namık Kemal UYANIK, Tüzel Kişilik Perdesinin Kaldırılması ve Organik Bağ, Edition 3, Seçkin Yayınevi, Ankara, 2023, p. 927 ↩︎
  13. UYANIK, p. 971 ↩︎
  14. Court of Cassation. 9th Chamber, Dated. 14.11.2018, Numbered. 2018/2125, Decision. 2018/20573 (www.lexpera.com.tr). ↩︎

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LIMITATION OF PRE-EMPTIVE RIGHTS IN JOINT STOCK COMPANIES

ABSTRACT

The pre-emptive right granted to shareholders in joint stock companies is a fundamental safeguard aimed at ensuring the continuity of the existing shareholding structure during capital increase processes. However, depending on the company’s financial status, investment plans, or long-term strategic objectives, the limitation of this right may arise under certain circumstances. The Turkish Commercial Code allows the limitation of pre-emptive rights only on the condition that it is based on justified grounds and that specific procedural rules are complied with. In this article, the legal grounds, conditions of application, and legal consequences of such limitation will be addressed.

Keywords: Joint Stock Company, Pre-Emptive Right, General Assembly, Board of Directors, Limitation, Removal

1. INTRODUCTION

In the narrow sense, the pre-emptive right is a shareholder right that entitles shareholders to acquire the newly issued shares in a capital increase, in proportion to their existing shareholding, before external parties1. Under the Turkish Commercial Code numbered 6102 (“TCC”), the pre-emptive right is defined as a privilege granted to joint stock company shareholders to preserve their existing shareholding ratios during capital increases.

With the entry into force of TCC on July 1, 2012, significant structural changes were introduced in the regulations regarding pre-emptive rights. Within this scope, the adoption of the registered capital system has been permitted also for non-public joint stock companies; and clarity has been provided regarding which corporate body is authorized to determine the duration for exercising the right to acquire new shares. Furthermore, invoking share transfer restrictions as a justification for limiting this right has been prohibited, and efforts have been made to establish a balance in line with the principle of equal treatment. Thus, with the new system, not only has the protection of shareholders’ existing share ratios been secured, but also the potential for abuse in the capital increase process has been reduced2.

In this article, within the framework of the aforementioned regulations, the legal grounds and application of the limitation of pre-emptive rights will be elaborated, and how such rights may be limited in a manner that protects shareholder interests, as well as under which conditions such limitations will be valid, will be examined

2. CAPITAL INCREASE IN JOINT STOCK COMPANIES AND THE PURPOSE OF THE PRE-EMPTIVE RIGHT

In joint stock companies, the concept of capital is addressed within the framework of two different systems. While the principal capital refers to the amount of capital specified and fully committed in the company’s articles of association, the registered capital defines the ceiling amount that a company may increase its capital up to. The pre-emptive right can be exercised under both capital systems; however, by its nature, it becomes operative only in the case of external capital increases. Indeed, external capital increase refers to the process whereby new shareholders join the company with the aim of increasing the company’s equity. In such cases, the shareholding ratios of existing shareholders may change. The purpose of the pre-emptive right in such capital increases is to enable existing shareholders to preserve their current shareholding ratios3.

3. LIMITATION OF THE PRE-EMPTIVE RIGHT

Although the pre-emptive right serves to protect shareholders’ rights, it may also prolong the capital increase process, raise costs, and hinder companies from securing capital swiftly4. Therefore, the limitation of the pre-emptive right may emerge as a favorable privilege for the protection of the company. In cases where the allocation of new shares to third parties takes precedence over the existing shareholders’ pre-emptive rights, the limitation of such rights may come into question5.

On the other hand, a disproportionate limitation of the pre-emptive right may weaken shareholders’ fundamental financial and managerial rights, such as the right to receive dividends and the right to vote at the general assembly. For such reasons, the limitation of the pre-emptive right has been explicitly and definitively regulated under the TCC system, thereby safeguarding the interests of company shareholders.

A. TYPES OF LIMITATION OF THE PRE-EMPTIVE RIGHT

The limitation of the pre-emptive right may occur in two forms: restriction or removal. As can be understood from the wording of Article 461 of the TCC, the fundamental principle is that the pre-emptive right shall not be limited. However, in exceptional cases, limitation or removal of the pre-emptive right is permitted. Yet, in order to prevent such limitation or removal from being exercised arbitrarily, the relevant procedures have been subjected to specific rules6.[1]

Accordingly, limitation of the pre-emptive right may arise in such a way that only a certain portion of shareholders may benefit from the right to acquire new shares, or that some share classes may be completely excluded from this right. Full removal of the pre-emptive right means that all shareholders are deprived of the opportunity to acquire new shares and the right becomes entirely inapplicable. Both of these practices are integral parts of the capital increase resolution and must be evaluated and resolved jointly7.

B. COMPETENT CORPORATE BODY

TCC does not directly and explicitly regulate which corporate body of a joint stock company is authorized to limit the pre-emptive right. However, in view of the distinction made in Article 461 of the TCC, it can be stated that the capital system to which the company is subject is a determining factor in identifying the competent body. If the company is subject to the principal capital system, this decision is taken by the general assembly, whereas if it is subject to the registered capital system, the decision may also be taken by the board of directors.

To better understand the rationale for this distinction, it is necessary first to examine which corporate body is authorized to make capital increase decisions. This is because the exercise or limitation of the pre-emptive right is directly linked to the capital increase process.

In the principal capital system, the decision to increase capital is made by the general assembly. Therefore, in this system, the decision to limit the pre-emptive right also falls within the competence of the general assembly. However, the situation differs in the registered capital system. In this system, the company’s capital is increased, when needed, by a resolution of the board of directors. This authority must be based on an express authorization clause included in the company’s articles of association8.

The protection of the pre-emptive right is, in principle, guaranteed under the TCC, and limitation or complete removal of this right is allowed only in exceptional cases. In order for such an exception to apply, the legislator requires the fulfillment of two fundamental conditions simultaneously:

  • the general assembly must adopt the decision with an increased quorum (affirmative vote of at least 60% of the principal capital), and
  • the relevant limitation or removal must be based on justified grounds

Nevertheless, the fulfillment of these conditions does not permit the limitation or removal to be exercised arbitrarily. Furthermore, no person shall be unjustly benefited or harmed through the limitation or removal of the pre-emptive right9.

In cases where the articles of association grant the board of directors the authority to limit or fully remove the pre-emptive right, the board is obliged to prepare a detailed report that sets out the justified grounds upon which the decision is based, the reasons for issuing the new shares with or without a premium, and the basis for determining the applicable premium amount. The registration and announcement of this report in the trade registry is also mandatory, in order to ensure transparency toward shareholders and to allow for legal scrutiny of the decision10.

C. PRINCIPLES TO BE FOLLOWED IN LIMITING THE PRE-EMPTIVE RIGHT

In the preamble of Article 461/2 of the TCC, it is stated that the provision is based on four fundamental principles aimed at protecting shareholders and strengthening the right to acquire new shares. These principles are listed as follows:

  • The pre-emptive right cannot be limited through the articles of association,
  • The right can only be limited upon the existence of justified grounds,
  • The limitation cannot be carried out for the purpose of benefiting specific persons or causing loss to certain shareholders,
  • The right can only be limited through a resolution adopted with an increased quorum, and thus it constitutes a minority right11.

According to these principles, which are clearly stated in the preamble of the article, one of the most important points to be considered in the limitation of the pre-emptive right is that this process must not be carried out arbitrarily.

The law, by stipulating that the pre-emptive right may only be limited on the basis of justified grounds, aims to prevent the abuse of this right. The justified grounds for the limitation of the right must be linked to the actual needs of the company and commercial necessities. For instance, situations such as a public offering or a strategic merger may be considered justified grounds. However, it is not possible to limit this right solely based on the personal or group interests of any shareholder. This is of utmost importance for the protection of the equal rights of shareholders and the adoption of a fair governance approach. Moreover, since the limitation of the pre-emptive right may only be affected with the approval of a qualified majority, it must be ensured that such decisions are made in line with the interests of the company and all shareholders.

4. CONCLUSION

The pre-emptive right stands out as a fundamental right aimed at maintaining internal corporate balance during capital increases by allowing shareholders to preserve their existing shareholding ratios. However, in light of economic and structural necessities, the limitation of this right may, in certain cases, become a requirement for the benefit of the company.
In this context, this article has addressed the relationship of the pre-emptive right with external capital increases, its applicability under the registered and principal capital systems, the legal grounds for its limitation, and the impact of arbitrary and disproportionate limitations on shareholder rights. The types of limitation and the principles to be followed in their implementation have also been explained. As a result, the balance between the pre-emptive right and the interests of the company is a matter that must be carefully considered in each concrete case, and decisions concerning the limitation of this right must be assessed in both procedural and substantive terms in accordance with the principle of the rule of law.

