Ercüment Erdem Prof. Dr. H. Ercüment Erdem

Delegation Of Duties Of The Board Of Directors

May 2014

Introduction

The Turkish Commercial Code No. 6102[1] (“TCC”) materially deviates from the abrogated Turkish Commercial Code No. 6762 (“ATC”), especially concerning the authorities and responsibilities of the board of directors. The TCC introduces important novelties governing the duties and authorities of the board of directors, and defines inalienable and nontransferable duties. There are important changes and innovations such as the separation of the top management and the day to day administration of the company, and the new system of delegation of powers. The board is now authorized to adopt any decision in order to realize any act falling within the scope of company activities.

The March 2011 newsletter article assessed in general the innovations which the TCC introduced concerning the board of directors[2]. This article will focus on the duties and authorities of the board of directors, as well as the delegation of such powers.

Nontransferable Duties

In General

The duties and powers of the general assembly and the board of directors and their distribution among the bodies of joint stock companies were subject to debate under the ATC. In order to overcome this lack of clarity, the legislator expressly defines the inalienable and nontransferable duties of both the general assembly and the board of directors. Furthermore, Art. 394 TCC specifies that the board of directors is authorized to resolve any matter beyond those falling within the authority of the general assembly under the law or the articles of association; thus, the board of directors is designated as the main competent body. Thus, the principle of supremacy of the general assembly is abandoned.

Art. 375 TCC regulates the nontransferable duties and powers of the board of directors. This article specifies certain powers, including the top management of the company and the instructions regarding top management, determination of the management structure, establishment of a basis for financial planning, appointment and discharge of managers and signatories, surveillance of the management, the keeping of company ledgers and preparation of activity reports. Similarly to the ATC, the execution of general assembly resolutions and notification of the courts in the event of insolvency are also among the nontransferable duties of the board of directors. These duties may not be transferred to another body, committee, board or delegated to third persons, through the articles of association, a resolution or otherwise.

The nontransferable duties of the board of directors are not limited to those specified in Art. 375 TCC. Various other provisions stipulate tasks for which solely the board of directors is authorized. For example, the authority to appoint commercial representatives regulated under Art. 368 TCC should also be considered as a nontransferable duty based on Art. 375/1/d, which specifies the duty to appoint and discharge managers, persons having the same function and signatories among nontransferable duties.

Additionally, the preparation of the merger agreements for merger transactions (Art. 145), preparation of the agenda and convocation of the general assembly meetings (Art. 410), preparation of the annual activity report and a proposal to the general assembly on the areas in which the profit should be used (Art. 516), obtaining the approval of the Ministry of Customs and Trade for amendments to the articles of association where necessary (Art. 435), providing consent or denying transfer of registered shares are also among the powers and duties of the board of directors. The articles of association or general assembly resolutions may assign further nontransferable duties to the board of directors.

Top Management and Signatories

Specific attention should be paid to the fact that the appointment and discharge of top management, managers and signatories are among the nontransferable duties of the board of directors. These duties mainly comprise of the determination of the company strategy and giving instructions for its application.

The board of directors is exclusively authorized to select the top management. Appointments to inferior positions under the top management may be delegated to the managers. Through emphasizing the word “top management” the code reiterates that the board of directors shall not be occupied with the day-to-day administration of the company, which is not included in the duties of top management.

Nonetheless, the wording of Art. 375/1/d TCC which reads “the appointment and discharge of managers, persons having the same function and signatories” can be construed to comprise all signatories, not just the top management when defining the scope of the nontransferable duty of the board. Accordingly, appointment of signatories is not among the powers which the board of directors can delegate.

The scope of managers and signatories with regards to the above provision is highly disputed among scholars. The selection and replacement of all signatories of every rank, who have been discharged, resigned or whose authorities are revoked for other reasons by the board of directors, acting as a board through adopting resolutions, will result in a large material workload, especially in large-scale companies (for example banks having a great number of branches). The narrow or broad interpretation of this wording by the courts will determine the scope of powers which the board of directors is entitled to delegate to third persons in practice. This provision has been adopted from Swiss legislation, and Swiss practice is to interpret this wording in a narrow manner to comprise the top management only. This provision could be interpreted in a similar manner for practical reasons under Turkish law as well.

Distribution of Duties

Contrary to the ATC, the TCC regulates the transfer of management and representation of the company in separate articles, and introduces major changes with regards to both the internal distribution of duties within the board and the delegation of duties to board members or to third persons. In light of these provisions, the board of directors may determine its own organizational structure, the management, the distribution of powers and duties, and establish committees if needed.

