Legal guide for company directors and CEOs in Turkey

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Crisis Management and Adapting Their Company to Current Conditions

The board of directors is liable for taking the necessary actions to assure the continuity of the company and its operations under the obligation of duty of care and loyalty set by the Turkish Commercial Code (the “Code”). Accordingly, directors should exercise all due diligence to manage the crisis brought on by COVID-19 and secure the financial position of the company. Although operations of many companies are adversely affected by COVID-19 due to disrupted supply chains and the inability to operate facilities, directors continue to be expected to come up with reformatory solutions by “good faith” rules (i.e. crisis management plans). Therefore, it is advisable for directors to: (i) rearrange their supply chains, production methods and operations to ensure the companies have adequate liquidity and financing; (ii) receive legal or other professional support when it is necessary; and (iii) provide sufficient justifications for their actions to prevent compensation claims as far as possible.

Keeping Up to Date

Directors are expected to be aware of all relevant regulations and ensure that the company complies with them. Accordingly, keeping up to date can be difficult, especially when numerous regulations may be implemented on a daily basis; therefore, it is advisable to seek legal assistance to keep updated. 

Safety of Employees and Consumers

Directors are expected to take necessary measures/appoint individuals who will take necessary measures to prevent the transmission of COVID-19 among the company’s employees and customers as far as possible. Failure to take such measures, or failure to duly appoint other individuals who would do so, may result in the liability of the directors in question. 

Directors duties and responsibilities

This guide focuses on the rules relating to the directors of limited liability companies (Limited Sirket) only. Other forms of company stipulated under the Code are not covered by this guide.

1. What form does the board of directors take?

Companies have a one-tier board of directors in Turkey. 

2. What is the role of non-executive or independent directors?

The board of directors of a company may comprise executive directors, non-executive directors and independent directors. In practice, independent directors would usually be appointed in public companies. Turkish law does not generally differentiate non-executive directors from executive directors – the main distinction between the two types of directors being that certain forms of liability under the Code would only be assumed by executive directors. Absent of the authority to represent and bind the company, non-executive directors mostly focus on the management policies of the company (i.e. crisis management, human resources etc.). 

3. Who can be appointed as a director? 

The Code stipulates specific eligibility requirements. For example, a person who is bankrupt or subject to an interdiction cannot be appointed as a director. Furthermore, public officials are not allowed to be appointed as directors. In addition to the Code, articles of association may also specify certain eligibility requirements. 

An individual director is not required to be resident in Turkey, and there is no Turkish nationality requirement. Legal entities can also be appointed as directors, regardless of whether they are incorporated in Turkey or not. If a legal entity is appointed as a director, a real person representative must also be appointed to perform the functions of director.
It is not necessary to be a shareholder of the company in order to be appointed as a director. However, at least one of the company’s shareholders must be appointed as a director to represent and manage the company. 1 Please kindly note that such a requirement is only applicable to limited liability companies and not to joint stock companies.

4. How is a director appointed?

There is no provision in the Code which restricts the maximum number of directors, but the company must have at least one director.

The first directors of a newly-incorporated company, whether they are real persons or legal entities and their real person representatives, are required to be appointed according to the articles of association of the company.

The appointment of subsequent directors is subject to a resolution of the shareholders’ general assembly, and this authority is non-delegable. A notarised copy of the resolution of the shareholders’ general assembly appointing director(s) must be filed by the directors with the Commercial Registry having jurisdiction in the area where the company’s head office is located.

If the company has more than one director, one of the directors will be appointed by the shareholders’ general assembly as the chairman of the board of directors. It is important to note that the chairman may be appointed regardless of whether he/she is a shareholder of the company. However, a legal entity director may not be appointed chairman.

At the end of his/her term of office, reappointment is possible; however, appointments are usually made for an indefinite term. 2 Please kindly note that directors can be appointed for 3 years at most in joint stock companies.

5. How is a director removed from office?

A director may resign his/her office at any time if he/she meets the specific conditions, such as justified reasons or notice period, stipulated under employment law and his/her employment contract with the company. The same applies to the company wishing to terminate the contractual relationship with the director. Furthermore, the director’s appointment is terminated ipso iure at the end of his/her term of appointment if the director has been appointed for a defined term. 

The director’s term of appointment will also be terminated ipso iure if the director no longer meets the eligibility requirements, i.e. if he/she becomes bankrupt or subject to an interdiction. The termination of appointment must be filed with the Trade Registry.

