THE GROUP OF COMPANIES CONCEPT

Turkey 2014 | EXECUTIVE GUIDE | REVIEW: LEGAL

The new Turkish Commercial Code (TCC) of 2012 introduced fresh ideas and regulations on group company formation to further open up the country to the global economy, as Köksal Law explains.

As of July 7, 2012, Turkish Commercial Code (TCC) No. 6102 went into effect and abolished the former Commercial Code No. 6762. The corporate section of the TCC sets forth new concepts that are applicable for Turkish enterprises' activities. The Foreign Direct Investments Code (No. 4875) mentions that foreign capitalized companies are to be treated the same as Turkish entities, meaning the TCC has vital importance for foreign capitalized Turkish enterprises. However, there are certain concepts that are set forth by the TCC that may impact the foreign entities themselves. Group of Companies is one of these specific areas.

Although Turkey already had the notion of “Holding" companies in its laws and even some specific legislation, this is the first time that its commercial code entertains the concept of Group of Companies as a corporate term and identifies important obligations for the members of the group of companies. The TCC regulates group companies between articles 195 and 209. There are many technical issues dealt with in the TCC about groups of companies that are beyond the scope of this particular article. Therefore, this article will only be focusing on the general issues that may impact foreign investors.

The TCC does not provide a definition of a group of companies. Instead, it defines the controlling company and the subsidiary. TCC Article 195 sets forth the means of creating control generally by measuring the i) voting rights, ii) management rights, iii) number of shares, iv) management contract, or v) other means. The TCC did not count the means of control in a limited manner by referring to “other means" in Article 195/1-b and left it to the discretion of the interpreter (be it the judge, trade registry, or tax authorities, for example) on a case-by-case basis.

After identifying the controlling company and subsidiary, Article 195/1 explicitly sets forth that if at least one of these companies, be it the controlling one or the subsidiary, has its registered address in Turkey, then the group of companies provisions of the TCC shall apply to these companies. This statement is of vital importance, as the code does not seek the existence of the controlling company in Turkey, and even if only the subsidiary is settled in Turkey the controlling company will be directly impacted by the TCC provisions. Such regulation leads to potential claims against the controlling company abroad, which can be brought directly before the Turkish courts. Thus, foreign entities holding controlling powers in a Turkish subsidiary should closely monitor TCC regulations regarding the group of companies and abide by them as such.

Trade Registry By-Law Article 105 sets forth that a group of companies is composed of one corporation and at least two or more corporations affiliated to such a corporation. The language of the provisions sometimes leads to the mistaken notion that foreign entities that do not have more than one affiliate in Turkey will be exempted from the group of companies regulations; however, this is not the case. If the foreign entity that has an affiliate in Turkey has at least one other affiliate in or beyond Turkey, such an entity will also be subject to the group company regulations of the TCC.

In regard to which provisions may have direct impact on the foreign entity having subsidiaries in Turkey. The main issue to be aware of is about the liability of the controlling entity. Article 202 regulates such liabilities. The liability may arise in two different cases, the first concerns the abuse of the controlling power over the subsidiaries. In the event that the subsidiary suffers losses due to the instructions of the controlling entity, and if such losses are not offset by the controlling entity in the accounts of the subsidiary as designated by the TCC, then each shareholder of the subsidiary and the creditors of the subsidiary may demand the controlling entity and the board members who led to such loss to pay the loss to the subsidiary. It should be noted that, even if the controlling entity is located abroad, lawsuits will be brought before the Turkish commercial courts. Thus, the foreign entities and foreign board members may find themselves sued directly in a Turkish court.

Another interesting case that can be brought by the shareholders of the subsidiary is designated in Article 202/2. If the subsidiary's general assembly resolves on mergers, demergers, and liquidations, and does not have any reasonable grounds, the shareholders of the subsidiary who objected to such a resolution and who get such an objection annotated in the meeting minutes may apply to the Turkish courts to seek compensation for damages, or get their shares purchased at the market value. This is also a brand new facet for Turkish corporate legislation.

Apart from the above, a “merger squeeze out" is, for the first time, regulated by the TCC; if the controlling entity holds at least 90% of the shares of the subsidiary, then it is enabled to squeeze-out the minority due to reasonable grounds as designated in Article 208 of the TCC. The squeeze-out value is the market value of the shares on the stock market, or else if it is not listed, the commercial courts calculate the value.

In summary, a new group of companies regime as set forth by the TCC will be closely monitored by those entities that have affiliates in Turkey, and the reporting liabilities shall be strictly abided by. As the board members of the controlling entities may face personal liabilities, they should also report fully on the relationships between the parent company and its subsidiaries.