Main Principles Concerning the Incorporated Companies – Av. Lider Tanrıkulu

INTRODUCTION

The Incorporated Companies, which bring small capitals together under financial, commercial and industrial institutions and which always have had an important role in economy, are among the most important economic institutions. The main relations related to incorporated companies, which have many social and economic functions, are found in the Turkish Trade Act. No. 6102. In our present day, incorporated companies have become very important in the utilization of the small and dormant capital for the good of economy. Since the birth of incorporated companies, some principles have been accepted concerning some aspects of the incorporated companies like the foundation, activities, the preservation of capital structures, and the rights of partners and creditors of these companies and many of these principles were legalised due to legal needs.

THE PRINCIPLE OF MAJORITY

An incorporated company is a stock corporation and the capital, instead of the number of people, is important. The person or the persons who have the majority of the capital and form the quorum of decision in the company’s general board, have the right to make decisions about almost anything and they have the right to choose the managers of the company. The right to vote is determined based on the number of shares and the persons in question participate in the profit share based on the number of their shares. The persons who have the majority of the capital have a greater influence and right to make decisions concerning the prime contract. In incorporated companies, one of the most important applications of the principle of majority is related to the general board. This principle, which is especially important concerning the rights of partnership of the shareholder, is based on the principle that the decisions will be made based on the votes which are determined by the shares. The usage of shares based on their total nominal values (Turkish Trade Act article No. 434) is a manifestation of the principle of majority.

The principle of majority is also in effect for the decisions board of management, which is another legal and obligatory part of incorporated companies. But unlike the general boards, the votes in the board of management are determined by the number of members and the decision are made with the votes of the majority of members who are present at the meeting. The principle of majority ensures the ease of the decision-making processes, the operation of the company, and therefore, the mobility of the company. Yet, it must be stated that the principle of majority is not compulsory and therefore it is not obligatory to apply it in every situation.

As it can be seen, the dominance of the majority is very important, but there are some mechanisms which were developed to prevent the absolute dominance of the majority and to ensure the preservation of the rights of the minority. Minority rights are some of the most important of these mechanisms. Some rights are given to minority and individual shareholders with the Turkish Trade Act. The right to receive profit share, the right to receive preparatory stage interest, the right to receive liquidation share, the right to receive shares without charge, the right of preference, the right to participate in the general board and vote, to right to receive information and inspect, the right to file an annulment action and the right to file an avoidance action are among the rights given to the individual shareholders. The rights given to the minority (with 1/10 of the shares in nun-public incorporated companies and 1/20 of the shares in public incorporated companies) are as follows:
The minority has the right to demand the discussion of financial statements and the postponement of matters related to these, without the permission of the general board (Turkish Trade Act article No. 420); to call the general board to meeting, stating the reasons and the subject of the meeting (Turkish Trade Act article No. 411-412); to ask the board of management to draw attention to the subjects they want if the general board is to meet; to resort to the court and ask for a special inspector to be appointed in 3 months, in case the general board refuses to carry out a special inspection (Turkish Trade Act article No. 438); to ask the court to carry out the dissolution of the company if there are acceptable reasons to demand such a thing; to ask the management board to print the share certificates.

THE PRINCIPLE OF MAINTENANCE OF THE CAPITAL (PROPERTY)

The main goal of the principle of maintenance of the capital is to protect the advantage of the creditors of the company and to ensure the reliability of the capital by en ensuring the existence of market confidence. As it has been stated above, incorporated companies are very important for the country’s economy. Incorporated companies are foundations which encourage newly-found big capitals to invest by bring together small and dormant initiatives. To be able to benefit from such positive effects of incorporated companies, one must trust incorporated companies and one must be encouraged to become a partner in such a company. The legislative body has taken several precautions to be able to provide trust. These precautions are as follows;

