A. Joint Stock Company
The main piece of legislation governing commercial companies in Turkey is the Turkish Commercial Code, which entered into force in 1 July 2012. The joint stock company is only one of the corporate structures foreseen by the Turkish Commercial Code, although it remains the most preferred by both local and foreign investors, mainly due to the ability to go public and the fluidity with which share transfers can be realised. A joint stock company is governed by its articles of association. Among other provisions, the articles of association fundamentally provide corporate information (such as title, registered office, share capital etc.) and corporate governance rules (such as number of directors, manner of representation, and reserved matters, if any).
As a general rule, the establishment of a joint stock company is not subject to any regulatory or governmental consent, except for certain specific sectors (i.e. banking, energy, holding companies etc.) where the investors are obliged to obtain the consents of the Ministry of Trade and/or the relevant regulatory authority. A joint stock company is formed upon registration with the relevant trade registry.
The Turkish Commercial Code allows the incorporation of single shareholder joint stock companies with no upper limit on the number of shareholders a company may have. It should be noted, however, that pursuant to the Capital Markets Law, a company is deemed to have become public if it has more than 500 shareholders. The shareholders of joint stock companies may be individuals or legal entities and there is no restriction on their nationality.
(i) Share Capital: As a general rule, joint stock companies must be incorporated with a minimum share capital of TRY 50,000 or TRY 100,000 if a registered share capital system is implemented. In certain regulated sectors (such as financial services and energy), the minimum share capital is considerably higher and varies depending on the activity to be performed. Share capital may be contributed in cash or in kind. Assets, including intellectual property rights and virtual media, which are not encumbered, are cash valuable and transferrable, may be contributed as share capital in kind. If cash is contributed as share capital, 25% of such amount must be deposited with a Turkish bank prior to the incorporation or registration of the share capital increase, with the remaining amount being paid within the 24-month period following the registration thereof with the relevant trade registry.
(ii) Shares and Share Certificates: The share capital of joint stock companies must be divided into shares with a nominal value of at least TRY 0.01 or its multiples. Consequently, the share capital may be divided into as many shares as desired, subject to the nominal value of any share not being less than TRY 0.01. Although not mandatory, registered or bearer certificates may be issued to represent the shares of joint stock companies. The difference in issuing or not issuing certificates for the shares lies in the procedure of share transfers and does not affect shareholding rights. Please refer to 3.1.1(e) (Joint Stock Company, Share Transfers) for the procedures relating to the transfer of shares in joint stock companies.
(iii) Dividends: The right to receive dividends is an essential shareholding right with their distribution being decided upon by the general assembly. Unless otherwise set forth under the articles of association, each shareholder is entitled to receive dividends pro rata to its shareholding rate in the company. However, in order to distribute dividends, legal reserves must first be set aside in order to provide for unforeseeable future losses. In this respect, joint stock companies are required to set aside 5% of their net period profit every year as a first legal reserve until 20% of the paid-in share capital is reached. Until such legal reserves exceed 50% of the share capital of the joint stock company, these may only be used to cover losses, for the continuation of business during times of decline or the prevention of unemployment and minimisation of its effects. Upon these reserves exceeding 50% of the share capital, the excess amount shall become distributable. It is possible to distribute “interim dividends” during the course of a financial year upon the approval of the general assembly if the company has generated profits. Such “interim dividends” shall be set-off against the profits to be distributed at the end of the financial year, if any.