Unless otherwise stated in the articles of association, a resolution to remove a director(s) is to be passed by the shareholders’ general assembly. A notarised copy of the resolution must be filed by the directors with the Trade Registry having jurisdiction in the area where the company’s headquarters are located.

In addition, any shareholder can make an application to court for the removal of a director when there are justified reasons, such as a material breach of the duty of care or loss of qualifications necessary to properly manage the company.

6. What authority does a director have to represent the company?

The authority to manage the company and the power to represent the company towards third parties are distinguished from one another.

Directors are authorised to decide all issues in relation to the management of the company which are not explicitly reserved by law or the articles of association for resolutions of the shareholders’ general assembly. In principle, directors use this authority jointly; however, it is common to share management tasks among directors through internal regulation.
Unless provided otherwise by the articles of association and unless the company has only one director, a company is represented through the signatures of at least two directors. However, in practice the articles of association are drafted to allow the representation of the company through a single signature.

The scope and extent of management authorities, to the extent not determined by law or the articles of association, is determined by a shareholders’ general assembly resolution indicating the persons authorised to represent the company. A copy of the resolution must be notarised and filed with the Trade Registry having jurisdiction in the area where the company’s head office is located. Following registration, any legal defect regarding the appointment of representative directors can only invalidate transactions if the third party had knowledge of the legal defect. In addition, restrictions on representational power cannot be raised against third parties acting in good faith. However, restrictions aimed at limiting the powers of representation solely to the business of the head office or a branch, or to require a joint exercise of such powers, are valid if these restrictions are registered and published.

7. How does the board operate in practice?

If there is more than one director, directors may jointly be regarded as a board of directors. All directors exercise their duties jointly unless certain tasks are delegated to one or more of the directors in person. Decisions of directors are passed with a majority of votes and the chairman has a casting vote where votes are tied.

It is possible to hold non-physical meetings between directors provided that the articles of association permit this.

8. What contractual relationship does the director have with the company?

A shareholder’s resolution appointing a director to that office does not constitute an immediate legal relationship between the future director and the company. The consent of the director is also necessary, and the parties should enter into a contractual relationship in conjunction with the shareholders’ general assembly resolution. Usually this contractual relationship is in the form of an employment contract or an agency contract, which regulates issues such as the director’s term of office, duties and responsibilities, remuneration, business transactions subject to approval, confidentiality, non-competition, and termination of the relationship. It is not mandatory to conclude such a contract in writing unless the director is also a shareholder.

A director is entitled to seek remuneration in exchange for his services. It is possible to provide in the articles of association that the directors shall receive dividends. The shareholders’ general assembly has the sole authority to determine directors’ salaries.

9. What rules apply in respect of conflicts of interest?

A director is obliged to protect the company’s interests in good faith. He/she is therefore required to place the interests of the company before his/her own or those of a third party.
The Code sets out specific prohibitions in respect of voting rights. For instance, it is not possible for persons who have participated in the company’s management to vote on shareholders’ general assembly resolutions in respect of the release of directors. In addition, a director cannot vote on resolutions regarding the approval of his/her own activities and whether they were conducted in accordance with his/her duty of loyalty or non-compete obligation. Moreover, directors who are shareholders are prohibited from borrowing money from the company in certain circumstances.
A director cannot perform any activity which may compete with the company unless such an activity is expressly permitted in the articles of association or by written consent of the shareholders’ general assembly.

In practice companies and directors usually also conclude agreements which regulate in detail the non-competition duty of the director and transactions which are subject to the approval of shareholders.

10. What other general duties does a director have?

Directors are authorised to act in relation to all issues which are not explicitly reserved for shareholders by law or in the articles of association. While fulfilling these duties, the directors must comply with the mandatory provisions of the law, the articles of association, the contractual relationship between the director and the company and, if applicable, any resolutions of shareholders’ general assemblies. Even though the duties of the directors are owed to the company, directors are also under a limited duty of care towards the shareholders and creditors of the company.
Directors are subject to a wide range of duties which are not all specified by the Code; however, the Code defines some of the duties and responsibilities of directors which are not allowed to be delegated as follows:

  • to execute ultimate direction and management
  • to determine the company’s management organisation
  • to supervise people to whom management functions have been delegated
  • to establish a committee for early risk detection and management
  • to prepare the company’s financial statements and annual report
  • to organise shareholders’ meetings and to implement shareholders’ resolutions
  • to notify the court if the company’s liabilities exceed its assets.

 It is also possible to extend the scope of non-delegable duties through the articles of association.

11. To whom does the director owe duties?

A director owes duties to the company, shareholders and creditors of the company. The director is liable as to the damages incurred by such company, shareholders or creditors of the company if it infringes the duties under the applicable laws or the articles of association of the company.

