The TCC regulates several company types, namely: (i) joint-stock companies (JSCs), (ii) limited liability companies (LLCs), (iii) collective companies (kolektif şirket), (iv) co-operative companies (komandit şirket) and (v) co-operative companies limited by shares (sermayesi paylara bölünmüş komandit şirket).
The main differences between these company types arise from the allocation of liability, the corporate governance structure and the legal form of the entity.
Due to the advantageous position of the shareholders' liabilities, JSCs and LLCs are usually preferred for doing business in Turkey.
The principal sources (ie, the main legislative and regulatory sources) of corporate governance requirements in Turkey are:
The Ministry of Trade (the Ministry) is the main authority responsible for the implementation and enforcement of the corporate governance principles embodied in the TCC for corporate entities.
The CML and in particular the corporate governance-related secondary regulation (the relevant Capital Markets Communiqués) are enforced by the Capital Markets Board (CMB), which is an independent regulatory and supervisory authority in charge of fair and orderly functioning of the securities market in Turkey.
The Turkish Industry and Business Association, which is an independent non-governmental organisation, issued the first Corporate Governance Best Practice Code in Turkey in 2002 and has an important role in the formation and development of the corporate governance principles.
Under Turkish law, only JSCs can offer tradeable shares to the public.
The TCC sets forth the main principles of corporate governance for listed and private companies. Communiqué II-17.1 sets forth in detail corporate governance principles applicable only to listed companies.
Communiqué II-17.1 lays out three different groups of companies for implementation purposes based on the average market value of the company. Companies within the scope of the First Group must comply with all mandatory corporate governance rules provided under Communiqué II-17.1, yet there are some exemptions for companies within the scope of the Second and Third Groups. Details of the groups are as follows:
Since any problems of poor governance of the First Group are likely to have a larger impact on investors and the market, the companies in this group are subject to higher standards of investor protection. Therefore, listed companies in the First Group are required to comply fully with the mandatory corporate governance principles listed in Communiqué II-17.1. On the other hand, the Second and Third Groups are exempt from compliance requirements with certain principles.
Pursuant to Communiqué II-17.1, the main themes of corporate governance requirements can be listed as follows:
Among the themes listed above, one of the key corporate governance requirements that is also closely followed up by the CMB is disclosure of events and developments that may affect and/or influence the value of a company’s securities or the investment decisions of a company’s shareholders. Please refer to 5 Shareholders for detailed information in relation to disclosure and reporting obligations.
Furthermore, it is mandatory for all groups of listed companies to form the following committees within the board of directors:
If an early risk detection committee and a remuneration committee cannot be formed due to the composition of the board, the corporate governance committee shall perform their respective duties. Each of these committees must be chaired by an independent director (who will be appointed after the approval of the nominees by the CMB) and the majority of these committees should comprise of independent directors. Further, the audit committees must be entirely composed of independent directors. In order to secure independent functioning of the committees, the general manager of the company is prohibited from participating in them.
There are no corporate governance rules or requirements that should be drawn out apart from the ones explained under each section of this chapter.
On 11 January 2019 the CMB announced a new guideline in relation to the reporting of corporate governance that has been enacted on 1 March 2019 (the Guideline) with an aim to reach complete, reliable and clear information in relation to the compliance status of listed companies with the corporate governance principles set forth under Communiqué No II-17.1.
The Guideline does not provide any novelties in relation to the corporate governance principles but only makes a procedural change in relation to the listed companies' reporting obligations. According to the Guideline, the listed companies are required to make compliance disclosures in two separate forms to report their compliance with (i) voluntary corporate governance principles and (ii) current corporate governance principles.
In addition, a corporate governance compliance section will remain as a part of the companies' annual report. This section will consist of a compliance statement that clearly indicates which principles are not complied with or which are partially complied with and express the fact that the foregoing forms that are announced on the Public Disclosure Platform are approved via a board resolution.
Lastly, a new online system called Central Registration System (MERSIS), bringing certain changes to the registration application procedures of corporate governance matters, has been introduced.
Under the previous system (ie, before the introduction of MERSIS), hard copies of registration documents were submitted to the trade registries. Now, MERSIS requires companies to make applications with regard to the registration of their corporate governance issues through the online system. However, hard copies of the application documents are still submitted to the trade registries and therefore MERSIS became an additional step in the registration process rather than being a tool to expedite the registration process.
The principal bodies involved in the governance and management of a company are as follows:
The management body of JSCs is the board of directors (BoD) and the management body of LLCs is the board of managers (BoM) (each, the Board, and together, the Boards).
