Whereas the concept of “Group of Companies” has not been touched upon under old version of Turkish Commercial Code, with the introduction of new  Turkish Commercial Code(“TCC”) numbered 6102, provisions on the “Group of Companies” have been adopted and heavily regulated  under Article  195 of the new Turkish Commercial Code.

With this regulation, it is aimed to protect the independence and transparency of the subsidiary company, which is in a relatively weak position against the dominant company, and to inform the public in general.

How to Define Dominance Within the Meaning of Law

Pursuant to TCC Article 195, “dominance” can be achieved through participation in the capital of a company, or alternatively it can be established only on a contractual basis, without a need for participation in the capital.

The provisions regarding the group of companies stipulated at TCC are applied, which means one of companies deemed as controlling company and the other company is deemed an affiliate company, in the occurrence of one of the following events.

In case one of the companies directly or indirectly has the majority of voting rights of other company,

In case a company has the right to elect the number of members that make up the majority to make decisions in the Board of Directors of the other Company pursuant to Articles of Association of the latter.

As a caveat, it is good reason enough to apply the pertinent Article of TCC  in case one of the companies forming the group of companies  is incorporated in Turkey.

Notification, Registration and Announcement Obligations

Within the framework of the TCC  Article 198, the notification, registration and announcement obligation has been imposed on the companies included in the group of companies regarding share ownership.

The purpose of the notification obligations is the disclosure of participation relations, especially mutual participation, thus informing the public, ensuring transparency in the capital market and implementing responsibility provisions.

In joint stock companies, the transfer of shares is possible through an agreement regarding the transfer of shares or, if the certificate is issued, their endorsement and the transfer of possession to the acquirer, whereas in limited companies, the transfer of shares is provided by a notarized share transfer agreement. In this sense, TTC Article 198 introduces exceptional provisions regarding the transfer of shares in joint stock companies, accordingly in the existence of the conditions listed in TCC Article 198, the obligation of notification, registration and announcement will be a must.

Pursuant to TCC Article 198/1, if a company directly or indirectly owns shares of another company in the amount specified in the article or if their shares fall below these percentages; the purchasing company shall notify the target company and the competent authorities indicated in the TCC and other legislation within ten days following the completion of the said transactions.

The competent authorities indicated in other laws may be government entities, such as the Capital Markets Board, the Banking Regulation and Supervision Agency, the Competition Authority and the Treasury, as the case may be.

The registration and announcement obligation of capital companies receiving notifications is regulated in Article 107/5 of the Trade Registry Regulation. Accordingly, capital companies receiving the notifications must have the relevant notifications registered and announced at the trade registry directorate they are registered in, within ten days from the date of receipt of the notification. The notification obligation stipulated by the TCC covers all shares, as such it cannot be allocated only to shares exceeding the percentage rates specified in Article 198.

As a side note, the acquisition or disposal of the shares at these percentages will be announced under a separate heading in the annual activity and audit reports and will be announced on the corporate website.

Failure to Fulfill Registration and Announcement Obligation by Notification

The sanction for not applying to the relevant trade registry office within the period foreseen for the registration and announcement obligation in accordance with TCC Article 198/2 is the freezing of the shareholding rights arising from the shares subject to transfer. This means that the voting right cannot be exercised, and the vote cast will be invalid despite this situation.

The validity of the decision taken in this way is evaluated depending on whether the invalid votes affect the decision quorum. If such invalid votes affect the decision quorum, the decision or decisions taken become invalid upon challenge.

The validity of the decisions adopted before notification and registration can be challenged at the competent court with proper venue without being subject to any period of prescription claim  even after the proper   notification and registration at the trade registry provided that  invalid votes had substantial effect on decision quorum.

Conclusion

With the obligation to make the notification, registration and announcement in writing, it is aimed to record the dominant partner relationship and inform the public in general.

Since failure to conclude foregoing transactions will lead to situations such as the inability to exercise shareholder rights and also the invalidity of company decisions, it is imperative  and one must be very careful  that these obligations regarding share transfers are fulfilled within the legal period foreseen by the law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.