References

  1. Mustafa Yavuz, “Anonim Şirketlerde Rüçhan Hakkı ile Bu Hakkın Sınırlandırılma Esasları”, Gümrük Ticaret Dergisi, 2021, p.13. ↩︎
  2. Preamble of TCC Article 461. ↩︎
  3. Yavuz, p.14. ↩︎
  4. Nihan Değirmencioğlu Aydın, “Anonim Şirketlerde Rüçhan Hakkı.”, On İki Levha Yayıncılık, 2021, s. 215. ↩︎
  5. Aydın, p. 216. ↩︎
  6. Mustafa Yavuz, p.18. ↩︎
  7. Adıgüzel, p. 3. ↩︎
  8. TCC Article 460/4 ↩︎
  9. TCC Article 461/2 ↩︎
  10. TCC Article 461/2 ↩︎
  11. Preamble of TCC Article 461. ↩︎

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THE FUNCTION AND SIGNIFICANCE OF COMMITTEES AFFILIATED TO THE BOARD OF DIRECTORS WITHIN THE FRAMEWORK OF CORPORATE GOVERNANCE PRINCIPLESPRE-JOINT STOCK COMPANY IN TURKISH LAW

ABSTRACT

Committees established within the board of directors, in accordance with corporate governance principles, are formed to enhance specialization, efficiency, and transparency in decision-making processes, thereby contributing to the board of directors’ ability to fulfill its duties more effectively. Although the specifics regarding these committees are regulated by the relevant legislation, their structure, areas of responsibility, and working methods may vary depending on the needs of each company, within the framework set by said legislation. The effectiveness of the committees depends on the clarity of their mandates, the formation of an appropriate member composition, and the establishment of a regular workflow. In this context, independent board members, in particular, play a critical role both by serving on committees and by maintaining the balance between the general assembly and the board of directors. This study comprehensively addresses the contributions of the committees and independent members to corporate governance within the framework of the relevant legislation

Keywords: Independent Board Member, Committees, Company Management, Corporate Governance Principles, Corporate Governance Communiqué

1. INTRODUCTION

The global development of the economy and commerce, the transformation of large-scale joint stock companies into multi-stakeholder structures, and the increasing number of publicly held companies have made it necessary to ensure the protection of investors, minorities, and other stakeholders. In order to safeguard these groups and ensure that companies are managed with a professional management approach, an effective corporate governance system must be established.

The concept of corporate governance does not have a definitive definition due to its dynamic and constantly evolving nature. However, it can generally be defined as a modern and contemporary form of management that prevents arbitrary decision-making by company management and ensures fairness, transparency, responsibility, and accountability1.

Article 365 of the Turkish Commercial Code2 numbered 6102 (“TCC“) states that the board of directors is responsible for the management of joint stock companies. Therefore, establishing an effective corporate governance structure is the responsibility of the board of directors. The effective functioning of this structure established by the board of directors is ensured through the committees affiliated to the board of directors.

This study examines the function, structure, and contributions to corporate governance of the committees established within the board of directors in accordance with the corporate governance principles. In this context, a detailed overview of the subject will be presented within the scope of the TCC, the Capital Markets Law3numbered 6362 (“CML“), the Corporate Governance Communiqué4 (II-17.1) (“Communiqué“), and the Corporate Governance Principles (“Principles“) attached to the Communiqué.

2. THE ROLE OF COMMITTEES IN THE IMPLEMENTATION OF CORPORATE GOVERNANCE PRINCIPLES

The corporate governance regulations within the TCC are limited, and the legislator has delegated the regulatory authority in this area to the Capital Markets Board (“Board”). This is stated in Article 1529 of the TCC as follows: “In publicly held joint stock companies, the corporate governance principles, the essentials of the board of directors’ statement regarding this matter, and the rules and results of the companies’ rating in this regard shall be determined by the Capital Markets Board.” The second paragraph of the same article also stipulates that other institutions may issue regulations, limited to their own areas of responsibility, with the approval of the Board5.

Article 17 of the CML, in parallel with the TCC, mandates that the Board shall determine the corporate governance principles, the content and publication of corporate governance compliance reports, the rating of companies’ compliance with these principles, and the procedures and principles regarding independent board memberships in publicly held partnerships. Furthermore, the Board is authorized to require publicly held partnerships, whose shares are traded on the stock exchange, to comply partially or fully with corporate governance principles based on their characteristics, to establish the procedures and principles related to this matter, and to make relevant decisions.

The Board has established comprehensive and detailed regulations regarding corporate governance principles through the Communiqué and the Principles. Article 1 of the Communiqué defines the scope of partnerships subject to the Principles. According to this article, the following are not subject to the provisions of the Principles:

  1. Publicly held partnerships whose shares are not traded on the stock exchange,
  2. Partnerships traded on markets and platforms other than the National Market, Second National Market, or Corporate Products Market6,
  3. Partnerships applying to the Board for an initial public offering, whose shares will be traded on markets and platforms other than the National Market, Second National Market, or Corporate Products Market,
  4. Partnerships considered to be resident abroad according to Decree No. 32 on the Protection of the Value of the Turkish Currency7.

For partnerships other than those listed above, the mandatory provisions of the Principles are specified in Article 5 of the Communiqué. Among these mandatory provisions are the committees that must be established under Article 4.5.1 of the Principles to ensure that the board of directors effectively fulfills its duties and responsibilities. Therefore, the establishment of committees affiliated with the board of directors is an indispensable and mandatory element in the implementation of the Principles.

Article 4.5.1 of the Principles mandates the establishment of the audit committee, the early risk detection committee, the corporate governance committee, the nomination committee, and the remuneration committee. If the nomination and remuneration committees cannot be established, the corporate governance committee shall assume their duties. Article 4.5.2 of the Principles states that the responsibilities, working procedures, and membership of the committees shall be determined by the board of directors and disclosed through the Public Disclosure Platform (“PDP”).

It is important to note that partnerships whose shares are offered to the public for the first time or that apply to the Board for their shares to be traded on the stock exchange must comply with the mandatory provisions of the Principles as of the date of the first general assembly following the commencement of trading of their shares on the stock exchange. Additionally, the Board classifies partnerships into three groups based on their systemic importance, considering their market value and the market value of their publicly traded shares. Upon transitioning between these groups, partnerships must comply with the obligations of the new group as of the date of the first general assembly following the publication of the Board’s decision regarding their inclusion in the new group in the Board’s bulletin.

Committees established under the board of directors are essentially sub-units that perform research, advisory, and preparatory functions for the board and do not have the status of separate entities8. To better understand the matters related to these committees, the concepts of “non-executive board membership” and “independent board membership” will be addressed first. Subsequently, the responsibilities, composition, and working principles of each committee will be examined individually.

3. THE RELATIONSHIP BETWEEN NON-EXECUTIVE BOARD MEMBERSHIP AND THE CONCEPT OF INDEPENDENCE

The concept of being “executive” essentially refers to actively participating in the daily operations of the company. Executive members, who play an active role in daily affairs within the company’s organizational structure, have a more significant influence on management and administration. Non-executive members, on the other hand, fulfill supervisory and oversight duties related to management9.To ensure effective oversight and supervision within companies, Article 4.3.2 of the Principles stipulates that non-executive members must constitute a numerical majority on the board of directors.

In Turkish law, non-executive board membership is regulated as a general concept, and independent board membership is defined based on the distinction between executive and non-executive roles10. This distinction is articulated in Article 4.3.3 of the Principles as follows: “Among the non-executive members of the board of directors, there shall be independent members who possess the ability to perform their duties without being influenced by any external factor.”  Similarly, Article 4.3.4 specifies that the number of independent members within the board of directors must not be less than one-third of the total number of members. To qualify as independent members, non-executive members must meet certain criteria, which are outlined in Article 4.3.6 of the Principles. Independent members are required to satisfy all these criteria.

The importance of independent membership becomes evident in the context of investor protection. Shareholders cannot directly monitor the company’s management, internal operations, and business activities. Therefore, the presence of independent board members is crucial for overseeing the company’s administration and management and safeguarding the interests of shareholders. By undertaking roles in committees affiliated with the board of directors, independent board members gain better access to internal company information, enhance their oversight capabilities, and contribute to minimizing risks in company management through their committee-based recommendations to the board. Consequently, the Communiqué and the Principles mandate the presence of independent board members on the board of directors and its affiliated committees.

The term of office for independent members on the board of directors is three years, and according to Article 4.3.5 of the Principles, re-election of independent members is permissible. Furthermore, any circumstance that jeopardizes the independence of an independent member must be immediately reported to the board of directors for public disclosure through the PDP. This matter must also be simultaneously reported to the Board in writing.

