1. Primary sources of law, regulation and practice
What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a 'comply or explain' basis?
The Turkish Commercial Code (TCC) dated 13 January 2011 (Law No.
6102) (TCC) entered into force on 1 July 2012. The TCC has
important objectives such as ensuring transparency, adopting
corporate governance standards and introducing internationally
accepted auditing and reporting standards.
In addition to the above, the laws, communiqués and principles governing corporate rules and practice are as follows:
- Law No. 6335 amending the TCC (the Amendment Code);
- the Capital Markets Law (CML) dated 6 December 2012 (Law No. 6362), which entered into force on 30 December 2012 replacing the former Capital Markets Law dated 30 July 1981 (Law No. 2499);
- the Capital Markets Communiqués (the CMB Communiqués); and
- the Corporate Governance Communiqué (CGC) dated 3 January 2014, serial II, No. 17.1 and Corporate Governance Principles (CGP) that are listed as annex 1 of the CGC.
According to the CGC, publicly held companies that have shares traded on the stock exchange are subject to the mandatory implementation of certain corporate governance principles; however, there are minor exceptions to mandatory principles (eg, the number of independent board members). As per the CGC, the criteria regarding the number of independent board members shall not be applied to third-group corporations (corporations that are excluded from the first and second groups, the shares of which are traded on National Market, Second National Market and Collective Products Market) and two board members are sufficient for third-group corporations.
There are also some listing requirements that are applied on a 'comply or explain' basis. For example, article 4.2.5 of the CGP stipulates that the responsibilities of the chair of the board of directors and the chief executive officer or general manager must be explicitly separated; however, if it has been resolved that the roles of chair of the board of directors and the chief executive officer or general manager are considered the same, this decision (and grounds for this decision) must be disclosed at the Public Disclosure Platform (PDP) (CGP, article 4.2.6).
2. Responsible entities
What are the primary government agencies or other
entities responsible for making such rules and enforcing them? Are
there any well-known shareholder groups or proxy advisory firms
whose views are often considered?
The Ministry of Customs and Trade is the regulatory body responsible for enforcing the TCC's provisions on corporations (article 210 of the TCC). The disputes arising from the TCC are mainly resolved before commercial courts.
The CML, CMB Communiqués and the CGP are enforced by the Capital Markets Board (CMB). The CMB is the regulatory and supervisory authority in charge of the securities markets in Turkey. The CMB is entitled to hand out administrative sanctions to companies or individuals in the event of non-compliance. In the event the conditions set forth under the CML and the relevant legislation occur, the public prosecutor may prepare an indictment upon the written request of the CMB.
As regards the associations whose views are often considered, two associations, namely the Capital Market Investors' Association (BORYAD) and the Turkish Industry and Business Association (TUSIAD), can be mentioned. TUSIAD was established in 1971 to represent the business world and BORYAD was established in 2001 to defend shareholder rights and promote investment.
Under the TCC there are legal grounds for proxy advisory firms, especially to protect the rights of minority shareholders in public companies.
3. Shareholder powers
What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?
According to the TCC, apart from specific exceptions (ie, appointment of the initial board members of companies by the articles of association (AOA)), shareholders have exclusive authority to appoint or remove board members. As per article 407 of the TCC, shareholders may use this authority during the general assembly (GA). An exception to this rule is that, in the event a board member leaves their post, the board may also temporarily appoint a new member. However, temporary appointments must also be approved during the next meeting of the GA by shareholders.
Article 408 of the TCC similarly determines the authority of the GA to appoint and dismiss board members. Accordingly, the GA is authorised to make decisions as set forth under the law and the AOA. The same article also stipulates the non-transferable duties and authorities of the GA. Accordingly, privileges may be granted in respect of the election, nomination, release and dismissal of board members.
Under Turkish law, shareholders holding at least 10 per cent of the share capital of non-public companies and 5 per cent of the capital of public companies are defined as minority shareholders. The minority shareholders may:
request the board to call an extraordinary meeting of the GA to question the company's management and request that additional items be added to the agenda (TCC, article 411);
ask the GA to appoint a special auditor to investigate and clarify certain issues even if it is not on the agenda. In order for shareholders to use this option, they must first exhaust their rights of information and examination. If the GA accepts this request, minority shareholders can request the commercial court to appoint a special auditor (TCC, article 438). This is applicable not only for minority shareholders, but for all;
request the board to issue registered share certificates. If made, such request of the minority shareholders must be accepted and registered share certificates must be delivered to owners (TCC, article 486); and
request the company to be dissolved, if there is a 'just cause' in that regard. The TCC does not define what a just cause would be, but it is accepted among scholars that there would be a just cause to request the dissolution of the company if the GA was called to numerous meetings contrary to the law, if the rights of minority shareholders are violated, especially the right to examine and demand information, if the company constantly loses its assets and does not generate any profit, etc (TCC, article 531).