  • It is possible to establish the company with a minimum amount of capital. (Turkish Trade Act Article No. 332/I)
  • It is obligatory that all of the capital is promised in the prime contract. (Turkish Trade Act Article No. 335)
  • It is forbidden for the company to acquire all its share and become the single shareholder. (Turkish Trade Act Article No.338/III)
  • There are some prerequisites for the properties which can be turned into capital in kind. (Turkish Trade Act Article No.342/I)
  • There are some precautions about the evaluation of capitals in kind. (Turkish Trade Act Article No. 343)
  • It is obligatory to follow the rules concerning the estimated time until payment, place of payment and evidence of payment of the cash which was promised. (Turkish Trade Act Article No.344/1, 345/1)
  • It is not possible to issue a share under the nominal value (Turkish Trade Act Article No.347)
  • It is not allowed to take an action which can cause the company to lose money to the advantage of the founders like giving money or shares without cost to the founders. (Turkish Trade Act Article No. 348)
  • The assignment of shares before the registry of the company does not hold any legal value concerning the company. (Turkish Trade Act Article No.352)
  • It is forbidden for the shareholders to be indebted to the company. (Turkish Trade Act Article No.358)
  • There are regulation concerning what must be done if a certain amount of the capital is lost. (Turkish Trade Act Article No.376)
  • The company is not allowed to take cannot onerously accept or seize the shares which surpass one tenth (1/10) of the principal or issued capital or shares which will surpass one tenth (1/10) of the principal or issued capital after a certain procedure. (Turkish Trade Act Article No. 379)
  • It is obligatory to follow the legal regulation concerning the increase of the amount of capital. (Turkish Trade Act Article No.456)
  • It is obligatory to follow the legal regulation concerning the decrease of the amount of capital.(Turkish Trade Act Article No.473-474)
  • It is not possible to ask the capital back. (Turkish Trade Act Article No.480/3)
  • It is not possible to pay interest for the capital (Turkish Trade Act Article No.509/1)
  • It is not possible to issue a share certificate to a holder for shares, the costs of which have been paid in full. (Turkish Trade Act Article No.484, 485/2),
  • It is possible to limit the assignment of shares in some situations outlined by the law. (Turkish Trade Act Article No.491)
  • The profit share can only be distributed from the net profit of the year and free surplus cash in hand. (Turkish Trade Act Article No. 509/2)

The management board (Turkish Trade Act Article No.391) and the general board (Turkish Trade Act Article No. 447) decisions which are not made in accordance with the foundational principles of incorporated companies and the principle of maintenance of the capital are invalid. These invalid decisions are legally ineffective and cannot be regulated afterwards. They are inspected on their own motion (ex officio) by the courts of invalidity and can also be subject to a plea. They can also be made subject to a declaratory lawsuit for an undetermined time. Declaratory lawsuits can be filed in accordance with the articles No. 391 and No. 447 of the Turkish Trade Act by shareholders, members of the management board, members of the general board and those who have a financial or a legal interest.

THE PRINCIPLE OF LIMITED LIABILITY

When outlining the liability of the partners, the legislator has dictated that the shareholders are responsible against the company in accordance with the amount of capital shares they have promised. This principle, which is called “the single debt” principle”, has been made a subject of law with the article No. 480/1 of the Turkish Trade Act. This way ensures that the liability of the shareholders concerns only the amount of capital he/she has promised and the company.

The shareholder is not liable for the debts of the company, on the basis that incorporated companies are unlimitedly liable for their own debts. The shareholder is not liable for the company’s debts to third parties and the creditors of the company; the shareholder is liable only for the company itself. The shareholder, who has promised a certain amount of capital to the company, can relieve himself/herself of this liability by paying the amount he/she has promised.

Likewise, the shareholders are not liable for the public debts of the company. The shareholders are not liable for the public debts like taxes and insurance policy premiums, yet the board of management is liable for these to a certain degree. As the management board is the legal representative of the company, the members of the management board are unlimitedly and jointly liable for covering the above-mentioned expenses with their own properties, in case such expenses cannot be covered with the company’s own property.

THE PRINCIPLE OF THE ATTENDANCE OF THE GOVERNMENT

The Incorporated Companies, which bring small capitals together under financial, commercial and industrial institutions and which always have had an important role in economy, are important institutions also for the government. The government constantly observes companies, as they are an important part of the economic and social life. The regulations concerning external auditing regulated by the Turkish Trade Act, which is the auditing of the government, are as follows:

  • Permissions concerning the establishment of the incorporated companies in public and financial markets (Turkish Trade Act article No. 333) and changes to the prime contract (Turkish Trade Act article No. 453) are subject to the allowance of the Ministry of Industry and Commerce.
  • One of the conditions of the validity of the decisions made by the general board dictates that a representative of the ministry must be present at the meeting. (Turkish Trade Act article No.407/3, 422/1)
  • The Ministry of Industry and Commerce can file a suit of annulment within a year of learning about negative actions of a company which could harm the public order and are against the fundamental principles of companies. (Turkish Trade Act article No.210/4)
  • If a company lacks one of the necessary legal organisations or if the general board is unable to meet, the court, on the request of Ministry of Industry and Commerce, shareholders and creditors of the company, can determine a time for a company to correct these wrongs and can rule decide that the company should be annulled, if the company does not correct these wrongs within the time determined by the court. (Turkish Trade Act article No.530)
  • As the incorporated companies which supply and publicly sell stocks and shares are under the supervision of the Capital Markets Board, the audit of these companies is under the responsibility of the Capital Markets Board. (Capital Markets Board Act No. 2499 Article No. 2/1)