4. COMMITTEES AFFILIATED WITH THE BOARD OF DIRECTORS

Pursuant to Article 4.5.3 of the Principles, committees must consist of at least two members. In committees with two members, both members must be non-executive board members; in committees with more than two members, the majority must be composed of non-executive board members. It is stipulated that the chairs of the committees must be independent board members. Additionally, it is stated that individuals with expertise in the relevant field may serve as members of committees, except for the audit committee, even if they are not members of the board of directors.

Furthermore, the Principles state that to ensure the effective functioning of the committees, it is preferable that a board member does not serve on more than one committee, and that all necessary resources and support required for the committees to fulfill their duties must be provided by the board of directors. Committees may also seek independent expert opinions on matters they deem necessary for their activities, and the cost of such consultancy services shall be borne by the company.

All work carried out by the committees must be documented in writing and recorded. Committees must convene at the frequency specified in their working principles and submit reports to the board of directors, detailing their activities and meeting outcomes.

4.1.  Audit Committee

Pursuant to Article 4.5.9 of the Principles, the audit committee oversees the company’s accounting system, the public disclosure of financial information, the independent audit, and the functioning and effectiveness of the company’s internal control and internal audit systems. The selection of the independent audit firm, the preparation of independent audit agreements, the initiation of the audit process, and all phases of the audit firm’s work are carried out under the supervision of the audit committee. Furthermore, the audit committee determines the independent audit firm from which services will be procured and the services to be obtained from such firms, and submits these determinations to the board of directors for approval.

The audit committee’s evaluations regarding the compliance and accuracy of the annual and interim financial statements, which are to be disclosed to the public, with the company’s accounting principles are submitted in writing to the board of directors, along with the opinions of the company’s responsible executives and the independent auditors.

Article 4.5.3 of the Principles stipulates that all members of the audit committee must be selected from among independent members. This committee, composed entirely of independent members, conducts its activities by convening at least four times a year, on a quarterly basis. Disclosures regarding the activities and meeting outcomes of the audit committee must be included in the company’s annual report.

4.2. Corporate Governance Committee

This committee monitors compliance with corporate governance principles within the company, engages in improvement efforts, and provides recommendations to the board of directors in these areas. It operates to ensure the functionality of the corporate governance mechanism within the partnership, to monitor whether corporate governance principles are being implemented, to investigate the reasons if they are not being applied, to identify conflicts of interest arising from non-compliance with corporate governance principles, and to determine criteria for improving practices11.

The committee also supervises the activities of the investor relations department. Therefore, it plays an important role in establishing a functional governance structure and acts as a bridge. Consequently, it is essential that the members of this committee are professionals with relevant expertise, possess the necessary experience, and are independent12.

As previously mentioned, if the company does not have separate nomination and remuneration committees, the corporate governance committee will assume the duties of those committees. Given its broad scope of duties, the committee is considered to have an active and significant role in ensuring the functionality of the company’s corporate governance mechanisms.

4.3. Nomination Committee

    Regulated in two separate paragraphs under Article 4.5.11 of the Principles, the nomination committee works on establishing a transparent system for identifying, evaluating, and training suitable candidates for the board of directors and for executive positions with administrative responsibility, and for setting policies and strategies in this area.

    The committee also monitors the work of the individuals it nominates throughout their term of service and regularly evaluates the structure and efficiency of the board of directors, submitting recommendations for changes to the board of directors where necessary. The nomination committee plays a critical role in ensuring continuity and oversight in the performance of the board and senior management, contributing directly to the company’s future and its performance trajectory13.

    4.4. Early Risk Detection Committee

      As regulated under Article 4.5.12 of the Principles, the early risk detection committee is responsible for identifying, at an early stage, the risks that may endanger the existence, development, and continuity of the company, for taking necessary measures regarding identified risks, and for managing risk. The committee reviews the company’s risk management systems at least once a year.

      Accordingly, the general assembly and the board of directors will be able to develop foresight in the face of risks and threats that may affect the company and take precautions when necessary. The most significant difference between this committee and the audit committee is that while the latter conducts retrospective reviews, the early risk detection committee ensures the management of prospective risk. Considering the crises and fluctuations in the current global economy, this committee plays a critical role in ensuring the sustainability of the company14.

      4.5. Remuneration Committee

        The remuneration committee determines its recommendations concerning the remuneration principles of board members and senior executives by taking into account the company’s long-term goals. It sets remuneration criteria in connection with the performance of both the company and the relevant member, and submits its proposals concerning the remuneration to be paid to board members and executives with administrative responsibility to the board of directors, based on the degree to which such criteria are met. In doing so, it ensures the establishment of a transparent and formal remuneration procedure.

        Essentially, since the authority to determine the financial rights of board members belongs to the general assembly pursuant to Article 408 of the TCC, the recommendations of the remuneration committee must be submitted by the board to the general assembly. It is possible, however, for the board of directors to determine the financial rights of executives who are not board members. As the committee determines financial rights based on performance, it naturally also serves a supervisory function over these executives15.

        5. CONCLUSION

        Board committees are corporate governance tools that are gaining increasing importance in modern company management, aiming to enhance the efficiency of managerial functions. These committees play a critical role in achieving the company’s strategic objectives by ensuring transparency and efficiency in organizational oversight and decision-making processes. Committees primarily serve advisory and preparatory functions for the board of directors; thus, they mostly act as consultative bodies and, although rarely, may also possess decision-making authority.

        Independent board members contribute to the more objective supervision of companies and help establish healthier foundations in relationships with internal and external stakeholders. Beyond being a mere legal requirement, independent members serve an important supervisory function that safeguards the company’s long-term interests. The active participation of these members enhances the quality of decision-making processes in company management and ensures more solid foundations for the company’s growth. In Turkish law, a more detailed regulation of board committees and independent membership mechanisms will contribute both to the strengthening of corporate governance and to the increased effectiveness of internal control systems within companies. This process will not only support the sustainability of companies but also foster increased trust in the business world and promote more transparent corporate operations

        References

        1. Cafer Eminoğlu, Türk Ticaret Kanunu’nda Kurumsal Yönetim, 2014, p.7 ↩︎
        2. Official Gazette dated 14.02.2011 and numbered 27846 ↩︎
        3. Official Gazette dated 31.12.2012 and numbered 28513 ↩︎
        4. Official Gazette dated 03.01.2014 and numbered 28871 ↩︎
        5. Abdullah Bilgili, Kurumsal Yönetim İlkeleri Çerçevesinde Bağımsız Yönetim Kurulu Üyeliği, 2024, s.27 ↩︎
        6. With the Borsa İstanbul A.Ş. (“BİAŞ”) Listing Directive (“Directive”) dated 20.11.2015, the names and structures of BİAŞ Equity Market segments were changed. Two new markets, named the “Star Market” and the “Main Market”, were established to replace the former National Market and Second National Market. Additionally, the name of the Corporate Products Market was revised to “Collective Investment Products and Structured Products Market.” Subsequently, on 19.09.2019, Article 12 of the Directive was amended, and the Collective Investment Products and Structured Products Market was abolished. However, the changes in market names made within BİAŞ have not yet been updated in the Communiqué. ↩︎
        7. Official Gazette dated 11.08.1989 and numbered 20249 ↩︎
        8. Evin Emine Demir, Anonim Şirket Yönetim Kurulu Bünyesinde Oluşturulan Komiteler, 2016, s.45 ↩︎
        9. Aslı E. Gürbüz Usluel, İcra Kurulu, Türkiye Barolar Birliği Dergisi, Issue: 142, 2019, p. 373 ↩︎
        10. Bilgili, op.cit., p. 54 ↩︎
        11. Neslihan Akça, Sermaye Piyasalarında Kurumsal Yönetim İlkeleri, 2019, p.82 ↩︎
        12. Bilgili op.cit., p.84 ↩︎
        13. Tuğba Yılmaz, Kurumsal Yönetim İlkelerinin Uygulanmasında Yönetim Kurulu ve Yönetim Kuruluna Bağlı Komiteler, 2021, p.96 ↩︎
        14. Yılmaz, op.cit, p.89 ↩︎
        15. Akça, op.cit., p.83 ↩︎

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        PRE-JOINT STOCK COMPANY IN TURKISH LAW

        ABSTRACT

        The Turkish Commercial Code No. 6102 makes a dual distinction in terms of the establishment of joint-stock companies and regulates the establishment process separately as establishment and gaining legal personality. In fact, although a joint-stock company is considered to be established when the founders declare their will to establish a joint-stock company in the articles of association, the signatures of which are approved by a notary or signed in the presence of the trade registry director or his/her deputy, it gains legal personality with registration in the trade registry. In this process from the establishment of a joint-stock company to the moment it gains legal personality, the existence of a pre-joint-stock company emerges. The legal status and liability of a pre-joint-stock company are controversial in the doctrine.