Boards should contain at least one director/manager. However, the number must not be less than five for listed companies that should mandatorily comply with Communiqué II-17.1.
Both in JSCs and LLCs the board is responsible for all business and transactions in relation to the company's operations, save for the non-transferable powers granted to the general assembly (GA) by law or the articles of association of the company.
Lastly, if the articles of association (AoA) of the company provides for setting up of committees for internal control, detection and assessment of risk then the board will be responsible for forming and monitoring these committees.
Although the Boards are the main bodies responsible for the management of JSCs and LLCs, the TCC requires certain management decisions to be adopted or approved by the GA as follows:
The TCC sets out general duties of the Board as follows:
In principle, the Board may entirely delegate its management duties and operate solely as a supervisory body. However, the following duties of the Board cannot be delegated under the TCC:
Further, as explained under 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares, listed companies are required to form a number of committees within the Board. The roles of these committees are briefly as follows:
Unless otherwise designated under the AoA of the company, the BoD and BoM convene with the majority of the members and resolve with the majority of the members present at the meeting.
Board members cannot vote on behalf of each other and they cannot appoint a representative to attend the meetings and vote on behalf of them.
In the event that none of the board members requests a meeting then the board resolutions may be taken by receiving written approval from the majority of the members provided that such proposal is addressed to each and every member.
Please also see the explanations in relation to the decision-making process of the GA under 5.3 Shareholder Meetings.
Pursuant to the TCC, the Board shall be composed of at least one member, who can be an individual or a legal entity. If a legal entity is appointed as a director or a manager, an individual should be appointed as the real person representative of such legal entity and registered with the relevant trade registry. Additionally, a chairman and a vice-chairman should be appointed by the Boards amongst the directors/managers (save for the boards composed of one member). In LLCs, at least one of the board members shall be a shareholder.
In addition to the above, pursuant to the terms of CommuniquéII-17, the number of members of the Board in a listed company shall not be fewer than five. Furthermore, a majority of the Board members are required to consist of non-executive members and the number of independent Board members cannot be fewer than one third of the total number of the Board members and there must be at least two independent Board members. Both in the TCC and Communiqué II-17, there is no ceiling provided in respect of the size of the Board. According to Communiqué II-17, the company shall determine a target percentage of female board members of not less than 25% and a target time, and shall establish a strategy to reach these targets.
The TCC requires that a chairman and at least one vice-chairman be appointed among the Board members. It should be noted that the Board members do not have any special duty that should be performed individually except calling for board meetings.
According to the TCC, the Board is authorised to take action in relation to any and all works and transactions that are (i) required for the realisation of the purpose of the company, and (ii) not exclusively listed under the GA's powers and authorities as per the TCC or the AoA of the company.
The TCC sets forth the general duties of the members of the Board in a non-exhaustive manner as explained in detail under 3.2 Decisions Made by Particular Bodies. The directors must carry out their duties with the same diligence as a prudent director would carry out that duty and directors are expected to take decisions based on the business judgement rule in accordance with corporate governance principles. In general, the directors are deemed compliant with their duty of care obligations if the Board has adopted the decision based on research relevant to that particular situation and has obtained information from relevant persons/experts (ie, makes an informed decision). Further, as per CommuniquéII-17.1, the Board should conduct its activities transparently, fairly, responsibly and accountably.
The Board may partially or entirely delegate certain managerial and representative duties and powers to one or more directors, other bodies of the company and/or any other third parties through an internal directive.
Directors delegated with management duties are considered as 'executive directors', whereas directors with no management duties are considered as 'non-executive directors'. There is no special regime applicable to executive directors and the general liability regime for Board members is also applicable to the executive directors. Accordingly, executive directors would be liable if they, at their fault, fail to fulfil their obligations arising from the law and/or the articles of association of the JSC. Please refer to Section 4.8 Consequences and Enforcement of Breach of Directors' Duties for details.
When delegating the duties, the Board has the duty to make the appointments with due care and delegate its duties to appropriate persons. In the case of delegation, those who delegated their powers cannot be held responsible for actions and decisions of the delegated persons unless they (i) have made the appointments without due care, or (ii) fail to supervise the delegated persons.
The duties of the directors that cannot be delegated are limited to the duties listed under 3.2 Decisions Made by Particular Bodies; however, the articles of association of a company may also provide additional delegation restrictions.
Please see the explanations under 4.1 Board Structure for information on composition requirements of the board.
The directors/managers of JSCs and LLCs are appointed, released and dismissed by the general assembly of the company that consists of the shareholders. The term of office, rights such as wages, attendance fees, bonuses and premiums of the Board members are also resolved by the GA.
