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More Transparency and Less Concern about Factoring Companies in Turkey

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Overview

Factoring refers a financial transaction where a business sells their account receivable to a third party which is called a factor at a discount in exchange for immediate money with finance continued business. In respect that, factors usually establish a credit line with clients and designate the amount of credit that their clients can propose to customers. The factoring industry has the majority of small and medium sized companies, so there is sensitive to undulation in economic activities. Thanks to global markets, Turkish factoring companies become to rise in economic activities which provide three main services to their customers. These are discounting, collection and guaranteeing of domestic and also international future receivables with the assignment of receivables to the factory company. Factoring services have four main functions. Firstly, finance for the supplier who the factoring pays the client the amount essential for his working in exchange for his invoices. Secondly, in order to maintenance of the receivables account and the factoring company run the trade debt of the client who keeping the sales accounts ledgers and sending out the invoices. Thirdly, the factory company collects the payments due from the debtors of the client in collection of receivables. Lastly, the factoring company carriers the risk of any bad debt for protection against the default in payment by debtors.

Popularity of energy in factoring sector

According to BDDK statistics, in 2012 there are three energy sectors (nuclear fuel, petroleum products, coal) which are total factoring volume are increased to 3.5 billion TL from 1.3 billion TL. In addition to this, these three energy sectors impact the total share of factoring receivables to 17.9%. In particular, escalating of energy sectors enable investor to benefit from factoring services. Turkey involves in energy sectors which reflect the rate of factoring sector.

Factoring Companies Benefit from being Bank's Subsidiary

There are 14 bank’s subsidiaries factoring companies operating in Turkey. These benefit from less equity capital and also provide much more loan facilities in comparison with independent factoring companies. On the other hand, financial controlling mechanism was necessary for the account receivables against bad debts and accuracy of financial statements and ratios. In connection with comprehensive audit reporting system target, new by law has been published in Official Gazette.

New Accounting Standards will bring transparency to factoring sector

Pursuant to new by law code 123 factoring firms shall issue their consolidated and non-consolidated financial statements together with independent audit report following confirmation of general assembly within seven days. These documents shall be accessible for five years. Furthermore, factoring firms are required to make provision for uncollectible receivables.

  • 20% provision should be made for receivables that are not collected between 90-180 days.
  • 50 % provision shall be made for both capital and interests that are not obtained up to 1 year
  • If the maturity of payment is overdue for more than 1 year, 100% provision shall be made.

 

Minority Actions in Turkish Corporate Governance

Starting with the Cadbury Report, corporate governance has changed its structure over the years in several jurisdictions so as to find the right balance between minority and majority shareholders. In 2011, Turkey has its own significant change with a new Turkish Commercial Code. Within the framework of this new code, it is intended to balance the power of majority shareholders against minority. In order to protect minority shareholder rights against majority, Turkish Commercial Code provides certain measures. Before involving in the actions of minority shareholders it is important to define who can be assumed as minority.

In the context of the code, for non-public companies, shareholders who hold minimum 10% of the shares are considered as minority. For public companies, minority rights shall be effective for the holders of 5% of the shares. Although there are several provisions that is listed on below provided to protect minority shareholders, legislation present balancing measures such as the procedure of squeeze out. According to article 208 of Turkish Commercial Code, in order to prevent bad influences of minority shareholders on the company management, majority shareholders that own 90% of the shares can buy minority shareholders share by stock market value if any, or price determined by article 202. The actions that are provided by the code are listed as follows;

1. Representation on Board of Directors

Under the terms of Turkish Commercial Code, minority shareholders have right to be represented on board of directors. Minority shareholder has a right to be either a member of the board of directors or have a right to offer a person to be a board member if this right is defined in the article of association.

If there is no valid reason exists, the person offered by minority shareholders must be selected by General Assembly to be a member of board of directors. Within the scope of this regulation, the shares that give the right to minority shareholders are considered as privileged shares. 

2. Right to Appoint an Independent Auditor

In general, all shareholders of a company have right to be informed about company's business condition, right to be informed about financial statement of the company, right to examine company's booking records or documents.

In case of a growing concern about mismanagement of the company, any shareholder including minority shareholders, has right to demand an independent auditor to clarify non-transparent matters from the General Assembly. This request can be made even if it is not scheduled on the agenda. In case of General Assembly accept such requests, then either company itself or the shareholder who made such demand apply to national courts in 30 days for an independent auditor appointment. However, if the General Assembly refuses the request, then minority shareholders are entitled to apply to national courts in 30 days for an independent auditor appointment.

3. Termination with Justified Reasons

Under the terms of Turkish Commercial Code, minority shareholders that have justified reasons may request the dissolution of the company from national courts where the company’s head office is located. Justified reasons are not defined by the code however, in practice is accepted that, infringement of personal rights especially rights to demand information and examination of company’s situation (financial statement examinations) are counted as justified reasons. Instead of dissolution of the company, Court may decide elimination of applicant shareholders by paying market values of their shares or decide any other reasonable and fair solution.

4. Call for General Meeting

Shareholders holding at least 10% of the shares for non-public companies and 5% of the shares for public companies are entitled to call General Assembly for an extraordinary meeting. In addition to that, minority shareholders are also entitled to include the matters to the agenda that they wish to discuss with General Assembly. Shareholders that hold lesser number of shares than 10%-5% depending on the type of company shall be entitled to use those rights aforementioned if it is agreed and defined in the articles of association.

5. Postponement of Financial Statement Negotiations

Under the terms of Turkish Commercial Code, minority shareholders have a right to demand from General Assembly the postponement of deliberations regarding financial statement and other related issues for 1 month. In that case, the meeting can be simply postponed with the decision of the chairman without any General Assembly resolution.

6. Issuance of Nominative Shares

For the non-public companies, minority shareholders can ask for issuance of shares in the name of the holder. With the demand of minority shareholders, the board of directors must issue the nominative shares and deliver them to its holders. If it is not demanded by the minority, then the board of directors has no obligation to issue company shares.

7. Rejection of Release Board of Directors from Liability

Founders, board of directors and supervisors’ liability arising from the establishment of the company and capital increase shall not be released for 4 years starting from the trade registration of the company. After the 4 years period passed, they can release from the liability only with the approval of the General Assembly. However, if minority shareholders of 10% or 5% of the shares use negative vote to release liability, then General Assembly cannot give the approval to release founders, board of directors and supervisors from their liability. Shareholders that hold lesser shares than 10%-5% depending on the type of the company may be entitled to use that right as well if it is determined by the articles of association.

Conclusion

Although there is still a great influence of majority in corporate governance, with the new Turkish Commercial Code minority shareholders are no longer fragile as they were before against majority power by extending the rights and actions and eliminating provisions that make them non-effective.

Therefore, instead of non-functional mechanisms of previous commercial code, functional measures and recognized shareholders are brought by.

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