        In this study, the controversial legal nature of the pre-joint stock company structure that emerged during the establishment process of joint stock companies in Turkish law will be examined, and then the actual structure and legal liability of the pre-joint stock company, as well as the duration of the pre-joint stock company and the termination cases will be discussed. Finally, the possible legal regulations that need to be made on this issue in order to clarify the current legal nature of pre-joint stock companies in Turkish law will be evaluated.

        Keywords: Turkish Commercial Code, Joint Stock Company, Pre-Joint Stock Company, Ordinary Partnership, Legal Nature, Legal Personality, Establishment, Registration

        1. INTRODUCTION

        A joint stock company, which is regulated between Articles 329 and 563 of the Turkish Commercial Code No. 6102 (“TCC1”), is deemed to have been established when the founders declare their will to establish a joint stock company in the articles of association, which is drawn up by the law, in which they have unconditionally committed to pay the entire capital, their signatures are notarized or signed in the presence of the trade registry director or his/her deputy2. However, at this stage, the company does not yet have a legal entity. In fact, the first paragraph of Article 335 of the TCC quoted above only explains the establishment phase of joint stock companies, and the phase of gaining legal personality is separated by referring to the first paragraph of Article 355 in the second paragraph of the same Article. At this point, the pre-joint stock company structure, which was introduced as a new regulation by Article 335 of the TCC, is in question. In fact, all commercial companies that are being established have the status of an ordinary partnership before they gain legal personality. However, an exception has been made to this rule for joint stock companies, and the provisions of ordinary partnerships have been excluded, and a stage called pre-partnership has been created, at least until the company gains legal personality, with the signing stage before the notary/trade registry3.

        2. THE CONTROVERSIAL LEGAL NATURE OF THE PRE-JOINT STOCK COMPANY

        A pre-joint stock company is established by making the articles of association of the planned joint stock company in written form and approving the signatures of all founders by a notary public or by signing the articles of association in the presence of the trade registry director or his/her deputy. The company planned to be established gains legal personality by registering the pre-joint stock company articles of association with the trade registry where the company headquarters is located.

        Based on the fact that joint stock companies can gain legal personality through registration in the trade registry, it can be said that the pre-joint stock company, which is accepted to have come into existence at the stage before registration, is a “joint stock company-like” structure that does not have a legal personality and merchant status, and has the authority to carry out certain legal transactions through its organs within the framework of the articles of association, even if they are limited to the works specifically specified in the articles of association or to be carried out due to the nature of the business4.

        The legal nature of the pre-joint stock company is not clearly stated in the TCC, but in the justification of Article 335 which states “The article points to the existence of the pre-joint stock company and clarifies the moment of formation of this company. The pre-joint stock company differs from the joint stock company with a legal personality. The mentioned point is emphasized by reserving the first paragraph of Article 355.”, it is emphasized that according to the prevailing view, the pre-joint stock company is not an ordinary company or an association, but a joint ownership (company). Again, the same justification includes the explanation that “The partners (founders) of the pre-joint company do not have the status of merchants, the pre-joint company ends without liquidation with the registration of the company. In a single-person joint stock company, the pre-joint company has the nature of the sole founder’s private property.”

        Based on these explanations, it is understood that what the law-maker meant by the dominant view expressed in the justification was German law, and that in fact, with the provision of Article 355 of the TCC, the law-maker wanted to introduce the pre-company institution, which is valid in German law, into our law5.

        However, concerning the inadequacy of the current legal regulation on this issue by stating in the justification of Article 335 that “The nature and legal status of the pre-joint-stock company in Turkish law will be clarified in the doctrine and court decisions.” this issue has been left to doctrine and precedents. In this context, no settled jurisprudence has yet been formed, and different views have emerged in the doctrine regarding the legal nature of the pre-joint-stock company.

        At this point, the second paragraph of Article 620 of the Turkish Code of Obligations No. 6098 (“TCO6”) comes to the fore. The provision in question states that “If a partnership does not have the distinctive characteristics of partnerships regulated by law, it is deemed to be an ordinary partnership subject to the provisions of this section.” and in light of this article, there are also views that argue that pre-joint stock companies have the characteristics of ordinary partnerships. Indeed, Tekinalp argues that the company stated to have been established in Article 335 of the TCC is not a joint-stock partnership, because a joint-stock partnership has acquired legal personality in accordance with Article 355, and that this company cannot be described as a joint-stock partnership without legal personality, and that the company mentioned in Article 335 of the TCC is an ordinary partnership in accordance with Article 620/2 of the TCO, because according to the said paragraph, a partnership is considered an ordinary partnership if it does not have the distinctive characteristics of partnerships regulated by law7.

        The application of the second paragraph of Article 620 of the TCO against Article 335 of the TCC essentially points to a conflict between the pre-company system envisaged in German law and the pre-company system valid in Swiss law. However, as can be understood from the justification of Article 335, since Turkish law refers to the model adopted in German law, it would be appropriate to explain the structure and legal nature of the pre-company, the existence of which is accepted, according to the principles valid in German law.

        Moreover, during the period of the old Turkish Commercial Code No. 6762, the provision 620/2 of the TCO was decisive and valid, and in Turkish law, as in Swiss law, the formation that emerged during the process from the approval of the articles of association to registration was considered an ordinary partnership. However, instead of continuing the system of the old Turkish Commercial Code, the legislator felt the need for a new regulation with Article 335 of the TCC and referred to the principle of German law in its justification. When the necessity for this new regulation is taken into consideration, as Pulaşlı also argues, it can be said that the company up until the registration stage was not an ordinary partnership, because the founders aimed to establish a commercial company, not an ordinary partnership, with the joint-stock company agreement they signed8.

        3. ACTUAL STRUCTURE OF THE PRE-JOINT STOCK COMPANY

        Since the pre-joint stock company in Turkish law is of German law origin, the view adopted in German law regarding the actual structure and formation of the pre-joint stock company should also be accepted in Turkish law practice.

        In German law, a pre-joint stock company is an institution with its own assets, rights, and liabilities, like a joint stock company with a legal entity, and has the organs of the company to be established (general assembly and board of directors). Therefore, in Turkish law, it can be said that the pre-joint stock company has the organs of the joint stock company being established, namely the board of directors and the general assembly, as determined by the articles of association. The board of directors or the persons determined as the organs with management and representation authority specified in the articles of association of the joint stock company being established may also conduct transactions with third parties on behalf of the company at this stage9.

        4.   RESPONSIBILITY IN PRE-JOINT STOCK COMPANY

        The second paragraph of Article 355 of the TCC states “Those who perform transactions and undertake commitments on behalf of the company before registration are personally and severally liable for these transactions and commitments. However, if it is clearly stated that the transactions and commitments are performed on behalf of the company to be established in the future and these commitments are accepted by the company within three months after the company is registered in the trade registry, only the company shall be liable.” and a dual distinction is made regarding the liability in the pre-joint stock company. In this context, the first issue addressed in the aforementioned article is that those who perform transactions and undertake commitments on behalf of the company before the registration of the joint-stock company to be established are personally and severally liable for these transactions and commitments. At this point, for example, if the board of directors delegates the authority to represent the company to third parties, it will be necessary to accept that these persons will also be personally and jointly and severally liable together with the directors who are bodies. In addition, if the company is not established or cannot be established, those who perform transactions during the pre-joint stock company phase and before registration will have unlimited personal and joint liability10.

        In fact, in the continuation of the article mentioned above, it is regulated that only the company will be responsible if it is clearly stated that the transactions and commitments in question are made on behalf of the company to be established in the future and if these commitments are accepted by the company after the company is registered in the trade registry. Therefore, if the company is not established for any reason or if the transactions and commitments made by the authorities of the pre-joint stock company are not approved by the authorized bodies of the established joint stock company within the period specified in the article, the unlimited liability of the persons who made the transactions and commitments in question will continue.

        The main difference between a pre-joint stock company and an ordinary partnership comes to the fore at this point. Because, in the pre-joint stock company, the provisions of a joint stock company are applied in internal relations. In terms of liability to third parties, the provisions of an ordinary partnership are applied, as emphasized in the second article of Article 355 of the TCC.

        5. TERM AND TERMINATION OF THE PRE-JOINT STOCK COMPANY

          As we have previously stated in our article, a joint stock company is established by the founders declaring their will to establish a joint stock company in the articles of association, the signatures of which are approved by a notary or signed in the presence of the relevant trade registry office, and it gains its legal personality by being registered in the trade registry. Since the first paragraph of Article 354 of the TCC states that “The entire articles of association of the company shall be registered with the trade registry of the place where the company’s headquarters is located and announced in the Turkish Trade Registry Gazette within thirty days in joint stock companies to be established with the permission of the Ministry of Customs and Trade following the obtaining of the permission, in other companies following the establishment of the company per the first paragraph of Article 335.”, it can be said that the pre-joint stock company phase between establishment and registration is thirty (30) days as stated in the article.