Independence of Directors
The TCC does not set forth specific rules and requirements around the independence of directors, whereas Communiqué II-17.1 lays out specific qualifications, such as that the independent director:
Conflict of Interest
Under the TCC, the directors/managers are prohibited to participate in the discussions of the issues concerning their external personal interests (ie, any interest that does not relate to the interests of the company) or external personal interests of their spouse, lineal heirs and descendants, and relatives by blood and by marriage within third degree that conflict with the interests of the company. This prohibition would be applied whenever the good faith requires a director/manager not to participate in the discussions of the Board (eg, cases where the interests of the nominating shareholder conflict with the interests of the company). The directors/managers breaching the duty to avoid conflict of interest as well as directors/managers knowing the conflict but not taking the necessary precautions are liable for damages.
Please see the explanations related to the general and non-assignable duties of the Board under 3.2 Decisions Made by Particular Bodies.
The directors principally owe their duties to the shareholders of the company. However, the civil liabilities of directors arise when the directors, at their fault, fail to fulfil their obligations arising from the law and/or the articles of association of the company. In such cases, the directors are liable to indemnify the damages arising from such actions. This liability is owed towards the company itself, the shareholders and the creditors of the company.
When managing and representing the company, the directors are expected always to seek and prioritise the benefits and interests of the company exclusively over the benefits of share groups, shareholders and/or related parties of shareholders. Therefore, the directors must not allow their relationship with the shareholders who nominated them to interfere with their fiduciary duties to act in the way they consider most likely to promote the success of the company. As such, Turkish law does not provide any exception where the directors are allowed to represent or promote shareholders' interests over the JSCs interests.
Liabilities of directors under the TCC may be summarised as follows.
Civil liability arising from breach of general duties
The civil liabilities of directors arise when the directors/managers, at their fault, fail to fulfil their obligations arising from the law and/or the articles of association of the company. In such cases, the directors/managers are liable to indemnify the damages arising from such actions. This liability is owed towards the company itself, the shareholders and the creditors of the company.
Civil liability arising from special circumstances
In addition to the civil liabilities arising from general duties, the directors/managers may face civil liability in the following special circumstances where they are involved in certain actions.
Allocation of Civil Liability Between Directors
To the extent not delegated through a management internal directive, and subject to certain other conditions, indemnity arising from damages incurred as a result of the acts or omissions of the Board of a company can be asserted against/attributable to all directors/managers, without specifying the responsible person and the amount of damage caused specifically by any director/manager. The damages will be allocated between the directors/managers in accordance with their level of fault (ie, with intent or negligence). The court will evaluate the circumstances and determine on the allocation of damages with respect to each board member's fault. The members who caused the damages will be held liable in accordance with the level of fault attributable to themselves.
Under the TCC and the Turkish Criminal Code, directors/managers may be subject to criminal liability under certain circumstances (eg, failure to keep statutory books properly, forgery of documents). Certain special cases of civil liability listed above ("Civil liability arising from special circumstances") may also lead to criminal liability under certain circumstances and the directors/managers may be subject to short-term imprisonment or punitive fines (eg, imprisonment for a duration ranging from three months to two years).
Under the Turkish Criminal Code, short-term imprisonments may be converted to administrative fines considering the social and economic status of the convict during the trial period and qualifications of the offence.
The technical bankruptcy concept defined under Turkish law is effectively a balance sheet insolvency. If a company is technically bankrupted, the Board has several duties, such as calling the general assembly to an extraordinary meeting with a proposal of restorative actions designed to reinforce the financial status of the company. If the Board fails to comply with the requirements under the TCC, it shall be liable towards the company, shareholders and creditors for their losses and damages arising from such omission.
Directors/managers are not responsible for (i) contradictions with the laws and/or the articles of association or malpractices occurring beyond their control, and (ii) not being able to uphold their duty to supervise the company with prudence due to reasons that are beyond their control. Therefore, if the directors/managers can prove that any breach or misconduct has occurred beyond their control and/or they have not intentionally or negligently or by fault caused such breach or misconduct, they can avoid liability arising from such acts.
It should also be noted that, as explained under 3.2 Roles of Board Members, the directors can delegate their duties. In the case of delegation, those who delegated their powers cannot be held responsible for actions and decisions of the delegated persons unless they (i) have made the appointments without due care, or (ii) fail to supervise the delegated persons.
The directors/managers may be released from their liabilities arising from the acts and transactions that are properly reflected in the financial statements of the company by a general assembly resolution. In order for a release to be a valid, it should be made based on an annual or an interim financial statement. In practice, each year, in the ordinary general assembly in which the financial statements of the previous year will be approved, the directors are released from their liabilities arising from their acts during that previous year.