(iv) Minority Rights: While most resolutions, whether of the board of directors or general assembly, are required to be taken with a simple majority vote, the Turkish Commercial Code grants certain privileges to minority shareholders in order to ensure that their rights are not infringed upon by the other shareholders. In this respect, shareholders holding at least 10% of the share capital of a joint stock company, or at least 5% if the company’s shares are publicly traded, constitute the minority. Rights granted to minority shareholders under the Turkish Commercial Code are the rights to;
(i) request the board of directors to invite the general assembly to hold a meeting,
(ii) request additional discussion items to be added to the agenda of a general assembly meeting,
(iii) request the issuance of registered share certificates,
(iv) block the release of the company’s founders, directors or auditors from liability,
(v) request that discussion of the financial tables at the general assembly be delayed to another date, and
(vi) file a lawsuit with a commercial court to change the company’s auditor or to dissolve the company on the basis of justifiable
(c) Mandatory Corporate Bodies
(i) Board of Directors
A joint-stock company shall be managed and represented by a board of directors, appointed by the shareholders. The board of directors shall consist of at least one director, who may be an individual or a legal entity, although should a legal entity be appointed as a director, an individual must be appointed as the representative of that director. There is no restriction on the nationality of the directors, who also need not be shareholders of the company. However, if any director is a foreign national, a tax identification number must be obtained for them in Turkey, which is a simple procedure. For further information, please see 3.6.1 (Establishment Procedures, Joint Stock Company, Required Documents). Directors are appointed through the articles of association at incorporation and by the general assembly at later stages for a maximum term of three years, although it is possible for them to be re-elected for consecutive terms. It is also possible for a director to be temporarily elected through a board resolution, due to vacation of the position for any reason, on condition that such election is approved by the shareholders at the following general assembly meeting. The elected directors must then appoint one of the directors as the chairman. Although joint-stock companies are managed and represented by the board of directors, it is possible for management and representation to be delegated to third parties pursuant to an internal regulation to be issued by the board of directors, except for certain reserved matters (such as high-level management of the company) as stipulated under the Turkish Commercial Code.
Unless otherwise set forth under the articles of association or legislation, the board of directors must convene with a majority and take resolutions with the majority of directors present in the meeting. The Turkish Commercial Code also allows board meetings to be held by; (i) “way of circulation” (i.e. without a physical meeting), and (ii) electronic means, subject to the installation of a specific IT system for this purpose. The former case would be possible only if all members of the board of directors consent to adopt a resolution by “way of circulation” and a simple majority of the members approve such resolution. (ii) General Assembly The general assembly is the means by which the shareholders to supervise the business and management of a company. There are certain reserved matters that only the general assembly can decide. Such matters include without limitation amendments to the articles of association, the appointment of the members of the board of directors, distribution of profits or sale of a significant portion of the company’s assets.
The annual general assembly meeting must be convened within three months following the end of each financial year. The general assembly may also convene extraordinarily as required. As with board meetings, general assembly meetings may also be held by electronic means, subject to the installation of a specific system for this purpose. However, it is obligatory for companies whose shares are listed on the stock exchange to hold electronic general assembly meetings. A notice must be posted at least two weeks (or three weeks for public companies) prior to the date of the general assembly meeting, but such requirement may be waived, except for public companies, if all shareholders or their proxies shall be present in the meeting. A general assembly shall be validly convened if shareholders representing at least ¼ of the company’s share capital are present, and may take resolutions with the agreement of the majority of those present, although a higher quorum may be required for certain matters in accordance with the Turkish Commercial Code and/or the company’s articles of association. The presence of a representative of the Ministry of Trade may be necessary in specific circumstances (such as share capital increases and decreases).
The Turkish Commercial Code does not distinguish among individual and corporate directors in terms of their duties and liabilities. They are subject to the same principles and expected to comply with their fiduciary duties in the same manner. Directors have a general obligation to act in compliance with their duty of care, duty of loyalty and the duty of supervision (in case of a delegation of power). The Turkish Commercial Code requires directors to act as “cautious executives” and comply with their duty of care and duty of loyalty while performing their duties. The level of care or diligence expected from a direct is a combination of objective and subjective criteria.
The objective test requires the director to perform his/her duties in a manner that would be expected from a “cautious executive”. The “cautious executive” must act diligently, prudently and in line with bona fide principles to protect the interest of the company. The subjective test obliges the director to manage the company with professional skills, abilities and qualifications that are possessed (or should have been possessed) by that particular director. Joint-stock companies are primarily liable for public debts such as taxes and social security premiums. In the event of such debts not being paid by the company, these may be collected from the directors with such directors having the right of recourse to the company. However, the shareholders of joint-stock companies will not be liable for the public debts of the company so long as they are not also directors.
Criminal liability of directors may arise from a number of pieces of legislation, including the Turkish Commercial Code and the Capital Markets Law, however, in each case, only to the extent that a director was given special power and responsibility for conducting or monitoring the particular transactions which resulted in any of the above laws being breached.
(e) Share Transfers
As noted under 3.1.1(b) (Joint Stock Company, Shareholding, Shares and Share Certificates), there is no requirement to issue certificates for the shares of the joint-stock companies. The share transfer procedure will differ depending on whether or not share certificates exist. Execution of a delivery protocol will suffice if no share certificates have been issued. If certificates have been issued, the delivery of bearer share certificates in addition to a notification to the Central Registry Agency (Merkezi Kayıt Kuruluşu) will result in the transfer of those shares, while both endorsement and delivery are required for the transfer of registered share certificates. Still, most investors tend to negotiate and sign share purchase agreements to govern and regulate the commercial relationship between the parties.