          On the other hand, the second paragraph of Article 345 of the TCC has concluded that the company cannot acquire legal personality within three (3) months from the date of notary approval or the signing of the articles of association in the presence of the trade registry director or his/her deputy, as stipulated in the first paragraph of Article 335. Therefore, although there are different opinions on this issue, it is possible to say that the pre-joint stock company period can be a maximum of three (3) months.

          Once the company is registered with the trade registry and gains legal personality, the pre-joint stock company will end without liquidation, as explained in the justification of Article 335. At this point, in fact, the registration of the pre-joint stock company with the trade registry is not considered a reason for termination, on the contrary, the registration transforms the pre-joint company, which is considered a joint ownership, into a company with legal personality.

          On the other hand, if the pre-joint stock company is terminated for any reason by the will of the founders, the pre-joint stock company enters the liquidation process and the purpose of the pre-joint stock company continues limited to liquidation until the pre-joint stock company is liquidated and terminated.

          5. CONCLUSION

          The pre-joint stock company model, which has been adopted by all doctrines and high court decisions in German law and included as a new regulation in the TCC, is not an ordinary partnership or association, but rather a joint-stock company with a corporate structure, as explained in the justification of the relevant article. Since the pre-company is granted partial rights and juridical capacity, this company, which has all its organs, is managed by the board of directors and represented to the outside. Thus, a certain internally consistent system has been developed in German law regarding the pre-company. Therefore, the internal relations of the company, representation and responsibility, and the problems arising from these can be easily explained within this system11.

          The equalization obligation, although sometimes perceived as a mechanism allowing the controlling company to evade liability, actually aims to maintain power balances within the corporate group. The effective implementation of this obligation minimizes the financial losses of subsidiary companies and ensures the sustainability of the companies within the group. Ultimately, the compensation of losses resulting from the controlling company’s direction is not merely a legal requirement but should also be considered an ethical necessity within the framework of corporate governance principles. The proper and effective application of the equalization mechanism stipulated in the legislation will ensure both the healthy operation of the corporate group and the preservation of trust in commercial life.

          References

          1. Official Gazette dated 14.02.2011 and numbered 27846 ↩︎
          2. TCC Article 335/1 ↩︎
          3. Tamer Bozkurt, Şirketler Hukuku, Issue 11, Ankara 2020, p. 229 ↩︎
          4. Ömer Adil Atasoy, Berkay Ergün, Türk Hukukunda Ön Anonim Şirket, Law Faculty Journal, Year 3, Issue 2, December 2017, p. 7 ↩︎
          5. Emrullah Kervankıran, Ön Şirket ve Hukuki Niteliği, p. 366 (https://dergipark.org.tr/tr/) ↩︎
          6. Official Gazette dated 04.02.2011 and numbered 27836 ↩︎
          7. Ünal Tekinalp, Yeni Anonim ve Limited Ortaklıklar Hukuku ile Tek Kişi Ortaklığının Esasları, Issue 2, İstanbul 2012, Nr. 10-26, 10-27 ↩︎
          8. Hasan Pulaşlı, Yeni Türk Ticaret Kanununa Göre Tek Ortaklı Sermaye Şirketleri ve Buna İlişkin Bazı Özel Durumlar, Regesta Journal, 1 Issue, November 2011, p.14 (https://www.ito.org.tr/tr) ↩︎
          9. Ömer Adil Atasoy, Berkay Ergün, p. 9 ↩︎
          10. Ömer Adil Atasoy, Berkay Ergün, p. 10 ↩︎
          11. Emrullah Kervankıran, p. 366 ↩︎

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          CORPORATE GROUPS AND THE CONTROLLING COMPANY’S EQUALIZATION OBLIGATION

          ABSTRACT

          This article examines the equalization obligation of the controlling company within the framework of the concept of corporate groups. Article 195 and subsequent articles of the Turkish Commercial Code regulate the relationship between the controlling and subsidiary companies. The article analyzes the liabilities that may arise in cases of unlawful use of control and the equalization mechanism designed to eliminate such liabilities.

          Keywords: Corporate Groups, Joint Stock Company, Controlling Company, Subsidiary Company, Equalization Obligation, Liability, Turkish Commercial Code

          1. INTRODUCTION

          Corporate group is a structure formed when one company establishes direct or indirect control over other companies. With the enactment of the Turkish Commercial Code numbered 6102 (“TCC”)1, the effects of the controlling company on subsidiary companies and the limits of such influence have been legally defined. The relationships within a corporate group are significant not only from an economic or managerial perspective but also in terms of legal responsibilities.

          In this context, the question arises as to how the losses resulting from the controlling company’s actions that violate the interests of the subsidiary company will be compensated. TCC provides an equalization mechanism to ensure that losses incurred by subsidiary companies due to the controlling company’s actions are remedied.

          This study explains the equalization obligation of the controlling company over the subsidiary companies within the framework of the corporate group concept, examines the relevant legislative provisions, and presents legal evaluations on the subject.

          2. CORPORATE GROUPS

          A corporate group refers to a structure formed when one or more companies are linked to a controlling company either directly or indirectly through legal control criteria or a contractual arrangement2. This concept was not regulated under the former Turkish Commercial Code numbered 6762 but has been introduced for the first time under the new TCC in articles 195 to 209.

          While in some cases the existence of a corporate group is definitively recognized under the TCC, in others, it is identified as a presumption.

          (i) Controlling Company and Subsidiary Company

          According to Article 195 of the TCC, a) A commercial company is considered a controlling company if it directly or indirectly; i) holds the majority of voting rights in another commercial company; or ii) has the right to elect a majority of the members of the management body pursuant to the company’s articles of association; or iii) possesses, along with its own voting rights, the majority of voting rights alone or jointly with other shareholders or partners based on an agreement; b) A commercial company that maintains control over another commercial company under a contract or by other means is also considered a controlling company, with the latter being its subsidiary company. If at least one of these companies has its registered office in Türkiye, the provisions of the TCC concerning corporate groups shall apply3.

          A significant issue in the context of the corporate group concept is whether the defining element in the definition is “dominance and centralized management” or merely “control”. The reasoning of Article 195 of the TCC explains this notion as follows: “Control is a mathematically precise and therefore definitive criterion. Dominance, on the other hand, draws conclusions associated with legal presumptions. The instruments of control include capital majority, voting majority, and the majority of members in the management body. Under the control system, the actual exercise of dominance is not assessed; moreover, no legal consequences arise from proving that dominance is not exercised. The fundamental principle of this system is: Whoever holds control is presumed to be exercising dominance as well. In contrast, in a system based on dominance and centralized management, the mere presence of dominance is insufficient to conclude that it is being exercised; actual implementation of dominance must be evident and (if needed) proven.”

          As clearly stated in the first paragraph of Article 195 of the TCC, the “control” system is the basis, with only a presumption being accepted in the second paragraph. If reliance is placed on this presumption, the party challenging it bears the burden of proof.

          (ii) Presumption of Control

          The fact that a commercial company holds the majority of shares in another commercial company or possesses enough shares to make managerial decisions constitutes a presumption of the existence of a controlling company4. The ability to make management decisions, particularly in large-capital joint stock companies (especially publicly traded companies), arises when voting rights held at the general assembly allow a shareholder to form a majority despite not achieving the shareholding majority explicitly required under the TCC. Consequently, a shareholder who has not obtained majority shareholding in the company may still acquire control through the general assembly by utilizing the power vacuum resulting from dispersed shareholding5. The majority in the management body and privileged voting rights may completely neutralize capital majority. Therefore, the presumption in this context is not an irrebuttable legal assumption but one that can always be refuted.

          (iii) Indirect Control

          Indirect control occurs when a controlling company establishes control over another company through one or more subsidiary companies6. In this case, the controlling company can exercise control over other companies through the subsidiary company under its control.

          For instance, if Company A holds 60% of the shares and voting rights in Company B, and Company B, while holding only 10% of the shares in Company C, has the privilege to elect a number of board members sufficient to form a majority in Company C’s governing body, then Company A and Company B have a controlling company – subsidiary company relationship. Consequently, Company A, despite not being a shareholder in Company C, attains an indirect controlling position over Company C.

