Chapter 4: Company Law

Introduction

Company law in Turkey is set out in the Company Law Chapter of Turkish Commercial Code (“TCC”) enacted in 2011 and majority of the related articles in there became effective in 2012.

The rules on company law regulate the requirements for the formation, incorporation, organs and functioning of each specific type of company and furthermore the liability of the shareholders, and auditing and dissolution of the companies. Company Law as set forth in the TCC is not the only relevant legislation regarding companies but it is also complemented with some other legislation such as Capital Markets Law, Banking Law, Competition Law where appropriate.

One of the most significant introductions of the TCC is that it introduces single-shareholder company/incorporation and single-member limited liability company as the two new models of companies.

Types of Companies in the TCC

General Features of Companies

Incorporation is the process by which a new or existing business registers as a company. A company is a legal entity with a separate identity from those who own or run it. A business cannot operate as a company until it has been incorporated under the TCC.

There are key differences in the structures of different types of companies defined under an exhaustive list. Depending on the type of the company the liability of the shareholders and the directors vary.

Pursuant to Article 124/1 TCC, the types of companies with a legal personality under Turkish commercial law are listed exhaustively and there are five different types of companies. These are collective, comandite, joint stock corporation, limited liability and cooperatives. From this exhaustive list, the types joint stock corporation and limited liability company are the most common types preferred in business life in Turkey.

There are some common statutory requirements to be complied with by all the companies at the stage of establishment. These can be listed as follows:

1. Legal personality
2. Profit making purpose
3. To operate with a trade name
4. Registration with the Commercial Registry

The parties (shareholders/partners) establishing the company enter into a contract titled “Articles of Association (AoA)”.

Legal Consequences of Incorporation as a Company

The legal consequences of being incorporated under a separate legal personality and the liabilities of shareholders at the establishment stage can be listed as follows:

1. A company’s property belongs not to its directors, management or shareholders but to the legal personality created by the establishment of the company.
2. A company is responsible for its own debts and liabilities.
3. The immovable property, the date registered in the land title and the intellectual property rights and other assets from the date they are registered in the relevant registries and the movable property when it is transferred to a trustful person will be considered as a property capital invested in the company. Registration in the statutory registries removes the good faith.
4. The agreements made on the subscription of an immovable property or some similar rights like ownership rights on the property are valid without a requirement of statutory form.
5. For economic assets or movables subscribed, the company as the owner may conclude transactions on the assets defined.
6. Where the ownership on immovable property or other similar rights are subscribed as capital, than there has to be a registration in the Land Title in order for the company to carry out transactions on such property.
7. In cases of registration in the Land Title and in other registries, the registrations shall be made promptly. The company has the right to unilaterally request for that.
8. The Company may request from each shareholder to comply with their undertakings and it is entitled to take a legal action before the courts and where delays cause losses, then can claim compensation.
9. For the protection of the rights undertaken, the founders can request an injunction from the court against the partners.

Merger, Division (Spin off) and Conversion

Two types of mergers as “merger by acquisition” and “merger by formation of a new company” are defined in the TCC.

Pursuant to Article 159 TCC, a company can be divided under two different models. These are by way of splitting-up and by way of spinning-off. A split-up is the type of division in which all the assets of a commercial company are divided into units and transferred to an existing or a new company or companies, where the partners of the company subject to spin-off acquire shares and rights in the transferee companies, and where the divided company ceases to exist.

A spin-off on the other hand is a division in which the assets of a commercial company are divided into units and one or some parts of these divided units remain with the company subject to spin-off, and other part(s) are transferred to an existing or new company or companies, where the partners of the divided company acquire shares and rights in the transferee companies, and where the divided company continues to exist with the remaining part.

Legal Features of Companies

Collective (Liability) Company (General Partnership) (Articles 211-303 TCC)

According to Article 211 TCC, a collective company is a type of company which can be established only by persons (individuals) for the purposes of operating a commercial enterprise under a commercial title.

Like all other companies, the collective company should also have a title (company name), the AoA should be written and the signatures of the founding partners need to be notarized. Compared to joint stock and limited liability companies, a collective liability company has less number of shareholders so it is relatively easier to take decisions.

Commandite Company (Limited Partnership) (Articles 304-328 TCC)

Pursuant to Article 304 TCC, a comandite company is a company which is established to operate a commercial enterprise under a trade name, where the liability of one or more shareholders are not limited against the creditors and where the liability of others is limited with the capital subscribed.

The partners with a limited liability are not eligible for management and cannot object to the management of the limited liability partners.

Joint Stock Corporation (Articles 329-563 TCC)

Joint Stock Corporation is a capital company which is established for operating a commercial enterprise in any subject which is not prohibited by law and where the liability of the shareholders is limited with the amount of capital undertaken.

When a joint stock corporation is established, the incorporation will be subject to several areas of commercial law as well as contract law.

Pursuant to Article 276 of the previous Commercial Code, joint stock corporations could be established in two ways, namely immediate and gradual establishment procedures. The gradual establishment is eliminated in the TCC. Thus all joint stock corporations are subject to the same rules for establishment.

There is a minimum capital requirement for joint stock corporations. TCC has set forth two capital systems for all the joint stock companies, namely basic capital and registered capital. The Ministry of Trade is authorised to regulate the capital system.

Organs of the joint stock company are as follows:

1. General assembly: General assembly is the decision making organ of a joint stock company where each shareholder has the right and duty to participate and vote either personally or through a proxy. Since certain legal consequences arise from/by the decisions of the General Assembly, the decisions of the General Assembly are legal transactions and the decision taking mechanism, the conditions for its effectiveness and the effects are all subject to Article 27 of TCO.
2. Board of Directors (BoD): The Board of Directors is the representative organ of the joint stock company which can be composed of one or more persons as Directors to be assigned by the AoA. Board of Directors is the organ to whom the General Assembly may delegate partially or fully the authority of the management of the company.
3. Auditing: TCC has introduced a new system on the auditing of joint stock corporations where financial statements of companies are subject to the financial review in accordance with Turkish auditing and international standards which will be announced by the Authority of Public Supervision, Accountancy and Auditing. The auditing of the joint stock companies shall be made both internally and externally.

Limited Liability Company (Articles 564-572 TCC )

Limited liability company can be established by one or more individuals and legal entities with a defined capital of shares, and the liability of each partner is limited to the amount paid or undertaken.

A limited liability company to be formed by one or more individuals or legal entities should have a commercial title and a predetermined (fixed) capital and also have limited liability to the corporate assets.

Limited liability can be managed by one or more directors. The Director(s) may be individual(s) or legal entities.

Joint stock corporations and limited liability companies are the mostly preferred types among the business cycles. Yet there are some basic differences between joint stock companies and limited liability companies in terms of their personal assets. A joint stock company can go public and offer shares traded publicly where as a limited liability company cannot offer its shares to the public.

Cooperatives (Cooperatives Law No.1163 and Relevant Provisions of TCC)

Cooperatives are defined among the types of companies in the TCC. Based on the specific nature and the usage of cooperatives in practice, the legislator had regulated cooperatives with a special law. Therefore, all kinds of cooperatives are subject to Law No.1163.