Save for a board resolution in order for share transfers to be registered in the share ledger of the company, approval by any corporate body of the company is not required for share transfers in joint-stock companies unless the articles of association stipulate otherwise. Likewise, registration before and/or approval from any governmental authority is not required for the transfer of the shares of joint-stock companies. However, there are exceptions for regulated sectors if certain thresholds of shareholding have been exceeded or where the share transfer results in the purchaser being the sole shareholder of the company.
The Turkish Commercial Code permits two types of merger: one being the merger of a company into another and the other being the establishment of a new company by the merger of two or more companies. A merger shall only take place if it is approved by the general assembly meetings of the concerned companies. Upon the finalization of the merger, the acquired company shall be automatically dissolved. The Turkish Commercial Code sets forth compelling measures to protect the interests of the shareholders of the acquired company. One such measure is the requirement of the acquiring company, in the event of a merger through acquisition, to increase its share capital to an amount that will ensure the protection of the rights of the acquired company’s shareholders proportional to their shares and rights in the acquired company. An equalization payment may also be made to such shareholders if the asset valuation of an acquired company has a fractional value and this results in the shareholders of the acquired company not getting completely proportional shares or rights in the acquired company, provided that such amount does not exceed 10% of the actual value of the shares allocated to them in the acquiring company. A simplified merger procedure is available in the event of (i) a wholly-owned subsidiary being acquired by its parent company, (ii) the merger of affiliated companies where the acquiring company owns all of the shares granting voting rights of the acquired company, or (iii) the acquiring company owning at least 90% of the shares granting voting rights of the acquired company. But the latter case shall only be possible if the minority shareholders are offered equivalent shares in the acquiring company as well as compensation, and if the merger will not result in additional payments or personal obligations for the minority shareholders. The Turkish Commercial Code also ensures that the creditors of the merging companies are protected from the effects of the merger by requiring that they are notified both through three announcements to be made seven days apart in the Turkish Trade Registry Gazette and on their websites. Once the merger is registered with the trade registry, the acquiring company must secure the creditors’ receivables if they make a request in this regard within
three months of registration.
Joint-stock companies may spin-off the entirety or a portion of their assets and/or liabilities to an existing or a newly established company, in consideration of which the transferor company or its shareholders acquire the shares of the spun-off company. A full spin-off (i.e. transfer of the entire assets of a company to at least two companies) results in the dissolution of the transferor company and the shareholders of such dissolved company acquiring shares in the spun-off company. A partial spin-off (i.e. transfer of a portion of the assets of a company to at least one company) may lead to the rights and shares of the transferee company being acquired by the shareholders of the spun-off company or the establishment of a new company with the assets and shares of the transferee company, which are acquired in return for the transferred assets of the spun-off company. The Turkish Commercial Code allows both symmetrical spin-offs, whereby shareholders retain the same share ratios in the spun-off company and are granted shares in the transferee company pro-rata to their shareholding in the spun-off company and asymmetrical spin-offs, where the shareholders of the spun-off company are granted shares in the newly established or transferee company in accordance with their pre-spin-off share ratios. Asymmetrical spinoffs are convenient for corporate reorganizations as the share ratios of the shareholders of the transferee company are increased in the spun-off company if the share ratios of those shareholders in the transferee company are less than their share ratios in the spun-off company, helping to prevent any damages. As is the case with mergers, in order to protect the creditors of companies party to the spinoff from the effects of the spin-off, a notification must be made to them to confirm their receivables and to request securitization through three announcements to be made seven days apart in the Turkish Trade Registry Gazette and on their websites. The companies party to the spin-off must secure the receivables of the creditors which make such requests within three months from the date of the last announcement, although it is also possible to instead pay the debt if no damages will be incurred by the other creditors. Following the securitisation of the creditors’ receivables, spin-off needs to be approved by the general assemblies of the concerned companies and registered with the relevant trade registry.