12. How do the director’s duties change if the company is in financial difficulties?

In the case that the company is in financial difficulties, the directors’ duties would change towards securing the sustainability of the company and securing payments to the companies’ creditors. Accordingly, the Code foresees the following phases for its directors: 

  • if half of the total share capital of the company and reserve funds are lost according to the latest annual balance sheet, the board of directors shall invite the general assembly to convene immediately and present reformatory measures for the company which would cover the losses incurred in the short term and secure the sustainability of the company
  • if there are indications regarding the company being in debt, the board of directors shall prepare an interim balance sheet of the active assets over the sustainability of the enterprise and their possible sale prices. In the case that the interim balance sheet demonstrates that active assets of the company are not adequate to cover the payables to the creditors owed by the company, the board of directors shall make a legal notice to a commercial court of the first instance at the place where the company’s headquarters are located and request that the company is declared bankrupt. 

Not only civil liability but also criminal liability will arise for directors who fail to take necessary actions under the applicable law. Under Article 345/a of the Enforcement and Bankruptcy Law No. 2004, if the executors who are authorised to manage and represent the company fail to request the bankruptcy of the company, they may receive imprisonment from between 10 days and 3 months upon the request of one of the creditors.

13. What potential liabilities can a director incur?

Directors are liable towards the company for any damage incurred if they fail to fulfil their duties. In this regard, it is necessary to prove fault on the part of the directors. If more than one director is held liable for the same damage, each of the directors is severally liable for such damage to the extent to which such damage may be attributed to that director personally.
In the event of a breach of duty, the company, its shareholders and creditors may be entitled to bring a claim against the relevant director. However, creditors are only entitled to bring a claim against directors for indirect damages if the company becomes insolvent. In this case, creditors must first make an application to the Bankruptcy Administration to file a compensation claim against the directors.

Unless it is proven that the directors have appointed a third party to fulfil delegable duties without due care, the directors will not be liable for damages arising from the acts and decisions of the person to whom the duties have been delegated. This remains the case even in light of the director’s general duty of care and supervision.

In addition to damages incurred as a result of a breach of duty, directors may also be held liable if the company fails to meet its public debts, such as tax obligations and social security payments. However, this joint and several liability only extends to directors who have been authorised to represent the company. Therefore, directors who are not signatories of the company cannot be held liable in this respect. If the directors in office are different from those directors who were in office when the relevant liabilities arose, the current directors will be jointly and severally liable with the former directors to pay the relevant public debts. To bring a claim against directors for the recovery of these debts, it is necessary for the outstanding amounts not to be collected or to be considered impossible to collect from the company itself. It is important to note that there is no requirement to establish fault or negligence in performing the duties in this regard.

In addition to civil liability for public debts, the Code also provides for directors to be criminally liable in specific circumstances. This includes drafting of inaccurate documents regarding the incorporation of the company, committing fraud in the valuation of in-kind capital contributed, making false declarations for registrations at the Trade Registry, improper maintenance of the company’s records, and a failure to file insolvency proceedings.

14. How can a director limit his/her liability?

Directors’ liabilities can be discharged either by the passing of the statutory limitation period or through release by a shareholders’ general assembly resolution.

Unless other time limits are provided for in criminal matters, the right to bring an action against a director is subject to a 2-year limitation period starting from the time the claimant became aware of the damage and the identity of the liable director and, otherwise, 5 years from the occurrence of the event. After the relevant period has elapsed, the liability of the directors is deemed discharged.
The liability of directors may be limited or discharged in full following a shareholders’ general assembly resolution of release. This resolution is only effective for disclosed facts and only against the company and those shareholders who approve the resolution or who have since acquired their shares in full knowledge of the resolution. However, those shareholders who do not vote in favour of the release are still entitled to bring claims for a period of 6 months after the date of the release. The liability of directors arising from incorporation of the company or an increase of share capital continues for 4 years from the registration of the company, even if the directors are released during this period.

The release of directors by a shareholders’ general assembly resolution constitutes an affirmation by the company that the directors’ actions during the term covered by the resolution have been in compliance with the law and in the interests of the company. The resolution may be adopted by simple majority of votes represented at the meeting. This resolution cannot be withdrawn by another shareholders’ resolution. However, a court decision ordering the cancellation of the resolution may be granted under certain conditions (e.g. conflict with the articles of association or with applicable legal provisions).

Picture of Döne Yalçın
Döne Yalçın
Managing Partner Turkey