 THE PRINCIPLE OF PUBLIC DISCLOSURE

The princple of public disclosure has become very important not only for the shareholders and the creditors of the incorporated companies which collect and manage big capital, but also for the direct and indirect interests of the possible investors who have a certain influence on the markets. Thus, it has become obligatory for the public incorporated companies to announce all the information concerning the capital/property, within the limits of regulations,  to the public and it has become a right for those who have an interest in the company to receive such information.

The company must publish, with the exception of its own commercial secrets, annual reports, financial tables, prospectus and circular files in a proper, valid and satisfactory manner. The principles in the Turkish Trade Act which regulate the application of the principle of public disclosure are as follows:

  • The trade register is recorded by trade registry offices and their branches, under the supervision of the Ministry of Commerce. The trade registry records are open to public. This regulation which is based on the principle of public interest cannot be ruled out. It is possible to gain access, at all times, to every announcement in Trade Registry Gazette through ticaretsicil.gov.tr
  • One of the most important rulings of the principle of public disclosure is found in the article No. 1524 of the Turkish Trade Act. In accordance with this article, the founders of the companies which are regulated in accordance with the clause No. 4 of the article No. 397, must establish a website within the three months of the registry of the company to the trade registry and they have to allocate a part of this website to the announcements which the company is legally obliged to make. The enforcement/sanction of this ruling is regulated within the same article; not carrying out the above-mentioned processes related to the website will cause the related decisions to be cancelled, will result in consequences which are against the law and will require the liability of the managers and the members of the management board.

THE PRINCIPLE OF UTILISATION OF RIGHTS IN ACCORDANCE WITH THE CONTRIBUTION TO THE CAPITAL

According to this principle, which is also known as the principle of relativity, the shareholders can utilize the common rights, except for those which apply to everyone on the same level, in accordance with the amount of their shares. This principle is based on the understanding that a person should have a higher level of influence on the company’s decision through votes, as the person who contributes to the capital with a greater amount than others is taking a bigger risk by doing so.

The principle of relativity is used in terms of measurement of the reach of one’s rights concerning the financial rights such as the right to receive profit share, to right to take a part of the liquidation profit, the right to utilize the preparatory stage interest, the right to acquire new shares and administrative rights such as the right to vote.

This principle has an application in every situation. Rights such as participating in the general meeting, speaking and making suggestions can be utilised on the same level by everyone. The rights are outside the reach of the principle of relativity. Also, rights which are above the level of contribution of the shareholders can be determined in the prime contract.

THE PRINCIPLE OF EXTERNAL SUPERVISION

Even though incorporated companies deal with great amounts of capital and they operate on vast and technically detailed scales, the supervisors selected by the general board are usually unable to be effective. This situation is especially witnessed at public incorporated companies and the supervision of accounts in most of these companies depend on external supervisors such as experts, certified public accountants and special supervisory institutions.

This independent audit process consists of the supervision and evaluation of books, records and documents through the application of necessary audit techniques, with the intention of ensuring that the incorporated company may provide enough external audit reports and evidences which would ensure trust concerning the validity of financial tables and other financial data in relation to the reporting standards.

THE PRICIPLE OF MANAGEMENT OF EXTERNAL PROPERTY

The modern understanding suggests that incorporated companies should be managed by a person or a team with technical knowledge, instead of partners who contributed to the company with their shares.  In this case, the incorporated company is influenced more and more by the experts who manage the external property and the management board of the company becomes a kind of observatory section which supervises the above-mentioned experts. This method of management emphasizes the fact that the utilisation of external experts is one of the most important factors of validity, neutrality and independence of the institutional management. This principle suggests that the CEO (Chief Executive Officer) and the head of the management board should not be the same person.

In the present many holding companies in Turkey and in the world promote the above-mentioned method which promotes the utilisation of a CEO.

THE PRINCIPLE OF EQUAL TREATMENT

Even though incorporated companies are independent legal entities which are independent of the shareholders, they are usually managed through the decisions of the shareholders. The utilisation of incorporated companies, which are managed through the decisions made by the shareholders, by the shareholders for their own interests will cause harm to the balance of benefit. To prevent such a thing and to preserve the position of the shareholders, rulings about the principle of equal treatment have been added to the Turkish Trade Act. The article No. 357 of the Turkish Trade Act dictates that the shareholders are to be subject to equal treatment under equal conditions. This aims to ensure that the personal interests will not surpass the interests of the company and that the articles of the prime contract will be applied in a just manner which will be in accordance with the balance of benefit. This principle cannot be overruled by the shareholders through the prime contract. Yet, the shareholders may forfeit this principle with their own votes and in a concrete case.

