A Corporate Guide for Private Equity Funds in Turkey: Board of Directors in Joint Stock Companies
The management of a company is one of the most crucial issues for private equity funds since it is the value of the acquisition itself. As a key component of funding by a private equity, the management refers to controlling of daily business. In this context and aiming to assist the private equity funds interested in Turkish market we required to focus on board of directors as the management and representation body of joint stock companies. In this guiding article, private equity funds will find out more about the regulations and be projected for their upcoming investments. According to the Turkish Commercial Law, the board of directors is composed of one or more persons whom are appointed either by the articles of association ("AoA") or elected by general assembly. The legal entities are granted the authorization to become board of directors’ members. In such cases, the name of only single representative designated by and to the name of the legal entity is registered and published on the web site of the company for those who requires web-site publication by law. Only that representative on behalf of the company shall participate and vote in meetings. Since the representative of the legal entity himself is a board of directors’ member, the legal entity cannot be held responsible for his actions and decisions.
One of the principles that brings out corporate governance implementations to joint stock companies is about independent board members. Accordingly, the board member does not need to be a shareholder of the company. The certain share groups and shareholders that form a certain group in terms of their characteristics, and the minority shareholders may be granted a right to be represented in the board of directors. For this purpose, right to propose a candidate for membership to the board of directors and the right to be elected among the minority shareholders can be stipulated in the AoA for board members constituting a certain group of shareholders. Every year the board of directors shall elect a chairman, and at least one vice chairman among its members to replace the chairman in case of absence. The AoA may stipulate that the chairman and the vice chairman, or one of them, be elected by the general assembly. The board of directors can establish committees and commissions which can also have board members for the purpose of monitoring the course of business, having reports prepared regarding matters to be presented to the board, enforcing board of directors' decisions or for internal audit purposes. This provides effective monitoring of daily business for private equity funds. In accordance with an internal regulation to be drawn up by the board based on a provision to be inserted into the AoA, the board of directors can be authorized partially or fully to delegate management to one or more board members or to a third party. This regulation shall organize the management of the company; it shall define the duties required for management, indicate their positions, and particularly specify who is subordinated to whom and who is obliged to provide information.
The board of directors shall, upon request, inform in writing the shareholders and the creditors who can make a persuasive case that their interests are worthy of protection. In the event management is not delegated all board members shall manage the company.
In Turkish law, the board of directors can appoint commercial representatives and commercial agents and the board members and third parties in charge of management shall be held liable for prudent performance and protection of the company's interests. Unless otherwise stipulated in the AoA or unless the board of directors comprises one-member, representational authority shall be exercised by the board of directors by affixing two signatures. The board of directors can delegate this authority to one or more executive directors or to third parties, but at least one board member must have representational authority. Those who are authorized to represent can carry out on behalf of the company all manner of business and legal transactions within the purpose and scope of activity of the company and can use the trade name of the company for this purpose. The company reserves the right to recourse arising from transactions contrary to law and the AoA.
Transactions conducted with third parties outside the scope of activity by those who are authorized to represent the company shall bind the company, provided it is proven that the third party was aware that the transaction is outside the scope of activity or was capable of being aware as a requirement of the situation. The announcement of the company's AoA shall not be solely sufficient evidence to prove this matter.
The restriction on representational authority shall not be effectual against third parties in good faith; however, the restrictions which are registered and announced in relation to limiting representational authority solely to the business of the headquarters or a branch or to the exercising thereof jointly are valid.
The fact that the transaction performed by authorized persons is against the AoA or the general assembly resolution does not prevent third parties, acting in good faith, from making claims due to that transaction. The company shall be responsible for tort by those authorized to represent or manage while performing their duties. The company reserves its right to recourse. Regardless of whether the company is represented by a single shareholder during the conclusion of a contract, in single-shareholder joint stock companies the validity of such contract between this shareholder and the company requires that the contract be in written form. This requirement shall not apply to contracts regarding daily, insignificant and ordinary transactions according to market conditions. The board of directors and the management, to the extent delegated to them, shall be authorized to make decision with regard to all business and transactions required to perform the company's scope of activity, excluding those subjects to the authority of the general assembly by law and the AoA.
The non-delegable and indispensable duties and powers of the board of directors’ areas follows:
- a) Top-level management of the company and giving instructions in this regard.
- b) Determination of the company's management organization
- c) Establishment of the necessary system for financial planning to the extent required, and for accounting and finance audit.
- d) Appointment and dismissal of managers and persons performing the same function and authorized signatories.