Further, all shareholders are entitled to request information and examination. Pursuant to article 1.2.1 of the CGP, which is applicable to public companies, this right cannot be limited or cancelled by the AOA or by a decision of the company.
In addition, any shareholder has the right to ask the GA to file a lawsuit for damages against board members or auditors (TCC, articles 553 to 555), request to inspect the company's books and records and request information from the company's auditor. Shareholders may also request from courts, if there is a just cause, that the managers' right to manage the company be limited or completely abolished (TCC, article 630).
The shareholder vote required to elect and dismiss directors is the simple majority of the votes represented in the GA meeting, unless provided otherwise by law or the AOA. The necessary quorum for the GA meeting is shareholders or their representatives corresponding to at least one-quarter of the capital. If this quorum cannot be reached in the first meeting, no quorum is sought for the second meeting (TCC, article 418).
4. Shareholder decisions
What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?
According to article 408 of the TCC, the GA has exclusive authority over:
- amending the AOA;
- releasing the auditors and the board of directors or holding them liable;
- appointing the members of the board of directors, determining their fees, term of duties, discharging and replacing them;
- appointing and discharging the auditor except for the cases set forth under the law;
- taking decisions regarding the financial statements, the annual report of the board of directors, savings on the annual profit, determination of the dividend and gain margin and including the injection of the reserve fund into the capital or into the profit to be distributed and deciding on the use of the reserve fund;
- deciding on the dissolution of the company except for the cases set forth under the law; and
- sale of a substantial part of the company.
In the event the conditions stated under the CML and the related legislation are met, some exclusive powers of the GA may be transferred to the board of directors. For example, if a company chooses the registered capital system, the share capital of the company can be increased upon the board of directors' resolution. Also, when it is permitted by the AOA, the board of directors may restrict the pre-emptive rights of shareholders (CML, article 18/5).
Under Turkish law, there are no matters that are resolved by a non-binding shareholder vote.
5. Disproportionate voting rights
To what extent are disproportionate voting rights or
limits on the exercise of voting rights allowed?
As regards disproportionate voting rights, it should be noted that the TCC adopts the 'one share, one vote' principle. Accordingly, each share grants at least one voting right (TCC, article 434).
Pursuant to article 479 of the TCC, disproportionate voting rights may be granted to privileged shares. However, the voting privileges for private companies are limited to a maximum of 15 votes per share. This number can be increased only by a court decision for the sake of institutionalisation or because of a just cause. Thus, under the TCC regime, it is no longer possible to block a capital increase through the use of privileged shares. Further, privileged votes do not extend to resolutions regarding the amendment of the AOA of a company, or filing of discharge or liability suits.
6. Shareholders' meetings and voting
Are there any special requirements for shareholders to
participate in general meetings of shareholders or to vote? Can
shareholders act by written consent without a meeting? Are virtual
meetings of shareholders permitted?
Article 1.3.1 of the CGP stipulates that the announcement regarding GA meetings should be made at least three weeks in advance of the meeting on the company's corporate website and on the PDP.
According to the TCC, shareholders are invited to the meeting as
stipulated under the AOA, through an announcement published on the
company's website (if the company is required to have a
website) and in the Turkish Trade Registry Gazette. This
announcement must be made two weeks before the GA meeting (TCC,
Article 415 of the TCC stipulates the shareholders who are entitled to attend meetings. Accordingly, shareholders whose names are written in the attendance list prepared by the board of directors have the right to attend the meeting.
Pursuant to article 437 of the TCC, regulating the right to
examine and demand information, financial statements, consolidated
financial tables, annual reports of the board, audit reports and
suggestions of the board regarding the method of distribution of
dividends shall be made available to the shareholders at least 15
days before the meeting.
Pursuant to the TCC, e-signatures can be used to prepare meeting documentation and meetings can be held electronically (TCC, article 1527).