          (iv) Mutual Participation

          Companies that hold at least one-fourth of each other’s shares are considered to be in a mutual participation relationship. If one company is controlling the other, the latter is also regarded as a subsidiary company. If both companies control each other, they are both considered controlling and subsidiary companies7. The regulation introduced in the TCC aims to prevent misleading perceptions caused by mutual participation, avoid capital dilution (bubble capital)8, and eliminate concerns regarding the accuracy of balance sheets. If the shareholding ratio between companies remains below 25%, no legal mutual participation is deemed to exist. Another limitation imposed on mutual participation is the freezing of rights. A corporation that knowingly acquires shares of another corporation, thereby establishing a mutual participation status, may only exercise one-fourth of the total voting rights and other shareholder rights arising from those shares. Except for the right to acquire bonus shares, all other shareholder rights are frozen. Such shares are not considered in the calculation of quorum for meetings and decisions9. However, this limitation does not apply if the subsidiary company acquires shares of the controlling company or if both companies are controlling each other.

          3. LIABILITY

          Dominance does not grant the controlling company the right to unlawfully exercise this power over subsidiary companies. As with any unlawful use, there are legal consequences attached to such misconduct. The TCC does not provide a limited list of instances where control is exercised unlawfully. Accordingly:

          1. Certain legal transactions imposed by the controlling company on the subsidiary company (such as transfer of business, assets, profits, receivables, and liabilities) and material actions (such as failing to renew facilities without a justified reason, restricting or halting investments, making decisions or taking measures that negatively affect efficiency or operations, or refraining from taking measures that would promote development) and
          2. Transactions carried out through the exercise of control, which lack a clearly justifiable reason from the perspective of the subsidiary company (such as mergers, demergers, conversions, issuance of securities and significant amendments to the articles of association10) are also covered under this framework.

          Any transaction stipulated under the relevant articles of the TCC, such as providing guarantees, transferring receivables or liabilities, mergers, and demergers, is not inherently unlawful. The unlawfulness arises from the manner in which control is exercised and implemented. Unlawfulness arises from a transaction, decision, or measure that is either implemented or deliberately avoided by the controlling company, leading to losses for the subsidiary company, causing harm to shareholders and creditors, and lacking a justified reason from the company’s standpoint11.


          4.   LIABILITY OF THE CONTROLLING COMPANY FOR THE LOSS OF THE SUBSIDIRARY COMPANY AND THE RIGHT OF ACTION OF THE SUBSIDIARY COMPANY’S SHAREHOLDER

          Article 202/1 of the TCC regulates how equalization shall be provided for the losses incurred by a subsidiary company as a result of the transactions carried out by the controlling company, as specified in the relevant provision. Meanwhile, Article 202/2 grants the subsidiary company’s shareholders the right to file a lawsuit for compensation of damages or for the repurchase of their shares in cases where significant transactions are carried out through the exercise of control without a clearly justifiable reason from the subsidiary company’s perspective.

          Article 202/1 of the TCC stipulates that the controlling company may not exercise its control in a manner that causes losses to the subsidiary company. However, the provision does not explicitly define the scope of the term “loss”. At this point, reference should be made to the reasoning of the article, which provides the following explanation regarding the concept of “loss”: “It is broader than, and encompasses, “damage” as defined in the law of obligations. Loss may arise in the form of a decrease in assets or the prevention of asset growth, as well as through the loss of opportunity or the ability to successfully carry out a business activity, as in the case of the transfer of business, funds, or personnel.”

          Since business activities, by their nature, may involve risky decisions and potential losses that may be unavoidable even with the utmost care, expecting subsidiary companies to never suffer a loss under any circumstances would contradict the natural course of commerce and, consequently, life12. If the listed transactions and actions do not arise from a dominance relationship but instead result from prudent commercial conduct, this provision cannot be applied. If the loss occurs without a violation of the controlling entity’s duty of care and is based on a decision, legal transaction, or material act that the subsidiary company’s own management body or an independent decision could have undertaken, it does not fall within the scope of equalization13.

          For the controlling entity to be held liable for the loss suffered by the subsidiary company, such loss must have directly resulted from the intervention of the controlling entity. Without clear direction demonstrating the exercise of dominance, the controlling entity cannot be held responsible solely due to the economic conditions or commercial risks faced by the company. In this context, the liability of the controlling entity depends on the existence of an influence that directly led to the loss incurred by the subsidiary company. Such influence may take the form of written or verbal instructions, direct or indirect intervention in decision-making processes, the exercise of voting rights, exertion of pressure, or actual control through other means.

          If the subsidiary company acts under the direction of the controlling entity and would not have made such decisions otherwise, the resulting losses do not automatically establish liability for the controlling entity. Various mechanisms allow the controlling entity to avoid such liability. According to TCC Article 202/1-a, in order to prevent liability from arising, the relevant losses must “either be effectively equalized within the same financial year or the subsidiary company must be granted a legally enforceable claim of equivalent value, specifying how and when equalization will be carried out, no later than the end of that financial year.”. Although these mechanisms might suggest that the controlling entity could cause losses to subsidiary companies as long as it compensates them, it is crucial to remember that the purpose of the equalization mechanism is to balance the interests of the parties14.

          Equalization may involve granting the subsidiary company a benefit or advantage to offset the loss. For instance, it may take the form of providing guarantees or sureties, securing guarantees through counter-guarantees or endorsements, granting licenses and trademark usage rights, offering research and development services free of charge, providing know-how, facilitating internships and training for personnel, allowing access to a marketing network, transferring an equivalent real estate asset, granting preemptive rights in a capital increase ensuring that the company suffering the loss is designated as a beneficiary in a conditional capital increase. Equalization may be performed within the financial year in which the loss occurs, or a legally enforceable claim may be provided within that year specifying when and how equalization will take place. However, it is preferable to ensure that the right to claim equalization is not delayed for an extended period, which would undermine its expected benefit, and that mechanisms are in place for the subsidiary company to exercise its right effectively15.

          If the controlling company causes losses to the subsidiary company but does not actually equalize for them within the financial year or does not grant a legally enforceable claim within the required period, each shareholder of the subsidiary company is entitled to demand equalization for the company’s loss from the controlling company and its board members responsible for the loss. In the event of the subsidiary company’s insolvency, its creditors are also entitled to make such claims. Moreover, in cases where control is exercised and the transaction lacks a clearly justifiable reason from the perspective of the subsidiary company, such as mergers, demergers, conversions, dissolution, the issuance of securities, or significant amendments to the articles of association, shareholders who cast a dissenting vote in the general assembly and ensure their objection is recorded in the minutes, or those who submit a written objection to similar board decisions, have the right to demand compensation for their losses from the controlling entity. Alternatively, they may request that their shares be purchased at a value no less than their stock exchange price, or if no such price exists, or if it does not reflect fair value, at a price determined based on generally accepted valuation methods16

          5. CONCLUSION

          The influence of controlling companies over subsidiary companies has significant legal consequences. The TCC regulates the equalization mechanism to protect the interests of subsidiary companies against losses arising from the controlling company’s influence.

          The equalization obligation, although sometimes perceived as a mechanism allowing the controlling company to evade liability, actually aims to maintain power balances within the corporate group. The effective implementation of this obligation minimizes the financial losses of subsidiary companies and ensures the sustainability of the companies within the group. Ultimately, the compensation of losses resulting from the controlling company’s direction is not merely a legal requirement but should also be considered an ethical necessity within the framework of corporate governance principles. The proper and effective application of the equalization mechanism stipulated in the legislation will ensure both the healthy operation of the corporate group and the preservation of trust in commercial life.

          References

          1. The Official Gazette (“OG”) dated 14.02.2011 and numbered 27846 ↩︎
          2. Hasan Pulaşlı, “Türk Ticaret Kanunu Tasarısına Göre Şirketler Topluluğunun Temel Nitelikleri ve Hâkim Şirketin Güven Sorumluluğu”, Gazi University Law Faculty Magazine E. XI, P.12, Y. 2007, p. 262. ↩︎
          3. Turkish Commercial Code (TCC) Article 195 ↩︎
          4. TTC Article 195/2 ↩︎
          5. Gül Okutan Nilsson, Türk Ticaret Kanunu Tasarısı’na Göre Şirketler Topluluğu Hukuku, İstanbul 2009, p.133. (Şirketler Topluluğu) ↩︎
          6. TTC Article 195/3 ↩︎
          7. TTC Article 197 ↩︎
          8. Capital dilution is a process that leads to the reduction of existing shareholders’ rights over the company, particularly their voting and dividend rights. This typically occurs through methods such as increasing the company’s capital via the issuance of new shares, issuing shares at a low value, or disproportionate distribution of shares among existing shareholders through capital increases from internal resources. From the perspective of the TCC, provisions under TCC Article 461 and subsequent articles aim to prevent dilution by protecting shareholders’ preemptive rights. However, dilution may still occur if existing shareholders do not exercise their preemptive rights during a capital increase or if transactions favoring certain groups result in the violation of these rights. ↩︎
          9. TTC Article 201 ↩︎
          10. TTC Article 202 ↩︎
          11. Reasoning of Article 202 of TCC. ↩︎
          12. Sevda Bora Çınar, “Şirketler Topluluğunda Hâkim Teşebbüs”, İzmir Bar Association Magazine, 2023, p. 123. (https://www.izmirbarosu.org.tr/pdfdosya/sirketler-toplu2023912174126784) ↩︎
          13. Gül Okutan Nilsson, Şirketler Topluluğu, p. 230 ↩︎
          14. Gül Okutan Nilsson, Şirketler Topluluğu, s. 237. ↩︎
          15. Reasoning of Article 202 of TCC. ↩︎
          16. TCC Article 202 ↩︎

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          LIQUIDATION PROCESS OF LIMITED LIABILITY COMPANIES

          ABSTRACT

          Limited liability companies (“LLCs”) may wish to terminate their legal personality and cease to exist for various reasons, primarily economic. However, termination may also become necessary due to reasons such as bankruptcy.