In such case, the shareholders who (i) casted an affirmative vote for the release of the relevant director/manager, or (ii) acquired the shares of the company by being aware of the release decision, cannot assert claims against the relevant director/manager(s). Other shareholders' right to assert claims for acts of the directors who have been released by a general assembly resolution will lapse after six months following the release decision.
On the other hand, if the financial statements of the company do not reflect certain matters properly or include items hiding the real financial situation of the company, the directors will not be released from their liabilities arising from those hidden situations even if the general assembly takes a release decision.
Statute of Limitations
Under Turkish law, damage claims should be pursued against the directors within two years of the claimant being aware of (i) the damage and (ii) the director causing the damage; and in any event five years from the date of the action that caused the damage. In cases where criminal liability is in question along with liability for indemnity, if the Turkish Criminal Code foresees a longer statute of limitation period, such longer period will be applicable to damage claims as well.
The GA resolves on various types of payments to be made to the directors/managers, such as attendance fees, wages, bonuses and premiums. This is one of the non-assignable duties of the members of the GA; hence, it can be stated that shareholder approval is required for the payments to be made to the directors/managers.
Under Communiqué II-17.1, the remuneration packages for a listed company’s independent directors cannot include stock options or performance-based compensation.
The GA resolution deciding on the directors' remuneration must be registered with the Trade Registry and announced in the Trade Registry Gazette.
In addition to the announcement in the Trade Registry Gazette, the relevant GA resolution of the listed companies shall also be disclosed in the Public Disclosure Platform.
Furthermore, Communiqué II-17.1 requires listed companies to disclose the remuneration, fees or benefits payable to directors and officers under their annual activity report by having specific reference to each director and/or officer.
The relationship between the company and its shareholders is mainly formed through the GA decisions that can be held by the shareholders ordinarily and extraordinarily. According to the TCC, the shareholders use their rights in relation to the company via GA meetings. The rules and requirements that govern this relationship are regulated in detail under the AoA of the company that is registered at the MERSIS (ie, online registry system) and announced at the Trade Registry Gazette as of the company's incorporation along with any amendments thereto. Furthermore, according to Communiqué II-17.1, a company's AoA shall be announced and kept available at the company's website.
In principle, shareholders do not hold managerial powers and decide on issues related to the rights of the shareholders.
As explained under 3.2 Decisions Made by Particular Bodies, certain matters such as amendments to the company’s articles of association, director appointments and resolutions as to their terms of office, compensation and removal, distribution of dividends and the sale of a significant portion of the company’s assets are reserved for shareholders as their exclusive powers and rights.
Shareholders are not able to direct the management to take or refrain from taking certain actions since the Board is an independent body in the company.
According to Article 409 of the TCC, the GA convenes ordinarily or extraordinarily. The ordinary GA should be held within three months after the end of each financial year for the approval of the financial statements and the annual activity report prepared by the Board for the preceding year. The GA meetings other than the ordinary meetings are called extraordinary GA meetings that can be convened any time it is deemed necessary (eg, if the company wants to appoint/remove directors/managers, increase/decrease its share capital, etc).
The GA convenes upon invitation by the Board in order to discuss and resolve on the matters of a certain agenda. Subject to certain circumstances, the GA can also convene upon invitation by a shareholder, minority shareholders or the liquidation officer.
An announcement for calling the GA in the website of the company (for the companies that are required to establish a website) and in the Trade Registry Gazette must be made at least two weeks prior to the meeting date. However, according to Article 416 of the TCC, the GA can also convene without making any announcement, if all shareholders or their duly appointed representatives attend the GA meeting and have no objections to convene without any announcements.
The legal entity shareholders must (and individual shareholders may) appoint representatives who will be authorised to attend and vote in the relevant meeting by issuing a GA proxy separately for each GA to be held. Therefore, the shareholders may attend the meetings in person or through their representatives.
Unless a higher quorum is required under the AoA of the company or the TCC, the GA convenes with the presence of the shareholders or their representatives representing at least a quarter of the share capital of the company and resolves with the affirmative votes of the majority of the attendees. However, certain matters (eg, share capital increase/decrease, approval of merger/demerger, restricting the transfer of shares, sale of significant amount of assets, moving headquarters, etc) require higher meeting and decision quorums.