The following requirements have to be met in order to vote online:
- the company must have a website allocated for this purpose;
- shareholders who wish to participate in the online GA meeting must make such a request in advance;
- a technical report must be produced to prove that the electronic platform tools are sufficient for efficient participation and this report should be registered and published; and
- the identities of the online voters must be kept confidential.
The Ministry of Customs and Trade issued the Regulation on General Assembly Meetings of Joint Stock Companies held electronically, regarding the procedures of online GA meetings, published in Official Gazette No. 28481 of 28 November 2012. The companies shall have integrated in their AOA the sample article stating that the meetings can be held electronically. The said article can be found in the Regulation published by the Ministry of Customs and Trade. The company shall integrate the article as is because it is not possible to amend the article while adopting it.
Electronic meetings are mandatory for publicly listed companies.
The shareholders acting by written consent without a meeting can be realised by meetings that are held electronically, as explained above.
7. Shareholders and the board
Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?
Article 411 of the TCC stipulates that shareholders holding at least 10 per cent of the company's capital and for public companies, shareholders holding at least 5 per cent of the company's capital may request a general meeting. If such a meeting has already been convened, then they have the right to request certain topics to be included on the agenda including director nominations. If their request is not accepted by the board or not responded to within seven days, such shareholders have the right to apply to the commercial court to enforce their request.
According to article 446 of the TCC, the dissenting opinions of the shareholders must be recorded in the minutes of the GA meeting to grant shareholders a right to claim invalidity of such decisions.
8. Controlling shareholders' duties
Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?
Under Turkish law, controlling shareholders do not have any specific duties to the company or to non-controlling shareholders. However, it should be noted that all controlling shareholders must exercise their rights by complying with good faith principles. Further, there are special provisions for minority shareholders.
Additionally, the TCC regulates provisions with regard to group companies and article 202 of the TCC specifically stipulates that the dominant (controlling) company cannot exercise its dominance in a way that may give rise to a financial loss on the subsidiary (eg, instruct the subsidiary to be the guarantor of a loan), unless such loss is compensated within the same financial year or a right to claim compensation is granted to the subsidiary within the same financial year by providing details on when and how the loss will be compensated. The loss concept herein covers causing a potential risk to the company's financial assets or future profitability as well as value depreciation on them. Therefore, not only the actual losses sustained but also potential risks that may arise thereof fall within the definition of loss.
Both the shareholders of the subsidiaries and the creditors of the same may claim the indemnification of the loss of the subsidiary company from the dominant company by filing a lawsuit.
9. Shareholder responsibility
Can shareholders ever be held responsible for the acts or omissions of the company?
According to the TCC, the shareholders' liability is normally limited to their subscribed capital contribution. This rule is applicable for both joint-stock companies and limited liability companies (LLCs). There is an exception for LLCs as concerns governmental debts. Accordingly, shareholders of a LLC are liable with their personal assets for the governmental debts and the responsibility should be calculated over the shareholding ratio in the company capital. Other than this, the shareholders are not responsible for the acts or omissions of the company, unless such an act or omission results from the shareholders' own acts and has criminal elements.
10. Anti-takeover devices
Are anti-takeover devices permitted?
At present, share transfer restrictions are not permitted except for legal grounds determined under the TCC. However, the TCC introduces specific provisions regarding the restriction of share transfers through the AOA separately for LLCs and joint-stock companies (JSCs). Article 492 of the TCC requires JSCs to include in their AOA the specific reasons why share transfers may be rejected. Reasons related to the nature of the shareholders' composition or the scope of the company's activities or the economic independency of the company are deemed as important grounds for rejection as per the TCC. This is not an exhaustive list, therefore shareholders will need to select and predetermine the grounds for share transfer rejections and be very specific about it, if they want this protection to be reflected in the AOA. Otherwise, limitations on share transfer will continue as a contractual obligation pursuant to the shareholders' agreement.
Article 493/1 of the TCC provides an escape clause for JSCs
through the option to reject a share transfer, without basing its
decision on the grounds explained above, by offering to acquire, at
real value, the transfer shares itself or on behalf of its
shareholders or a third party.
For shareholders to resolve on the transfer restrictions of registered shares, an affirmative vote of 75 per cent of the shareholders or their representatives is required (TCC, article 421/3).
In contrast to the JSCs, the TCC explicitly allows LLCs to limit share transfers based on pre-emptive purchase rights, call options or other ancillary or additional obligations by so providing for them in their AOA. Such limitations may also be subsequently included into the AOA by a decision of the GA. In this regard, the positive vote of two-thirds of the GA is required (TCC, article 621).