The principle of equal treatment is a principle which is applied under equal conditions and it depends on relative equity, not on absolute equity. The relative equity in this case is manifested through the equal treatment of the shareholders who are in the same state. Relative equity has been deemed more fit concerning the equitable principles, while absolute equity may not be fit. Yet, absolute equity is applied in fields where the principle of relativity has no applications, such as the right to participate in the general board, the right to vote, the right to file an annulment suit, the right to receive and inspect information.

The sanctions/enforcements concerning the violation of this principle have been determined based on the organisation which violates the principle. In the article No.391 of the Turkish Trade Act, it has been stated the management board decisions which are against this principle are invalid. It is stated that annulment and voidance sanctions can be applied for the general board decisions which were made against this principle and that the derivativeness of voidance will be taken into consideration for the determination of invalidity. The measure used for both sanctions is continuity. The ones who have a legal interest in the decisions of the board of management can file a declaratory suit for an indefinite time if the decisions of the management board are declared invalid because of the violation of this principle. It is stated that the general board decisions which are against the principle of equal treatment are invalid with the verdict No. 2018/353 E.- 2019/2685 of the 11th civil department of the supreme court which states that:
“As it is possible for the partners who are also members of the board of management to have a greater share of the profit, the decision to distribute the profit share to the members of the board of management contradicts with the principle of equal treatment. The lack of evaluation, about the matter of a company secretly trying to distribute profit share and defy the principle of equal treatment, has been wrong, as nullity should have been declared.

THE PRINCIPLE OF MANDATORY RULES

This principle is manifested in the article No. 340 of the Turkish Trade Act which dictates:
“The prime contract can stray from the rulings of this act concerning incorporated companies, only if it is clearly allowed by law. The default rules of the prime contract which were formed in accordance with a certain law, are regulated by that certain law.” The article in which the principle is regulated have limited contract freedom of public and private incorporated companies. In accordance with this ruling, deviation of the prime contract from the rulings related to incorporated companies is only possible when it is clearly allowed by law. As it is stated by law, it is possible to deviate from the ruling only through the prime contract, and not through the decisions of the general board or “internal directives”
The aim of the regulation of the principle of mandatory rules is to ensure legal reliability and predictability by setting a certain standard for the prime contracts of incorporated companies and to protect the shareholders and interest groups.
Another matter is the controversial regulation which “clearly allows prime contracts to have articles which deviate from the mandatory rules.” From this “clear allowance” term it can be understood that the above-mentioned statement is true when such a deviation is “determined or suggested through the prime contract” or “when there are no contradictory rules in the prime contract.” The dispute about this matter derives from the ambiguity concerning what should be understood from this statemen; should the ruling be perceived literally or through its aim? In the report of the Justice Commission of the Draft of the Turkish Trade Act, the preamble of this article is stated as follows:
“In situations when the literal form of the phrase “clearly allows” can be unclear and it is possible to deviate from the literal form of this phrase to the direction of its aim with an interpretation which is in accordance with the methodological doctrine and based on satisfying and just reasoning which promotes the balance of interests.”
In conclusion it is possible to say that all rulings related to incorporated companies are mandatory and the deviation from these rulings is possible only when it is clearly suggested by law or when it is appropriate concerning the principle of equity and balance of interests.

CONCLUSION

Incorporated companies have a prominent role in social and economic life and contribute to the development of the country. The above-stated principles have been predominantly effective on the incorporated companies concerning matters such as the establishment, activities, preservation of capital structures and rights of partners and shareholders of incorporated companies.

Legal Practitioner

Ceren ÇETİNTAŞ

This article is translated by Kaan KABALAK

BIBLIOGRAPHY

  1. PULAŞLI, HASAN 2011, 6102 sayılı Türk Ticaret Kanununa Göre Şirketler Hukuku Şerhi, Ankara, Adalet Kitapçılık. (Company Law Annotation in Accordance with the Turkish Trade Act No. 6102)
  2. YAVUZ, Mustafa, 2019, Türk Hukukunda Anonim Şirketlere Hâkim Olan Temel İlkeler, Sayı: 18 | Gümrük Ticaret Dergisi. (Main Principles Concerning the Incorporated Companies in Turkish Legal System, Issue 18 of Customs Trade Magazine)
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