- Introduction
Prohibition of competition on company executives which may arise from contractual obligations or legislative stipulations are designed to protect and benefit all the shareholders and the company by preventing any of the executives from using insider information to start a rival business or contribute to a direct competitor, as most shareholders and executives have detailed knowledge of the company's intellectual property, trade secrets, business plans, as well as relationships with key stakeholders and access to customer lists.
In line with this goal of eliminating abuse of power arising from executive positions and preventing unfair competitive practice1, the Turkish Commercial Code numbered 6102 (“TCC”) openly stipulates the prohibition of competition on board members of joint stock companies (“JSC”), restraining the board members from (i) conducting commercial transactions within the scope of activity of the company on their or a third party's account or (ii) being a shareholder with unlimited liability of a company participating in the same main scope of activity without the general assembly's prior approval.
- Non-Compete Clauses for Shareholders of JSC
Despite the fact that prohibition of competition is openly stipulated for the board members of the JSC and stipulation of non-compete clauses under the articles of association for the shareholders of limited liability companies are explicitly permitted, the TCC falls silent as to the competing endeavours of JSC's shareholders. Indeed pursuant to the sole obligation principle, referring to the restriction on the shareholders on undertaking or becoming indebted to the company aside from their capital subscription, it is generally accepted that no other obligation is or can be imposed on the shareholders including the negative obligations (which would include the non-compete clauses obligating shareholders to avoid rival practices and ventures) by law. The very same principle of sole obligation also prohibits the stipulation of non-compete clauses under the articles of association of JSC for the shareholders.
Given that free market and free competition are regarded as general constitutional principles in Turkish corporate law, the scope of restrictions to the individual's constitutional right to establishment arising from private contracts should be interpreted in a confining manner. Indeed, the Turkish Court of Cassation ruled that non-compete clauses prohibiting the shareholders from participating in the same scope of activity as the company for the rest of their lives could not be deemed valid2 and it is safe to say that such clauses are applicable to the extent that they conform with the doctrine of proportionality as well as being explicitly stipulated in a manner that is least damaging to the constitutional rights of the shareholders.
Although a minority of scholars acknowledge that a statutory obligation to avoid competition is imposed on the shareholders through the general provisions of the civil code, namely bona fides or principle of good faith, the consistent decisions of the Court of Cassation require an openly stipulated non-compete clause under the shareholders' agreement to request compensation for in case of a breach. In this regard, non-compete clauses deeming the previous competing clauses invalid and/or void are generally permitted by the decisions of the Turkish Court of Cassation3.
- Remedies for Breach of Non-Compete Clauses
In line with the foregoing, the stipulation of non-compete clauses under the shareholders' agreements as well as articles of association of limited liability companies are relatively common and widely accepted in commercial practice. The remedies of breach in this regard vary significantly, however, and notably, the specific remedies set forth under the TCC against the board members in breach, which consist of deeming the transaction as made on behalf of the company or claiming the interest of the third parties from the transaction as the company's, will not be applicable for the competitive endeavours of the shareholders of JSC. However, provided that a penalty clause is explicitly stipulated under the shareholders' agreement, the non-breaching shareholders can claim penalty. Additionally, as the competing endeavours of shareholders would constitute a breach of contract in terms of Turkish law of obligations, the non-breaching shareholders may claim compensation based on the general provisions of the Turkish Code of Obligations. It is also important to mention that the company itself can claim compensation from the breaching shareholders provided that it is a party to the shareholders' agreement under which the non-compete clause is stipulated. The statute of limitations too, however, will differ from that of the claims of breach against the board of directors of the JSC and the non-breaching shareholders (or the company upon the foregoing criterion) will be required to claim for compensation within five (5) years from the breaching endeavour/transaction.
- Conclusion
The right to fair competition is directly related to the constitutional freedom of establishing private institutions. In addition, specifically in institutionally developed JSCs, the shareholders are relatively removed from the daily operations of the company and less acquainted with customer lists and intellectual property rights but rather more involved in new venture establishment and sectoral development. Consequently, it is understandable that a prohibition of competition on the shareholders of the JSC is not stipulated under the TCC and non-compete clauses under the shareholders' agreements are deemed valid to the extent that they do not entirely invalidate the constitutional rights and freedoms of the shareholders or violate the mandatory and/or fundamental provisions of the law, the ethical values and/or the public order.
Footnotes
1. Pınar AŞIK, “Anonim Şirketlerde Rekabet Yasağı (TTK m.396)”, Ankara Barosu Dergisi, s.166-167.
2. Decision numbered 2000/1729 and dated 02.03.2000 of the 11th Chamber of Turkish Court of Cassation.
3. Decision numbered 2020/996 and dated 06.02.2020 of the 11th Chamber of Turkish Court of Cassation.
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