          Upon termination, LLCs enter the liquidation process, which is a natural consequence of the company’s dissolution. Liquidation involves a series of steps, including the conversion of assets into cash, collection of receivables, payment of debts, and distribution of net assets to shareholders in accordance with their liquidation shares. Proper management of the liquidation process is essential to protect the rights of both creditors and shareholders. This article analyzes the liquidation process of LLCs and its legal consequences under Turkish law.

          Keywords: Limited Liability Company, Liquidation, Turkish Commercial Code, Liquidator, Creditor

          1. INTRODUCTION

          LLCs may be terminated for various reasons, including (i) the expiration of the term specified in the articles of association, (ii) a decision by the general assembly to liquidate the company, (iii) the bankruptcy of the company, (iv) the occurrence of a termination event specified in the articles of association, or (v) other grounds for termination as outlined in the Turkish Commercial Code No. 61021 (“TCC”)2.

          Although the TCC does not provide specific regulations for the liquidation of LLCs, Article 643 of the TCC stipulates that the liquidation provisions applicable to joint stock companies shall apply to LLCs by comparison3. The proper execution of the liquidation process is critical to safeguarding the interests of both shareholders and creditors.

          2. LIQUIDATION PROCESS

          Liquidation is the process of winding up a company’s affairs, which involves converting its assets into cash, collecting receivables, settling debts, and distributing any remaining assets to shareholders in proportion to their capital shares4.

          2.1. Initiation of Liquidation

          To initiate the liquidation process, the shareholders must pass a resolution at a general assembly meeting. Unless the articles of association provide otherwise, a resolution to approve the liquidation requires at least two-thirds of the votes represented at the general assembly meeting and a simple majority of the entire share capital with voting rights5. The resolution must then be registered with the trade registry and announced in the Turkish Trade Registry Gazette (“TTRG”). Upon the commencement of liquidation, the company’s activities are restricted to liquidation-related procedures, and the phrase “in liquidation” (“tasfiye halinde”) must be appended to its trade name6.

          2.2. Appointment of Liquidators

          The liquidation process is managed by liquidators, who may be appointed either through the articles of association or by a resolution of the general assembly. If no liquidator is appointed, the company’s director assumes the role of liquidator7.

          Liquidators must meet specific qualifications under the TCC. Pursuant to Article 536 of the TCC, at least one liquidator authorized to represent the company must be a Turkish citizen and domiciled in Türkiye. If the company director lacks the necessary qualifications to act as liquidator, the court will appoint a qualified individual to fulfill this role8.

          2.3. Stages of the Liquidation Process

          2.3.1. Preparation of Inventory and Balance Sheet

          Under Article 540 of the TCC, liquidators are required to prepare an inventory and balance sheet detailing the company’s financial status at the commencement of liquidation. These documents, which outline the company’s assets and liabilities, must be submitted to the general assembly for approval. Once approved by the general assembly, the liquidators are authorized to manage the company’s assets, settle receivables and payables, and take control of all relevant documents and books9.

          2.3.2. Notification to Creditors

          Protecting the rights of creditors is a key aspect of the liquidation process. Liquidators must identify known creditors by reviewing the company’s records and notify them of the liquidation via registered mail. Additionally, pursuant to Article 541 of the TCC, liquidators must publish three announcements in the TTRG at one-week intervals, inviting creditors to submit their claims10.

          2.3.3. Settlement of Debts and Distribution of Assets

          Following the creditor notifications, liquidators must settle the company’s debts in accordance with the statutory order of priority. Any ongoing legal disputes involving the company must also be resolved before the liquidation process can be finalized11.

          Once all debts have been paid, any remaining assets are distributed to shareholders in proportion to their capital shares and any privilege rights they may hold12.

          2.3.4. Completion of Liquidation

          After the final TTRG announcement, a three-month waiting period (“Waiting Period”) begins, as required under Article 543 of the TCC. During this period, creditors may assert their claims. However, the court may authorize the distribution of remaining assets to shareholders before the expiration of the Waiting Period if there is no risk to creditors13.

          At the end of the Waiting Period, liquidators must prepare a final liquidation balance sheet and submit it to the general assembly for approval. Upon approval, the liquidation process is deemed complete, and the company’s legal personality is terminated.

          To finalize the process, the general assembly resolution must be registered with the trade registry and announced in the TTRG. The company’s trade registry record is then deleted, and the liquidators must notify relevant administrative authorities of the company’s liquidation14.

          3. LIQUIDATION IN CASE OF INSOLVENCY

          If the liquidator determines that the company’s liabilities exceed its assets, the liquidator must notify the court. In such cases, the court may declare the company bankrupt, and the liquidation process will be conducted under the provisions of the Enforcement and Bankruptcy Law No. 200415, rather than the TCC16.

          4. WITHDRAWAL FROM LIQUIDATION

          Under certain circumstances, an LLC may withdraw from the liquidation process. If the company has been terminated due to the expiration of its term or by a general assembly resolution, and the distribution of assets has not yet commenced, the shareholders may decide to reverse the liquidation. This decision requires the approval of shareholders representing at least 60% of the company’s capital17.

          5. CONCLUSION

          Liquidation is the legal process through which an LLC is terminated. Throughout the liquidation process, the company retains its legal personality and continues to operate under its trade name with the addition of the phrase “in liquidation.” The process involves several key stages, including the preparation of an inventory and balance sheet, notification to creditors, settlement of debts, and distribution of remaining assets.

          Liquidators, whose qualifications are regulated under the TCC, are responsible for managing the liquidation process. If no liquidator is appointed, the company’s director assumes this role. Upon completion of the liquidation process, the company’s trade name is removed from the registry, and its legal entity ceases to exist.

          References

          1. Official Gazette dated 14.02.2011 and numbered 27846 ↩︎
          2. Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku II, pp. 594-615, Prof. Dr. Hasan Pulaşlı, Şirketler Hukuku Şerhi, Vol. IV, p. 3316 ↩︎
          3. Doç. Dr. Mustafa Yasan, Şirketler Hukuku Şerhi, Prof. Dr. Kemal Şenocak (Ed.), Vol. – 4, p. 5013, Prof. Dr. Hasan Pulaşlı, op. cit., p. 3313 ↩︎
          4. Poroy, Tekinalp, Çamoğlu, op. cit., p. 616 ↩︎
          5. Poroy, Tekinalp, Çamoğlu, op. cit., p. 598, Prof. Dr. Hasan Pulaşlı, op. cit., p. 3316 ↩︎
          6. Prof. Dr. Hasan Pulaşlı, op. cit., p. 3317 ↩︎
          7. Poroy, Tekinalp, Çamoğlu, op. cit., p. 616, Doç. Dr. Mustafa Yasan, op. cit., p. 5015 ↩︎
          8. Poroy, Tekinalp, Çamoğlu, op. cit., pp. 617-618, Doç. Dr. Mustafa Yasan, op. cit., pp. 5015-5016 ↩︎
          9. Doç. Dr. Mustafa Yasan, op. cit., pp 5017-5018 ↩︎
          10. Poroy, Tekinalp, Çamoğlu, op. cit., p. 625, Doç. Dr. Mustafa Yasan, op. cit., pp. 5017-5018 ↩︎
          11. Poroy, Tekinalp, Çamoğlu, op. cit., p. 626 ↩︎
          12. Poroy, Tekinalp, Çamoğlu, op. cit., pp. 626-627, Doç. Dr. Mustafa Yasan, op. cit., p. 5019 ↩︎
          13. Poroy, Tekinalp, Çamoğlu, op. cit., pp. 626-627 ↩︎
          14. Poroy, Tekinalp, Çamoğlu, op. cit., pp. 626-627, Doç. Dr. Mustafa Yasan, op. cit., p. 501 ↩︎
          15. Official Gazette dated 19.06.1932 and numbered 2128 ↩︎
          16. Poroy, Tekinalp, Çamoğlu, op. cit., p. 625 ↩︎
          17. Poroy, Tekinalp, Çamoğlu, op. cit., pp. 629-631, Doç. Dr. Mustafa Yasan, op. cit., p. 5020 ↩︎

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          PLEDGE OF JOINT STOCK COMPANY SHARES: LEGAL FRAMEWORK AND IMPLEMENTATION PROCESSES

          ABSTRACT

          Joint stock companies constitute one of the fundamental building blocks of capital markets within the dynamic structure of commercial life. The shareholding structure of these companies serves not only as a means of representing ownership but also as an important tool in securing economic relations. Particularly, the fact that joint stock company shares hold material value and can be easily transferred has led to their widespread use as collateral in legal transactions. The pledge of shares has found a broad application area in commercial life as an effective method used by creditors to secure their claims in debt relations.