Chairman and Deputy Chairman

Pursuant to Art. 366/1 TCC, the board of directors shall elect a chairman and at least one deputy chairman among its members each year. Thus, the TCC enables the election of more than one deputy chairman.

Committee and Commissions

The board of directors may establish committees and commissions for the surveillance of operations and administration, in which the board members may also participate (Art. 366/2). For example, although the TCC abandoned the internal audit system, if an internal audit is requested within a joint stock company, such an audit committee or commission may be established for this purpose. The establishment of committees or commissions is at the sole discretion of the board of directors. Nonetheless, Art. 378 TCC obliges companies traded on a stock exchange to have a committee for early detection of risk.

The committees may comprise of members of the board of directors, however there is no such obligation foreseen under the code.

The establishment of commissions is different from the distribution of tasks among the members of the board of directors or from the delegation of powers. The commissions and committees solely provide for a structure which assists the decision making process of the board of directors. Thus, contrary to the delegation of powers, there is no requirement of having a provision in the articles of association in order to set up committees.

Delegation of Duties of the Board of Directors

Management

Management authority entails the management and operation of the company in line with the policies determined by the board of directors. Management concerns the internal structure of the company. Unless delegated, the management authority belongs to all members of the board of directors, who shall exercise this authority acting as a board (even if the board consists of one member only).

Pursuant to Art. 367 TCC, the board of directors may delegate the management authority (other than its nontransferable duties examined above) to one or more members of the board of directors or to third persons. The transfer referred to under this provision is the transfer of the corporate function of the board of directors.

The board of directors may, at its own discretion, decide to become a non-executive board of surveillance with no executive powers, through delegating all of its management power. Thus, it is possible for joint stock companies to be managed by professional managers and to freely choose and determine the most convenient management structure for themselves.

The first prerequisite in order for the management power to be delegated is to have a provision that enables such delegation of power in the articles of association. A mere general assembly resolution governing the delegation of powers is not sufficient. Second, if authorized by the articles of association, the board of directors may delegate the management through adopting an internal regulation governing the delegation of management. The internal regulation shall designate the distribution and delegation of management authorities, positions, definitions of positions and their rankings, the hierarchy and obligations to inform among positions; in compliance with the accountability and responsibility principles.

Representation

Unlike management authority, representative authority concerns the (external) relations of the company with third persons. Therefore, the possibility of delegating the representation of a company is regulated in a more limited manner under the TCC in comparison with the delegation of management.

The board of directors may delegate its representative powers to one or more members of the board of directors or to third persons. Pursuant to Art. 370/2, at least one member of the board of directors should have the right to represent and bind the company.

Art. 367 governing the transfer of management provides for the conditions of delegation of the management authority only. Art. 370 governing the transfer of representative authority does not expressly require a provision in the articles of association and the preparation of an internal regulation. Nonetheless, it is disputed among scholars whether this Art. 370 should be considered together with Art. 367 stipulating the conditions of transfer of the management authority. Besides this debate, in practice, the management and representative authorities usually are exercised and therefore transferred together as a whole.

Conclusion

The TCC regulates the authorities of the board of directors and expressly specifies the nontransferable duties. The provision of a clear distinction and distribution of tasks between the bodies of the company is an important novelty of the TCC.

On the other hand, there are certain disputes governing the scope of nontransferable duties. The inclusion of the appointment and discharge of signatories and managers among nontransferable duties may cause serious obstacles in practice. The appointment and discharge of each signatory other than the persons in top management by the board of directors will result in an immense workload.

The TCC regulates the transfer of powers by the board of directors, which is another important novelty of the code. Accordingly, the articles of association should enable the delegation of the management authority and the board of directors should adopt an internal regulation for the delegation of management. Although the management and representation usually are not separate from each other in practice, the transfer of representative power is regulated under a separate provision. Art. 370 does not require a provision in the articles of association or in the adoption of an internal regulation.



[1] Published on the Official Gazette dated 14 February 2011 and no. 27846, and entered into force on 1 July 2012.

[2] Ercument Erdem, Innovations in the Board of Directors of Joint Stock Companies, http://www.erdem-erdem.av.tr/en/articles/innovations-in-the-board-of-directors-of-joint-stock-companies/ (accessed on 3 June 2014).