A BLUEPRINT FOR THE FUTURE

Turkey 2011 | EXECUTIVE GUIDE | REVIEW: ACCOUNTING

Amendments to the Commercial Code are bringing Turkish regulations in the business environment into increased harmony with EU and international standards from 2012 on.

The Turkish business world is going through a rapid transformation process and becoming an increasingly stronger competitor in the world arena. Therefore, in order to help Turkish enterprises boost their competitive strength, the introduction of a system built on more transparent corporate governance principles is of utmost importance. With the new Turkish Commercial Code—or the “New Law"—constructed on the grounds of transparency and accountability, the ability of all stakeholders in society to access information and protect their interests will be ensured, which will ultimately result in integration with the world economy and the obtainment of the objective of maintaining a high and sustainable growth rate with continuous economic stability.

The New Law, which is a modern and reformist law and which contains significant articles that will have a considerable impact on commercial life in Turkey, was published in the Official Gazette on February 14, 2011 after it was accepted by the Parliament in January 2011. The New Law will be effective from July 1, 2012 and will replace the Current Commercial Law, which has remained in force since 1957.

Corporate Governance

The New Law not only integrates Turkish commercial law with EU law, but also creates a good infrastructure for the sustainability and competitiveness of Turkish firms. In order to achieve this, the rules governing the New Law evolved from corporate governance rules. Corporate governance principles have moved beyond publicly traded companies and have become a good management practice, which has begun to affect all private and public operations and is an effective codex for internal and external auditing.

In the legal groundwork of the New Law, corporate governance rules are not perceived as a system of rules applicable only to publicly traded companies, but is considered to be a codex that should be applied to all companies in order to inspire investors with confidence and ensure sustainable development. The corporate governance approach of the New Law is based on four main pillars: transparency in depth, fairness, accountability, and responsibility. The reflections of these pillars can be observed throughout the New Law.

The New Law is composed of 1,535 articles and six chapters. These chapters are dedicated to commercial enterprises, commercial companies, negotiable instruments, transportation operations, maritime law, and insurance contracts. In this article, the focus, together with the general soul of the law, is on the chapters of commercial enterprises and commercial companies that will have a significant impact on Turkish commercial life. In this respect, some of the important changes brought with the New Law are outlined below.

Single Shareholder Company

The New Law introduces a simple, practical, and unique system for public incorporation. Additionally, it enables the incorporation of a joint-stock company (AŞ) or limited liability company (LŞ) with a single shareholder or a single partner, respectively. This change will abolish the requirement of incorporation by a minimum five shareholders for an AŞ and a minimum two partners for a LŞ.

In parallel with this change under the New Law a board of directors may consist of one person and the necessity that the board members have to be shareholders has been removed, which paves the way for independent board members. In addition, legal person entities are allowed to become board members. This change is a positive step in attracting foreign investment. A foreign investor will have the chance to make his/her investments into Turkey directly as a single shareholder by himself/herself.

Financial Reporting & Auditing

Parallel to the pillar of transparency and the need to restructure Turkish companies to be internationally competitive, the New Law gives importance to speak the language of the international markets, and hence international standards. Within this perspective, the New Law sets forth that the financial statements of all companies, regardless of whether they are public or not, have to be prepared in conformity with Turkish Accounting Standards, which are completely identical to International Financial Reporting Standards (IFRS). For small- and medium-size enterprises (SMEs), the use of IFRS will also be allowed.

Compared to the current legislation, the New Law outlines an entirely new system for the audit of the financial statements of companies. Accordingly, the audit, which is currently considered as one of the company's obligatory organs and performed by an auditor who does not have to be specialized in the subject matter, has been replaced by an independent audit to be exercised by an independent audit firm.For SMEs the audit of financial statements can also be performed by at least one or more Certified Public Accountants (CPAs) or Sworn Financial Advisors (SFAs). The audit is required to be performed in accordance with Turkish Auditing Standards, which are identical to IFRS. The audit of the annual report of the company, with the consideration of the link between the annual report and the financial statements only, is also in the scope of the audit. The general assembly cannot adopt any resolution based on the financial statements over which an adverse or disclaimer of opinion has been issued.

Another change introduced to the auditing system through the New Law is the requirement regarding the audit of special transactions and/or processes by the transaction auditors. These transaction auditors are auditors who will examine the various transactions, such as the incorporation of a company, capital increase and reduction, merger, spin-off, and conversion of the type of the company.

