Contact: Att. Revan Sunol; Erdem & Erdem (Turkey)
Introduction
Corporate governance refers to the system by which the distribution of rights and responsibilities among different participants in a corporation, and the rules and procedures for making decisions in corporate affairs is specified. As is known, the Turkish Commercial Code No. 6102 ("TCC") has adopted corporate governance rules in the regulation of corporate law. In line with the regulation in the TCC, Art. 17 of the Capital Markets Code No. 6362, which entered into force with its publication in the Official Gazette, dated 30.12.2012 and numbered 28513, sets forth that corporate governance shall be regulated by the Capital Markets Board ("Board").
In accordance with the above mentioned regulations, the Board has issued the Communiqué on Corporate Governance Rules to be Complied with by Companies and Related Party Transactions (Series II, No. 17.1), thereby abolishing the Communiqué on the Determination and Implementation of Corporate Governance Rules (Series IV, No. 56) and the Communiqué on Principles to be Complied with by Joint Stock Companies subject to the Capital Markets Code. Please note that this article is concerned with the regulations of the communiqué rather than the corporate governance rules. The corporate governance principles, which are set forth in detail with the Communiqué, shall be taken into consideration in the following months.
The Scope of the Communiqué
The scope of the Communiqué includes publicly held corporations that are publicly traded and corporations traded on the National Market (companies that fulfill the stock market's listing criteria are traded on the National Market), Second National Market (small and medium sized companies, companies temporarily or permanently de-listed from the National Market, and companies that fail the National Market's listing criteria are traded on the Second National Market) and Collective Products Market (certificates of investment trusts, real estate investment trusts, venture capital trusts and exchange traded funds, warrants, and certificates are traded on the Collective Products Market). It must be noted that the Communiqué provides for certain exceptions in the application of the corporate governance principles.
Important Regulations and Enforcement
The Communiqué provides for certain new regulations as well as revising certain issues that were already subject to regulation. In this context, the unit previously named "Shareholder Relations" has been renamed as "Investor Relations Department". Pursuant to the Communiqué the mentioned unit shall be under the management of a manager with administrative duties and shall report to the board of directors with respect to its activities at least once a year.
Related party transactions are regulated so as to comprise not only the relevant corporations but also their affiliated companies. Also, the issues of securities, surety, mortgage and liens, which were formerly regulated with a Board decision, are taken into consideration with detail.
Related Party Transactions
Before proceeding with an asset, service purchase, sale or obligation transfer transaction with their related parties, corporations and their affiliated corporations must adopt a board of directors resolution setting forth the terms of the transaction if such transaction is predicted to have a value equal to more than five percent of the value of the total assets of the corporation, or the proceeds or the value of the company. Also, a valuation must be conducted by an institution, determined by the Board, before the transaction. Where the predicted ratio is more than ten percent, the approval of the majority of independent directors shall also be required. Where the majority of independent directors do not approve the transaction, this must be announced in the Public Disclosure Platform ("PDP") and submitted for the approval of the general assembly. If it is decided to proceed with the transaction, the nature of the concerned parties' relation and information regarding the transaction must be disclosed in the PDP. If the transaction is not realized in accordance with the valuation, the grounds for such noncompliance must also be included within the disclosure.
It must be noted that corporations that are subject to trade in markets and platforms other than the National Market, the Second National Market and the Collective Products Market are also subject to the regulations regarding related party transactions.
Securities, Surety, Mortgage and Liens
Except for the benefit of their own legal entities, other corporations included in the consolidated financial statements and third parties with whom ordinary commercial activities are conducted, corporations and their affiliated corporations cannot provide securities, surety, mortgage and liens for the benefit of third parties. The approval of the majority of independent directors is required for such securities to be granted for the benefit of third parties with whom ordinary commercial activities are conducted. Where the majority of independent directors do not approve, this must be disclosed in the PDP and the opposing opinion must also be included within the disclosure.
Corporations may provide securities, surety, mortgage and liens to corporations and business partnerships, in which they are directly participating in the capital, in proportion to their participation in the capital.
It shall be noted that as a principle in the Communiqué, it is accepted that members of the board of directors shall not be allowed to vote in matters which may present a conflict of interest.
Corporate Governance Principles
Within the scope of the Communiqué, corporate governance principles are provided under the titles shareholders, public disclosure, transparency, stakeholders and board of directors. With these principles, the goal is:
- to protect the rights of shareholders as well as to ensure that corporations do not forget their legal, contractual, market protecting and social obligations to stakeholders such as employees, investors, clients and creditors who are not actually shareholders;
- to disclose to the public the responsibilities and duties of the board of directors and the administration (managers) and to render this disclosure regularly in order to establish a certain level of accountability in favor of any stakeholder;
- to adopt rules which would support ethical decision making mechanisms of corporations; and
- to assure that the board of directors has sufficient skills and understanding to monitor the administration of the company and also that it has a balanced commitment and independence vis-a-vis the company.
The corporate governance principles will be taken into consideration in a more detailed manner in the coming months.
Enforcement
Some of the corporate governance principles are provided as compulsory rules to be followed, while some of them as only guidelines. In the Communiqué, it is determined explicitly which principles constitute the obligatory principles that shall be followed. The Board has ex-officio authority to enforce the execution of such obligations and to take the necessary actions for such execution.
In line with this, the Board has the authority to file a declaratory action against transactions which are not in compliance with obligatory principles, to request preliminary injunctions without granting any securities for the rescissions of these transactions, to bring actions and to request to the relevant court that the decision be adopted in a manner that will result in compliance with the relevant obligation. The Board shall make its requests to the court so as to include a suggestion as to the how compliance may be attained.
Conclusion
The Communiqué provides for the adoption of transparent stakeholder protection mechanisms for corporations and includes enforcement procedures to ensure that obligatory rules are followed.