- e) High-level supervision of whether the persons in charge of management act in accordance with the law, AoA, internal regulations and written instructions of the board of directors
- f) Keeping the share book, resolution book of the board and the general assembly meeting and discussion register preparation of the annual report and corporate governance disclosure and submission thereof to the general assembly, organization of general assembly meetings, and enforcement of general assembly resolutions.
- g) Notifying the court regarding the company's state of excess of liabilities over assets.
The board of directors shall convene with the majority of all members and make its decisions with the majority of the members present at the meeting. This rule shall apply also in the event the board of directors convenes in an electronic environment.
The board members cannot vote to represent each other nor are they allowed to participate in the meeting by proxy. In the event the votes are tied the matter shall be left to the next meeting. If the votes are tied at the second meeting as well, the matter in question shall be deemed rejected. In the event none of the board members request a discussion, board of directors' resolutions on a proposal regarding a certain matter made by one of the members can be taken by obtaining the written approval of a majority of all members. All members of the board of directors must receive the same proposal. Approvals are not required to be on the same paper; however, all papers containing approvals must be attached to the board resolution register or converted into a resolution containing the signatures of approvers and attached to the board resolution book to ensure the validity of the resolution. The resolutions shall be valid only if they are in written form and signed.
The court can be asked to determine that the board resolution is null and void. In particular this applies to resolutions that:
- a) Contradict the principle of equal treatment
- b) Do not comply with the basic structure of the joint stock company or do not maintain the principle
of protecting the capital
- c) Violate the rights of shareholders or restrict or make these rights difficult to exercise
- d) Are within the non-delegable authorities of other bodies and relevant to the transfer of these authorities
Each board member can request information, ask questions, and conduct an inspection regarding all business and transactions of the company. The request of a board member for any book, record, contract, correspondence, or document to be brought to the board meeting, inspection or discussion thereof by the board or members, or a request for information from a manager or employee concerned with any matter cannot be rejected. Persons and committees in charge of company management, as well as all board members, are required to provide information at board meetings. A member's claim regarding this matter cannot be rejected and the member's questions must be answered.
Every board member can obtain information outside of board meetings, from people in charge of managing the company regarding the course of business and about certain individual tasks, with the permission of the chairman of the board, and if required to perform his/her duty, he/she can request from the chairman of the board the company books and files for inspection.
,If the chairman rejects a member's claim to obtain information, to ask questions and to conduct an inspection as mentioned above the matter shall be brought to the board within two days. If the board does not convene or rejects this claim, the member can apply to the commercial court of first instance at the company's headquarters. The court can review the claim without a hearing and deliver an order; the court's order shall be final. The chairman of the board cannot obtain information and inspect company books and files outside of the board meetings without permission of the board. The board member's rights arising from this article cannot be restricted or abolished. The AoA and the board of directors can extend the members' rights to information and inspection. Each member of the board can ask the chairman in writing to convene the board of directors.
A board member cannot participate in discussions regarding matters which lead to a conflict between interests of the company and personal interests of the member or a person of his/her lineal consanguinity or his/her spouse or one of his/her blood and in-law relatives up to and including the third degree. This prohibition shall also be applied in cases where acting in good faith requires the non-participation of a board member in the discussion. If in doubt about the existence of such conflict, a decision shall be made by the board of directors, and the member involved may not participate in this voting. Even if the conflict of interest is unknown to the board of directors, the concerned member is obliged to declare it and abide by the prohibition.
A board member who acts in contravention of these provisions, members who do not object to the participation of the concerned member in the meeting while the conflict of interest objectively exists and is known, and board members who decide in favor of the participation of the said member in the meeting shall be liable for damages incurred by the company in regard to this matter. The reason for non-participation in the discussion because of this prohibition, and related transactions, shall be written in the resolution of the board of directors. Provided that the AoA or the general assembly resolution determines the amount, board members can be paid an honorarium, salary, bonus, a premium and a portion of the annual profit.
A board member cannot conduct any transaction with the company in his/her or any other person's name without permission from the general assembly. If this provision is violated, the company can claim the transaction is null and void. The counterparty cannot make such a claim.
No board member can conduct any transaction of a commercial nature falling under the scope of activity of the company in his/her account or any other person's account without obtaining permission from the general assembly, and he/she cannot participate in a company involved in the same kind of commercial business as a partner with unlimited liability. The company shall be free to file a claim for compensation from the board members acting in contravention of this provision, or instead of compensation, to consider the transaction conducted as made in the name of the company and to file a lawsuit and claim any benefits arising from contracts made in the account of third parties belong to the company.