In LLCs, share transfers are subject to the approval of the GA
and may be rejected without a just reason, unless otherwise
stipulated in the AOA (TCC, article 577).
Given the differences between LLCs and JSCs, investors aiming to reflect the provisions of the shareholders' agreement to the AOA may prefer to incorporate an LLC, provided that the regulations in their field of activity allow this.
Any agreement between the JSC and a third party for the
acquisition by that third party of the JSC's shares in lieu of
the JSC itself or its affiliate or the parent company must comply
with the terms set forth under articles 379 and 380 of the TCC. An
agreement or obligation to this effect in violation of the terms of
article 379 of the TCC will be invalid.
The TCC bans a JSC, a third party or the JSC's subsidiary acting for the JSC, or the JSC's subsidiary promising shares in its parent company, from undertaking to sell treasury shares (TCC, article 380/2).
11. Issuance of new shares
May the board be permitted to issue new shares without
shareholder approval? Do shareholders have pre-emptive rights to
acquire newly issued shares?
Under the TCC, new shares are issued upon capital increases and this requires a shareholders' resolution. In public JSCs that adopt a registered capital system, capital can be increased without the approval of the shareholders, thus new shares can be issued accordingly, within the registered share capital (TCC, articles 459 and 460). In addition, according to article 461 of the TCC, existing shareholders have pre-emptive rights to acquire newly issued shares in proportion to their shareholding. Pre-emptive rights of shareholders may be restricted by a decision of the GA meeting, in the presence of just causes and with the positive vote of shareholders representing at least 60 per cent of the capital (TCC, article 461).
The TCC has introduced two new systems regarding capital. First, there is the new registered capital system for private JSCs, which was previously available only for public companies. A private JSC can adopt the registered share capital system by a provision to this effect in its AOA. The AOA must indicate the aggregate ceiling of the capital and the time limit for the board of directors' authority to increase capital within that set limit, which cannot be longer than five years. The company may then increase its capital without going through the burdensome procedures of holding a GA meeting up to a predetermined ceiling (TCC, articles 459 and 460). The minimum capital requirement for a JSC adopting the registered capital system is 100,000 Turkish liras (TCC, article 332).
Second, as a financing method for JSCs, the TCC brings a conditional capital increase system, through which the company's creditors (such as holders of bonds or other debt securities) and employees may partake in its equity. The conditional capital increase is not triggered by new capital commitments of the shareholders, but through the exercise of exchange (conversion option) and pre-emptive rights by creditors and employees (TCC, article 463).
12. Restrictions on the transfer of fully paid shares
Are restrictions on the transfer of fully paid shares
permitted and, if so, what restrictions are commonly
The CMB prohibits the restrictions on the transferability of shares of a public company. Accordingly, the transfer of the shares must not be limited and other restrictions must not be imposed on the shareholders to prevent them from going public.
Further, pursuant to article 8(ç) of the Quotation Directive issued by Borsa Istanbul, a company is prohibited from including any share transfer restrictions in its AOA regarding the securities to be listed on Borsa Istanbul.
Article 490 of the TCC stipulates that fully paid, registered shares can be transferred without any restriction, unless otherwise provided by law or by the AOA. The transfers of bearer shares are subject to the transfer of possession.
13. Compulsory repurchase rules
Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?
A share buyback system that was already available for listed companies under capital markets legislation has been introduced by the TCC for JSCs, in exceptional cases. The conditions for the buyback are as follows (TCC, article 379):
authorisation of the board of directors by a GA meeting;
acquisition and pledge may be accepted on condition that the shares it will acquire in the future and the shares held by its subsidiary companies do not exceed 10 per cent of the company's authorised or issued capital;
the GA meeting can only delegate such authority for a maximum period of five years;
the board of directors is required to state in the authorisation that these legal requirements have been fulfilled;
the nominal value of the shares that will be accepted as an acquisition or pledge by the authority must be stated;
the minimum and maximum limits of the consideration that will be paid for the shares must also be stated; and
acquired shares must be fully paid-up. Shares so issued are stripped of any voting rights.
Further, article 385 of the TCC stipulates that shares acquired or accepted as a pledge in a way that is contrary to the principles set forth under the TCC shall be disposed of, or the pledge on them shall be released within six months of the date of their acquisition or acceptance as a pledge. Any specific procedure regarding selling off or disposing of the pledge has not been provided. The authority to sell off such shares is held by the board of directors, which shall perform its duty according to the principles of equality and public disclosure.