LIMITED LIABILITY COMPANY
Another common form of company in Turkey is limited liability companies which are also regulated mainly by the Turkish Commercial Code. Although limited liability companies are structurally very similar to joint-stock companies, certain procedures require more formalities than the latter, such as share transfers. They are, nevertheless, favored in certain circumstances. The rules governing the establishment of a limited liability company are almost identical to a joint-stock company, except that in specific regulated sectors (such as certain financial services sectors), it is not possible to operate as a limited liability company.
The Turkish Commercial Code allows limited liability companies to be incorporated with a single shareholder, although the maximum number of shareholders permitted for such companies is 50. Individuals and legal entities of any nationality may be shareholders in a limited liability company.
(i) Share Capital: The Turkish Commercial Code requires limited liability companies to be incorporated with a minimum share capital of TRY 10,000 (subject to minimum share capital requirements in certain specific sectors where operating as a limited liability company is allowed). The registered share capital system is not an option for limited liability companies and they may only adopt the principal share capital system. Rules governing the contribution of share capital in cash or in-kind and deposit and payment
requirements are identical to the rules and requirements for joint-stock companies.
(ii) Shares and Share Certificates: The share capital of a limited liability company shall be divided into shares with a nominal value of at least TRY 25 or its multiples (i.e. TRY 50, TRY 100 etc.). Limited liability companies may only issue registered, not bearer, share certificates. As opposed to the share certificates of joint-stock companies, the share certificates of limited liability companies are not considered securities, the practical implications of which are detailed under 3.1.2(e) (Limited Liability Company, Share Transfers) below.
(iii) Dividends: Please see 3.1.1(b) (Joint Stock Company, Shareholding, Dividends) above.
(iv) Minority Rights: Please see 3.1.1(b) (Joint Stock Company, Shareholding, Minority Rights)
(c) Mandatory Corporate Bodies
A limited liability company shall be managed and represented by one or more managers appointed by the shareholders. If there is more than one manager, then there is a board of managers as per the Turkish Commercial Code. Unlike joint-stock companies, at least one of the managers must also be a shareholder. There is no restriction on the nationality of managers, however, should any manager be a foreign national, a tax identification number must be obtained for them in Turkey. For further information, please refer to 3.6.1 (Establishment Procedures, Limited Liability Company, Required Documents).
Except that managers can be appointed for an unlimited term, the rules governing, among others, the appointment of managers, their liabilities, delegation of duties, and electronic meetings are identical to those of a joint-stock company. The meeting quorum (in case of a board of managers) is also the same, however, unlike joint-stock companies, the chairman of the board of managers has a casting vote in case of a deadlock.
(ii) General Assembly
Similarly, with a joint-stock company, certain decisions are reserved to be exclusively adopted by the shareholders of a limited liability company; however such list is more extensive for limited liability companies as it also includes, among others, approval of any share transfer and squeeze-out of existing shareholder through a court order. There is no meeting quorum for the general assembly meeting of a limited liability company, and, unless a higher quorum is required as per the Turkish Commercial Code and/or the company’s articles of association, an affirmative vote by the majority of the shareholders attending the general assembly meeting shall suffice to adopt a resolution. Please also see 3.1.1(c) (Joint Stock Company, Mandatory Corporate Bodies, General Assembly)
for other matters concerning general assembly meetings of limited liability companies.
The managers of a limited liability company are subject to the same liability regime as the directors of a joint-stock company. However, this is not the case for the shareholders of a limited liability company. Accordingly, the shareholders of a limited liability company may be personally liable for the unpaid public debts (such as tax or social security premiums) of the company if the company cannot fulfill its obligation to pay such public debts. Other than this liability, shareholders shall be limited to the unpaid portion of their share capital contribution.
(e) Share Transfers
The share transfers of limited liability companies are subject to more formalities than those of joint-stock companies. However, these are not prohibitive. In order to effect the transfer of shares of limited liability companies, a share transfer agreement must be executed in writing before a notary public in Turkey. Upon the execution of such agreement, the general assembly of the limited liability company must convene to approve the relevant share transfer, unless otherwise set forth under the articles of association. However, approval will be deemed to have been granted if the general assembly does not reject the share transfer within three months of the execution of the share transfer agreement. The share transfer must then be registered before the trade registry. It should also be noted that the articles of association of a limited liability company may include a provision prohibiting or restricting the transfer of shares.
Please see 3.1.1(f) (Joint Stock Company, Mergers) above.
Please see 3.1.1(g) (Joint Stock Company, Spin-Offs) above.