Contact: Att. Berna Asık Zibel; Erdem & Erdem (Turkey)
Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”).
An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal, which ultimately is to generate a profit. A partnership, which does not meet the criteria of legally designed partnerships (i.e. companies under the Turkish Commercial Code No. 6102), is deemed to be an ordinary partnership.
Main Features of Ordinary Partnerships
Unlike companies under Turkish Commercial Code No. 6102 (“TCC”), an ordinary partnership does not constitute a legal entity. Since it does not have a legal personality, it cannot separate itself from its partners in its relations with third parties. In other words, ordinary partnerships cannot acquire rights and undertake obligations themselves separately from their partners. Thus, an ordinary partnership cannot stand as a plaintiff or defendant in a lawsuit. A lawsuit to be filed against an ordinary partnership must be filed against all partners and, a lawsuit must be filed jointly by all partners on behalf of the ordinary partnership. On the other hand, partners of an ordinary partnership may apply to the tax office and obtain a tax number in order to conduct commercial activities and to issue invoices.
Unless the contribution of a partner, itself, is subject to a form requirement under the applicable laws (e.g. immovable property, trademark, receivable, etc.), an ordinary partnership is not subject to a form requirement. The only requirement is the agreement of partners which may either be written or oral, without any notarization or registration requirement. However, in practice, ordinary partnership agreements are executed in a written form and even, in the presence of notary publics, for the ease of proof.
Each partner should make a contribution to the partnership in the form of cash, receivables, goods or efforts. Unless otherwise agreed under the ordinary partnership agreement, each partner’s contribution should be equal and should be in the character and significance required by the goal of such partnership.
Moreover, unless the partners agree to the contrary, the share of each partner in profit and loss should also be equal, irrespective of the value of their contributions. Pursuant to Article 623/2 of the TCO, if the share of a partner specified in the ordinary partnership agreement is determined only for losses or only for profits, such share will be considered as agreed both for losses and profits. It is only possible for a partner to join solely to profits but not to losses, if such partner contributes his efforts to the partnership.
Governance and Representation of Ordinary Partnerships
Pursuant to Article 624 of the TCO, resolutions of an ordinary partnership should be adopted unanimously, unless the partners agree that they can be adopted by a majority vote; and in such case, a majority is determined based on the number of the partners, and not the percentage of their contributions to the partnership.
As a general rule, the TCO provides that all partners have the right of management and representation of the partnership, unless otherwise agreed by the partners. The partners may assign the representation and management authority to one or more partners, or to a third person. As per Article 625 of the TCO, any partner holding management authority may act on his/her own but any other partner with management authority may stop a transaction by objecting to it prior to its completion. Unanimity is required to appoint someone to the general management of the partnership and to conduct activities under the extra-ordinary course of business. However, in case of emergency, all partners with the management authority may take necessary measures.
According to Article 637 of the TCO, the partner, who enters into a transaction with a third party in his name but on behalf of an ordinary partnership, personally becomes the debtor or the creditor of such third party. Where a transaction is conducted by one partner in the name of an ordinary partnership, the other partners become the debtor or the creditor under such transaction in accordance with the representation rules of law. The partner, who is entitled to manage the partnership, is also considered as entitled to represent the partnership against third parties. However, having said that, for material dispositive transactions, representation authority given by unanimous vote and a clear indication of this authority in said partner’s proxy are required. In ordinary partnerships, partners have joint ownership on property and several liabilities for obligations. However, partners may decide to write specific provisions into a written partnership agreement, in order to share liability, e.g. whereby the partner causing the other partners to pay indemnification agrees to reimburse or hold harmless the other partners.
The management authority assigned to one of the partners cannot be terminated or limited without just cause. Where there is just cause, even if otherwise agreed, each of the other partners can terminate another partner’s management authority. The TCO does not contain an exhaustive list of just causes, but provides examples under Article 629, e.g. extreme breach of duty, loss of competence for good management.
Rights and Obligations of Partners
The most important obligations of the partners in an ordinary partnership are the non-competition obligation and duty of care. The non-competition obligation regulated under Article 626 TCO is a broad obligation, which can be considered a prohibition of action against the ordinary partnership’s interests. None of the partners may enter into transactions, which may cause damage to or which conflict with the partnership’s goal.
