Legal guide for company directors and CEOs in Turkiye

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

According to the Corporate Governance Communiqué (the “Communiqué”) published by the Capital Markets Board (the “Board”), public companies are subject to sustainability principles and should include statements related to conformity with sustainability principles within their corporate governance compliance reports. The following types of public companies are excluded from the scope of this liability:

• Public companies whose shares are not traded on the stock
• Public companies whose shares are traded on stocks other than the National Market, Second National Market or Corporate Products Market
• Among the public companies which have applied to the Board for an initial public offering, companies whose shares will be traded on markets other than the National Market, Second National Market or Corporate Products Market
• Companies which are deemed as resident abroad according to Decree No. 32 on Protection of the Value of Turkish Currency. 

With regards to the above-mentioned liability, the Board has published the Framework for Compliance with Sustainability Principles (the “Framework”). The Framework comprises various sustainability principles as follows:

• General Principles: relate to the strategies, policies and objectives of companies with regard to sustainability, the application and review of these strategies and policies, and the review of the process to achieve an objective
• Environmental Principles: require that companies comply with environmental legislation and international standards such as ISO 14001, disclose the highest level of environmental and climate change management bodies and employees, identify incentives for environmental management, explain how environmental issues are integrated into labour-related matters and how environmental issues affect the value chain and customers, disclose measures and strategies to address the climate crisis, provide data on the use of renewable energy, etc.
• Social Principles: set standards for human and labour rights, health and safety at work, protection of personal data, ethical principles, social responsibility, customer satisfaction and transparency.  

According to the General Principles, the board of directors is obliged to determine matters that should be prioritised with regards to ESG and ESG-related risks and opportunities. Further, the board of directors is required to prepare ESG policies in accordance with such prioritised matters, risks and opportunities. 

Further, according to the Turkish Sustainability Reporting Standards (“TSRS”) published by Public Oversight, Accounting and Auditing Standards Authority (Kamu Gözetimi, Muhasebe ve Denetleme Standartları Kurumu) companies and financial institutions exceeding certain thresholds set out in TSRS or companies specifically listed regardless of the thresholds in TSRS are subject mandatory reporting of sustainability related financial information and climate related risks and opportunities, the details of which are listed further below in this guide. 

Even though the Communiqué and the Framework are the sole pieces of legislation on the ESG-related obligations of companies and directors, certain opinions indicate that the obligations foreseen under the Framework and the Communiqué should be valid for all companies. Additionally, some opinions set forth that the general corporate governance principles determined by the Turkish Commercial Code and similar pieces of legislation should be objectified by including the principles under the Framework within their scope. With respect to the TSRS, although mandatory reporting only applies to companies specifically listed in the TSRS and those exceeding certain thresholds set out in the legislation, other companies and institutions may choose to report voluntarily. 

The TSRS was published in the official Gazette on 29 December 2023 and has entered into force as of 1 January 2024. No change or new legislation is expected in the short term. However, there is speculation that the EU’s ESG-related obligations and regulations could affect Türkiye indirectly via commercial terms and local regulations. Türkiye’s Ministry of Commerce has already published the “European Green Deal Action Plan” with the purpose of ensuring compliance with the transformative and progressive policies of the EU and of the rest of the world. Consequently, additional action plans or the embodiment of the principles and targets set out under the “European Green Deal Action Plan” could be expected. 

According to the Communiqué, public companies should include in their Annual Activity Reports:

• Statements on whether they are compliant with sustainability principles
• Detailed explanations of the reasons for non-compliance
• Effects resulting from non-compliance. 

Additionally, the Framework determined certain principles with regards to the reporting requirements of companies. Accordingly, companies that fall under the scope of the Framework should publish their performance, targets and actions related to sustainability once a year. Sustainability-related actions could be published in the Activity Report. 

According to the TSRS, as of 1 January 2024, in-scope companies are required to report the information below:

• General Disclosure Provisions: Sustainability related financial information needs to be disclosed. According to the definition provided under the TSRS, sustainability-related financial information means information about the reporting entity's governance, strategy, risk management related to sustainability-related risks and opportunities, and related metrics and targets, risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance or cost of capital in the medium or long term.
• Climate-related Financial Information: Climate-related risks and opportunities, which cover the physical and transition risks companies are expected to face due to the climate crisis, are required to be disclosed.
• The TSRS outlines a transitional period with provisional clauses on reporting and exemptions. Accordingly:
• companies are not required to provide comparative information in their first TSRS-compliant reporting period. That said, descriptive financial information regarding sustainability must also include comparative data if it enhances understanding.
• Companies are allowed to issue sustainability reports for the first TSRS period following the reporting of their financial statements for said period. On that basis, reports must be presented:
  • with the second quarter or six-month interim financial reports if required;
  • simultaneously with optional interim general-purpose financial reports, if within nine months from the reporting period’s end; or
  • within nine months from the annual reporting period’s end if no interim financial report is presented.

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. 

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

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.). 

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 Türkiye, and there is no Turkish nationality requirement. Legal entities can also be appointed as directors, regardless of whether they are incorporated in Türkiye 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 1 Please kindly note that such a requirement is only applicable to limited liability companies and not to joint stock companies.  

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. 

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

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 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. 

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.

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. 

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. 

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. 

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. 

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. 

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. 

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. 

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).