Furthermore, in the following cases, a representative of the Ministry should attend the GA meetings of JSCs:
In such case, an appointment application should be made to the provincial directorate of the Ministry at least ten days prior to the GA meeting date (and after the board resolves to invite the GA to a meeting). The Ministry representative does not have any veto or voting rights with respect to GA agenda items but is authorised to supervise whether or not the principles and procedures applicable to the GA are followed (eg, invitation, attendance, voting, etc).
Please see the explanations under 4.8 Consequences and Enforcement of Breach of Directors' Duties.
Pursuant to Article 198 of the TCC, in the event that a shareholder enterprise directly or indirectly holds 5, 10, 20, 25, 33, 50, 67 or 100% of the shares of a company, the enterprise should inform the said company and the relevant authorities within ten days as of the completion of the relevant transactions. The acquisition or disposal of shares at the percentages stated above should be indicated in the annual activity and audit reports under a separate title and should be announced on the company’s website. The TCC requires all rights of the respective shareholder(s), including any voting rights arising from the acquisition of shares, to be suspended unless and until the foregoing registration and announcement obligation is satisfied.
Please see the explanations under 6.2 Disclosure of Corporate Governance Arrangements regarding disclosures for further information.
The boards of JSCs and LLCs must prepare the following documents in accordance with the below standards for each fiscal year, within three months following the end of each accounting period: (i) annual financial statements in accordance with Turkish Accounting Standards, where assets and liabilities, equity and activity outcomes are reflected in a transparent and credible manner; and (ii) annual activity reports based on the financial statements, including information on potential risks, substantial events, R&D works and payments to Board members and executives.
Additionally, annual reports and financial statements must also be disclosed in the Public Disclosure Platform by companies whose shares are publicly traded.
The Regulation on Minimum Content Requirements Related to the Annual Activity Reports No 28395 (Regulation No 28395) lays out the necessary provisions and disclosures to be included in the annual activity reports that are prepared by the Boards. As per Regulation No 28395, the following items related to the corporate governance arrangements should be disclosed under the annual activity reports:
Pursuant to the CML and Communiqué II-15.1, listed companies should also disclose the information, events and developments to the public that may affect the value of capital market instruments and investors' investment decisions (ie, the material events).
In addition, pursuant to Article 35/4 of the TCC, several corporate governance arrangements (eg, director and authorised representative appointments/removals, AoA amendments, ordinary GA resolutions, etc) are required to be registered at the MERSIS system and announced by the company in the Trade Registry Gazette as well.
The companies are incorporated upon registration with the MERSIS system and by submitting the required incorporation documents (eg, AoA) with the relevant trade registry offices. Following their incorporation, the companies are required to file any amendment of their AoA with the MERSIS system and by submitting the hard-copy documents at the relevant trade registry office.
In addition to filing the AoA and any amendments thereto, and filings made in line with Article 198 of the TCC (as explained under 5.5 Disclosure by Shareholders in Publicly Traded Companies), the TCC requires a number of filings with the trade registries, including:
The Trade Registry Gazette records are publicly available and may be accessed through the following website: https://www.ticaretsicil.gov.tr/.
The conditions for determining the companies that are subject to independent audit are provided under the relevant decision of the Council of Ministers, Decision on the Determination of Companies Subject to Independent Audit No. 2018/11597 (the Decision).
According to the Decision, the following regulations apply.
The audit must be made in line with the Turkish Auditing Standards, which are established by the Public Oversight Accounting and Auditing Standards Authority.
In order to ensure the independence of auditors, the TCC provides for a non-exhaustive list of persons who shall not qualify as auditors. This list includes shareholders, directors, board members and employees of the respective company. Further, the company's auditor or its affiliates cannot provide consultancy services to the company other than tax consultancy and tax audit services.
The auditor must be appointed by the general assembly of the company. The auditor must be appointed in every fiscal year and before the end of each fiscal year. After the appointment of the auditor, the Board must register the relevant general assembly resolution related to the appointment of the auditor with the Trade Registry and announce it on the Trade Registry Gazette and company's website immediately.
If an auditor is not appointed within the first four months of the fiscal year, the board of directors and every shareholder can request the court to appoint an auditor. Further, if there is a justified reason, especially in case of a doubt concerning the auditor's impartiality, the court may assign another auditor upon the request of board or minority shareholders (if the minority shareholder has opposed to the appointment of the auditor).
The Board of JSCs whose shares are publicly traded is obliged to form a committee for early determination of the factors jeopardising the existence, development and the future of the company, implementation of relevant measures and management of the risk. For other companies, this committee is formed if the auditor requires so.
This committee presents a report to the Board every two months that indicates the risks and the measures to be taken accordingly.
The Board should annually monitor the risk management and internal control systems of the company.