According to Article 628 TCO, each partner should take a certain level of care and expend a certain level of effort for the partnership similar to the care and effort put into his own work. Every partner should indemnify losses caused as a result of his fault, and such losses should not be deducted from the benefits they provide to the partnership. As per Article 628/2 TCO, a partner, who is being paid by the partnership for an assigned duty, is responsible as a “proxy” in accordance with the provisions of the TCO on proxy contracts.
Pursuant to Article 627 TCO, partners shall be responsible to a specific partner who incurred expenses or debts for the partnership. All partners shall also be responsible for the incurred damages, results and risks arising directly from such management rights. A partner who lends money to the partnership may ask for interest as of the lending date and a partner who expends effort for the business of an ordinary partnership, without any obligation, may request an equitable payment.
Changes in the Partnership
To join an ordinary partnership as a new partner, the consent of all partners is required. Similarly, to transfer shares of the partnership to a third party in an ordinary partnership, such third party cannot become a partner without consent of the other partners, and cannot acquire the right to interfere with the management of the partnership.
The acceptable reasons for the exit or the squeeze out of a partner from an ordinary partnership, which may be regulated under the partnership agreement, are: serving a termination notice to the other partners, being declared legally incapacitated, insolvency, foreclosure of a partner’s liquidation share and death. In the event of the exit or squeeze out of a partner from the ordinary partnership, the partnership share of such partner is automatically transferred to the other partners pro rata to their shares. Other partners should return the goods to the exiting/squeezed out partner whom he brought into the partnership, release him from the several liability for the due debts of the partnership and pay him the liquidation share, which should be paid if the partnership is liquidated on the date he exits or is squeezed out. If the assets of the partnership are not sufficient to pay the debts of the partnership at the exit/squeeze out date, such partner should pay the loss pro rata to his share. In addition, the exiting/squeezed out partner joins the profit and loss of the works which were not completed while he was a partner.
Termination and Liquidation of the Ordinary Partnership
Pursuant to Article 639 TCO, ordinary partnerships may be terminated due to the following reasons:
- Achievement of the goal stipulated in the partnership agreement, or the goal of the partnership becoming impossible to achieve;
- Death of a partner, provided that no prior agreement has been reached with the descendants of the partner for continuation of the partnership;
- A partner being declared legally incapacitated, a partner’s insolvency or foreclosure of a partner’s liquidation share;
- By unanimous decision of all partners;
- Expiry of the term determined in the partnership agreement;
- Termination by a partner upon notice where (i) such right is given to such partner in the partnership agreement, (ii) the partnership is formed for an indefinite period of time, or (iii) it is decided in the partnership agreement that the partnership shall cease with the death of a partner; or
- Court decision regarding the termination of the partnership based on a just cause (the termination of the partnership may be requested by one of the partners based on a just cause without giving any further notice before the expiration of the agreed term).
Each partner may request termination by giving six months notice, if (i) the partnership is formed for an indefinite period of time, or (ii) the partnership agreement provides that the partnership shall cease upon the death of a partner. Turkish law requires such a termination right to be performed in good faith and not with appropriate timing for the partnership. Termination in such a manner may only be required after the end of the partnership’s fiscal year, if a yearly accounting term is accepted by the partnership. If an ordinary partnership continues to engage in business after the expiry of its term, it turns into an ordinary partnership with an indefinite period.
If the partnership terminates due to a reason other than the termination notice, the management authority of a partner should cease when he learns about the termination or when he could have become aware of it had he taken sufficient care.
Pursuant to Article 642 TCO, the the partnership can be liquidated based on the value of the contributions. The profit of the partnership, if any, shall be distributed among the partners only after (i) the partnerships’ debts, (ii) partners’ expenditures and advance payments, and (iii) the capital contributions are paid off. Losses shall be borne by the partners personally if the assets of the partnership are not sufficient to pay off the above listed items. Termination or liquidation of the partnership does not amend or otherwise affect the validity of the partnership’s commitments already made towards third parties. In other words, termination or liquidation of a partnership does not invalidate or otherwise terminate the partnerships obligations (e.g. debts that are not due at the time of termination). The partners remain personally, jointly and severally liable for performance and/or payment for such obligations.
Conclusion
Ordinary partnerships are mostly formed for joint venture projects because it allows partners to seek a common goal by undertaking different and separable parts of a project (e.g. construction, financing, management, etc.), and does not impose a commercial company structure. Therefore, it is preferable. On the other hand, the liability rules of the ordinary partnership (i.e. the personal liability of the partners) prevent parties from engaging in ordinary partnerships at all times.