Internet Sites

One of the means of the New Law's aim of ensuring transparency is the company's internet site. Accordingly, each capital company has to have an internet site and reserve a certain part of the website specifically for the information of the stakeholders and society. All reports, particularly all obligatory announcements, financial statements, annual reports, and auditor's reports, must be included in the site. Also, the internet site shall provide the means for electronic general assembly and board meetings and also for electronic voting.

Group of Companies

Group of companies (Group), which are created for the specific purpose of managing more than one capital stock company according to predetermined and concrete policies within the context of controlling relationships, have been regulated for the first time in Turkish law by the New Law. A significant gap in the law was closed and a significant need has been satisfied. By means of this regulation the concepts of a controlling company, which sustains control, and a dependent company (subsidiary) that is under control have been clearly defined and the legal status of these companies and their relationships have been defined. The necessity for the transparency principle that forms the foundation of modern corporate law has been fulfilled by setting forth the requirement for controlling and dependent companies to disclose their legal position to the public. The New Law states that the Board of Directors of both controlling and dependent companies are required to report their inter-company relations. Thus, it has been ensured that the management of such companies will have detailed information regarding the results of inter-company relations. These reports will not be disclosed to the public, but only their results will be included in the annual report.

The New Law, for the first time, introduces the phenomenon of cross-shareholding through the stipulation that is in conformity with EU regulations. Measures are taken to prevent the abuse of cross-shareholdings and use of cross-shareholdings by the controlling shareholder and board of directors as a tool for strengthening their management.

Board of Directors

Some of the reforms of the New Law related to the Board of Directors are as follows:

•The requirement of a board member to be a shareholder in order to start carrying out his/her duties has been removed.

•The possibility for a legal entity to become a board member has been brought.

•A professional board concept has been introduced.

•The legal infrastructure that enables the representation of shareholder groups in the board has been established.

•A system that identifies the difference between the board and the management has been legally identified.

•It is made possible for a board of directors to hold meetings, take resolutions by electronic media, and confirm its resolutions by electronic signature.

Professionalism and specialization in bodies have been emphasized in the New Law. It makes possible for other board members to assign management power to board members, third parties, and management. In accordance with the principles of corporate governance, internal audit mechanisms have been introduced. Provisions concerning finance management, internal audit, financial planning, and risk management have, therefore, been specified.

It is worth re-emphasizing that the New Law is composed of 1,535 articles and there are several significant changes compared to present legislation. Although some of the significant changes were noted above, there are also other changes, such as the enrichment of the rights of minority interests and structural changes regarding spin-offs and mergers that secure the benefits of the shareholders, other stakeholders, and workers.

Effective Dates & Implementation

The New Law will be effective from July 1, 2012. However, the effective dates of some articles and sections differ. For example, the application of IFRS will be effective from January 1, 2013 and the audit of the financial statements in accordance with this law will be performed regarding the financial statements for the year ended December 31, 2013. The provisions regarding an internet site will be effective from July 1, 2013. The effective dates were regulated with a separate law, and this law should also be read alongside the New Law to obtain accurate and detailed information about the different effective dates of each article and section.

The period until the effective date of the New Law is closing fast. However, considering the reformist changes brought with the New Law, it is advisable that companies immediately take action to adapt to the provisions of the New Law. It should also be noted that before the law is effective, several communiqués will be announced regarding the implementation of some provisions of the law.

The New Law aims to regulate commercial relations in line with the recent changes in the local and global business environment as well as technological and legal developments, including EU legislation. In this respect, the New Law forms the basis for the competitiveness and sustainable development of companies and especially for SMEs, which are expected to be the catalysts for Turkey's future growth. The New Law is also expected to attract more foreign investment to Turkey. This will be achieved at least through the facts that: a) the New Law is based on corporate governance rules and hence transparency and accountability, b) the standards brought with the New Law are similar with or identical to the regulations in other developed markets, c) the availability of the option of incorporating a single shareholder company, and d) the enriched rights of minorities, and therefore foreign investors, will be more protected even if they intend to acquire a non-controlling interest.

Conclusion

Consequently, the New Law brings the infrastructure and the significant changes that will enable our companies to compete and become sustainable in the new world order. The New Law makes it obligatory that all businesses acquire a corporate structure that will ensure their sustainability for generations. Accordingly, even though the changes introduced with the New Law also bring certain costs for companies, these should be evaluated as minimum costs required for sustainability. In parallel to this, companies operating or planning to invest in Turkey should evaluate the preparation of a roadmap in advance during the period until the enactment of the New Law in order to comply with corporate governance principles as a prerequisite for survival in tomorrow's world.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

TBY would like to thank PricewaterhouseCoopers for compiling this analysis.