Similar principles apply to share buybacks in LLCs as well. An
LLC may acquire its own capital shares with two conditions (TCC,
article 612): it must have the necessary equity that may be freely
used to purchase these shares; and the nominal value of the shares
to be purchased must not exceed 10 per cent of the total share
Capital shares acquired in excess of this amount must be disposed of or redeemed through a capital reduction within a maximum period of two years (TCC, article 612/2).
The Communiqué on Share Repurchase (the Communiqué) issued by the CMB entered into force on 3 January 2014. According to the Communiqué, the board of directors must be authorised by the GA in order for a publicly held company to repurchase its own shares (Communiqué, article 5/1). There is an exception to this rule where listed companies are allowed to repurchase the shares without the necessity of a GA authorisation, if such repurchase is necessary for the purpose of avoiding a probable and serious loss. A probable and serious loss is deemed to exist where the daily average price of shares is below the nominal value or has lost value over 20 per cent. Unless such circumstances are present, the only way for a listed company to repurchase its shares without a GA authorisation is to obtain the approval of the CMB (Communiqué, subparagraphs 4 and 5 of article 5).
The nominal value of the repurchased shares cannot exceed 10 per cent of the paid-in capital where the total value of the shares cannot exceed the total value of the resources subject to profit distribution. Repurchased shares may be kept for an indefinite period as long as they do not exceed the aforementioned limits. The shares repurchased in breach of the Communiqué must be sold within one year of the date of repurchase or else they will be amortised by way of capital decrease (Communiqué, article 19).
The maximum duration of the repurchase programme is three years
for the companies listed on the stock exchange and one year for
other publicly held companies, unless the repurchase programme does
not foresee any specific duration (Communiqué, article
The repurchase of shares is not permitted if there is any postponed disclosure process regarding internal matters or significant transaction that has not yet been disclosed to the public.
14. Dissenters' rights
Do shareholders have appraisal rights?
The TCC also provides categories of important reasons that allow JSCs to reject the transfer of registered shares under their respective AOAs. The company may choose not to approve the share transfer by claiming an important reason stated under the AOA, or to acquire the shares to be transferred on its or a shareholders' or any third party's behalf by offering nominal value of the shares to the transferee (TCC, article 493).
If the company prefers to use an escape clause, the nominal value of the shares must be offered to the transferee. There is no definite basis for how the nominal value of shares will be determined and the transferor may apply to court for a determination of the nominal value of the shares to be transferred. If the transferee is offered a nominal value and does not reject such value within one month of its acknowledgment, the acquisition offer will be deemed accepted. If the company remains silent for a period of three months from the date of the transferee's application for approval, it will be deemed that the company has approved the share transfer. As long as the company does not approve the share transfer, the ownership of shares will remain with the transferor together with all monetary and management rights (TCC, articles 493 and 494).
In addition, the TCC regulates an escape fund to be paid to
shareholders in the event of a merger or change in the type of
company. In this regard, if the shareholders disagree with a merger
or change in the type of company, they have the right to sell their
shares to the company at a fair value (TCC, articles 141, 183 and
Moreover, the Communiqué on Common Principles of Significant Transactions and Retirement Rights issued on 24 December 2013 determines the extent of significant transactions and shapes the limits of voting rights and shareholders' retirement rights in publicly held companies. According to this communiqué, mergers, division transactions, change in the type of company or termination, along with other important transactions listed in article 5, require GA approval.
This communiqué details the provision regarding the retirement right in article 24 of the CML and determines the circumstances where the retirement right does not arise. In this respect, shareholders who voted against a significant transaction at the GA meeting and had their dissenting vote recorded in the minutes of that meeting will be able to sell their shares to the subject company.
According to this communiqué, it may be possible to abandon significant transactions where the total cost of the exercise of retirement rights exceeds the predetermined cost of the same or where certain shareholders, whose qualifications are specified beforehand, exercise the retirement right. Similar provisions are recognised for mandatory tender offers arising from a significant transaction. With an amendment dated February 2015, pursuant to article 11/1, in order to protect the rights and interests of investors, it has been provided that in case of a non-public company acquiring a publicly listed company, the controlling shareholders together with those acting with the controlling shareholders shall make a mandatory tender offer.
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First published by GTDT, 07.09.2019
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.