          Although the Turkish Commercial Code numbered 61021  (“TCC“) does not contain specific provisions regarding the pledge of joint stock company shares, the general pledge provisions set forth in the Turkish Civil Code numbered 47212 (“Civil Code“) establish the fundamental principles of these transactions. Whether the shares are certified or not directly affects the scope of the rights subject to the pledge and the procedure for establishing the pledge. This study will explain the concept of pledge and comprehensively examine the procedures for establishing a right of pledge over joint stock company share.

          Keywords: Joint Stock Company, Pledge of Share, Right of Pledge, Bearer Share Certificate, Registered Share Certificate, Certificated Share, Uncertificated Share

          I. INTRODUCTION

          In line with the developments in the commercial world, there has been a significant increase in the number of company establishments. Accordingly, as the importance of joint stock companies in commercial life grows, their shares inevitably become more frequently involved in legal transactions. The fact that joint stock company shares hold material value and are transferable has led to their frequent use in collateral transactions. The ability of shareholders to pledge their shares in a joint stock company to meet their financial needs demonstrates that pledge of share is a significant financing instrument.

          II. THE CONCEPT OF PLEDGE

          Pledge is a limited real right that authorizes the creditor to collect its receivables by converting the pledged value into cash in the event of non-performance, partial or poor performance by the debtor3. Although the pledge of shares in joint stock companies is not specifically regulated under the TCC, it is carried out in accordance with the general rules on pledge stipulated in the Civil Code.

          Under the Civil Code, the right of pledge is categorized into two main types: real estate (immovable) pledge and personal property (movable) pledge. Since joint stock company shares represent shareholding rights, whether they are embodied in certificates or not, the right of pledge established on shares is considered a pledge over rights. In this respect, the pledge established on the share is in the nature of a pledge established on the right and is subject to the principles regarding the movable pledge4. According to the Civil Code, in addition to tangible assets, receivables and rights that are not classified as tangible assets are also included within the scope of movable pledge types. Accordingly, the pledge established over joint stock company shares is regarded as a pledge on rights arising from shareholding and is subject to the provisions of “pledge on receivables and other rights” set forth in Articles 954 and following of the Civil Code.

          Although it is stated that the pledgee will establish a pledge over rights arising from shareholding, this does not apply to all shareholding rights. For instance, rights that cannot be converted into cash, such as participation in management (attendance at the general assembly, voting rights), protective shareholder rights (litigation rights, minority rights), and informational rights (right to access information, right to examine and audit), cannot be subject to pledge. Only rights related to assets that can be converted into cash (dividend rights, liquidation proceeds) fall within the scope of the pledge. Moreover, in the event that a pledge is established on a share, there will be no change in the shareholding status of the pledgor.

          III. ESTABLISHMENT OF RIGHT OF PLEDGE ON JOINT STOCK COMPANY SHARES

          The procedures for establishing a right of pledge over joint stock company shares vary depending on whether the shares are embodied in certificates and the type of share certificates. Additionally, in order to establish the right of pledge, the act of disposal must be performed following the realization of the promissory transaction.

          A pledge agreement is defined as a legal transaction in which a person undertakes the obligation to establish a pledge on a joint stock company share in favor of a creditor5. The written form is a validity requirement for the pledge agreement6, which is executed between the pledgor, who provides the share as collateral, and the creditor, who seeks to secure their claim7. The pledge agreement regarding certificated joint stock company shares corresponds to a promissory transaction, while the pledge agreement regarding uncertificated shares constitutes an act of disposal. The pledgor may be the debtor of the secured obligation or a third party. However, due to the accessory nature of the right of pledge, the pledgee can only be the creditor of the obligation secured by the pledge.

          A. Establishment of Right of Pledge on Uncertificated Shares

          According to the Civil Code, assignable receivables and other rights may be pledged. Unless otherwise provided, the provisions regarding pledge requiring delivery apply to such pledges8. Accordingly, the pledge of the economic rights granted by uncertificated shares in joint stock companies is possible9. As stated in Article 954 of the Civil Code, a written pledge agreement must be executed for the establishment of a right of pledge on an uncertificated share. This pledge agreement, unlike the promissory transaction, constitutes an act of disposal. Upon the execution of the written pledge agreement between the pledgor and the creditor, the right of pledge is established on the company share10.

          According to capital market legislation, dematerialization refers to the electronic registration of capital market instruments instead of issuing physical certificates. Dematerialized shares are also considered uncertificated shares. Pursuant to Article 47 of the Capital Markets Law numbered 636211, collateral agreements concerning capital market instruments registered with the Central Securities Depository (“CSD“) are executed in writing12. These agreements constitute an act of disposal, and the right of pledge is established upon their execution by the parties. Additionally, for the right of pledge on dematerialized shares to be enforceable against third parties, it must be reported to the CSD.

          B. Establishment of Right of Pledge on Certificated Shares

          Share certificates may be bearer or registered13 and are classified as negotiable instruments. In establishing a right of pledge on a share certificate, the provisions of the Civil Code regulating the pledge of negotiable instruments apply.

          The pledge of bearer share certificates is affected by endorsing the certificate with a “for pledge” annotation and delivering it to the creditor14. The transfer of possession to the creditor is mandatory for the establishment of the right of pledge.

          In the pledge of registered share certificates, a written pledge agreement must be executed between the parties and/or a pledge endorsement must be made on the registered certificates, followed by the delivery of these certificates15.

          V. CONCLUSION

          The establishment of a right of pledge on joint stock company shares serves as an important instrument in commercial law, providing financial flexibility for shareholders and a reliable security mechanism for creditors. This study has examined the legal framework concerning pledge of share transactions, addressing the procedural differences based on whether the shares are certificated and the type of share certificates.

          Turkish law allows for the application of pledge transactions on joint stock company shares within the general pledge regulations under the Civil Code. While a written pledge agreement is crucial for uncertificated shares and notification to the CSD is necessary for dematerialized shares, for certificated shares, the endorsement and delivery process take precedence. Compliance with formal requirements,the transfer of possession, and the alignment of the parties’ intentions are essential for the validity of these transactions.

          While pledge of share allows shareholders to pledge their shares as collateral to meet their financial needs, they also offering creditors a reliable security measure. This contributes to the vitality of capital markets and strengthens commercial relations. However, understanding the legal nature and procedural requirements of pledge transactions is of great importance for both shareholders and creditors.

          In conclusion, the pledge of joint stock company shares stands out as an indispensable legal tool for both investors and financial institutions. This mechanism enhances financial mobility for shareholders while providing a reliable security measure for creditors, ensuring compatibility with the dynamic structure of commercial life.

          References

          1. Official Gazette dated 14.02.2011 numbered 27846 ↩︎
          2. Official Gazette dated 21.11.2001 numbered 24607 ↩︎
          3. Capital Markets Board, Türk Hukukunda Anonim Şirket Hisse Senetlerinin Rehni Yönetici Özeti, p. 1 ↩︎
          4. Prof. Dr. Mehmet Serkan ERGÜNE, Anonim Şirket Payı Üzerinde Rehin Hakkı Kurulması, 2016, Vol. LXXIV, E.2, p. 741 ↩︎
          5. ERGÜNE, p. 742 ↩︎
          6. Turkish Civil Code (Civil Code), a.955 ↩︎
          7. ERGÜNE, p. 743 ↩︎
          8. Turkish Civil Code (Civil Code), a.954 ↩︎
          9. Prof. Dr. Hasan PULAŞLI, Şirketler Hukuku Şerhi Volume III, 2022, p. 2417 ↩︎
          10. ERGÜNE, p. 745 ↩︎
          11. Official Gazette dated 30.12.2012 and numbered 28513 ↩︎
          12. Capital Markets Law, Article 47/1 ↩︎
          13. Turkish Commercial Code (TCC), Article 484 ↩︎
          14. PULAŞLI, p. 2429 ↩︎
          15. Av. Dr. Umut KOLCUOĞLU, Anonim Şirketler Pay Rehni Kurulması İşlemleri, Nasıl Bir Ekonomi Gazetesi, December 2023 ↩︎

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