Preliminary Companies Pursuant to Provisions of the TTC
Turkish Commercial Code No. 6102 (“TCC”) separately regulates the incorporation of a joint stock company and a company becoming a legal entity. A joint stock company shall be deemed established once its founders declare their will to incorporate a company in the articles of association and their signatures on the articles are notarized. Nonetheless, the company shall become a legal entity by registering with the trade registry. This points to the existence of a preliminary company (pre-company); the period preceding the moment when the company becomes a legal entity. This article will analyze the pre-company as regulated for the first time under the TCC.
The Regime under the Abrogated Code
The prevailing opinion while the abrogated Turkish Commercial Code No. 6762 (“aTCC”) was in force was that a company’s founders constituted an ordinary partnership prior to the joint stock company becoming a legal entity through registration. In fact, there was a distinction drawn between a pre-incorporation partnership established between the founders intending to establish a company by preparing the articles of association and signing them, and a pre-company in the form of an ordinary partnership (ordinary company) in the period between the signing of the articles of association and the registration of the company.
Ordinary partnerships are not regulated in the general provisions governing commercial companies under the aTCC. The prevailing opinion was that the provisions related to the articles of association and statutory provisions of the aTCC regarding the company to be incorporated would apply to internal affairs and the provisions on ordinary partnerships under the abrogated Code of Obligations No. 818 would apply to the partnership’s external affairs. Nonetheless, the lack of coherence between the two codes resulted in certain problems, such as the retroactive application of the aTCC provisions.
Effect of the Incorporation of the Company on the Partnership
Upon becoming a real entity, the joint stock company assumes all capital subscriptions made by the ordinary partnership. The founders may request a refund of their expenses, approved by the first general assembly.
The common purpose of the ordinary partnership (affectio societatis) is the incorporation of the joint stock company. If the joint stock company may not be incorporated for any reason (the inability to obtain ministry approval for incorporation, the inability to fulfill the capital subscription requirement in progressive incorporation (a gradual incorporation procedure foreseen under the aTCC and abandoned by the TCC, tedrici kuruluş)) the ordinary partnership shall be deemed to not have achieved its purpose. Consequently, it is accepted that the ordinary partnership shall be terminated and liquidated. In such an event, a company will not assume the capital subscriptions or expenses of the founders. The partners of the partnership will be personally and jointly responsible for the actions they undertook in the name of the company to be established.
Pre-Company under the TCC
The TCC introduces a provision which acknowledges the existence of a preliminary company for the first time. TCC Art. 335/1 reads as follows: “The company shall be incorporated upon the founders’ declaration stating their will to incorporate a joint stock company in the articles of association prepared in accordance with the law and in which the founders unconditionally subscribed to pay the entire capital and on which their signatures are notarized.” As specified in the justification of the article (prepared together with the draft TCC), the pre-company has no legal personality; Article 335/1 clarifies the moment when the company is incorporated.
Although this provision is among the provisions governing joint stock companies, there is dispute on its scope. It is disputed whether this provision is applicable to all capital corporations (i.e. including limited liability companies) or to all corporations (including unlimited companies). Therefore, the wording “articles of association” hereinafter should be construed as articles of incorporation depending on the type of company to be incorporated.
The justification of the article 355 of the TCC states that pursuant to the prevailing opinion, the pre-company is not an ordinary partnership or an association, but a special type of co-ownership. Nonetheless, the justification states that the qualities and legal attributions of the pre-company are left to be determined by scholars and jurisprudence.
The legal characteristics of pre-companies are disputed among the scholars. The justification of 355 of the TCC the article states that the pre-company is not an ordinary partnership. This shows the desire to adopt the prevailing opinion under German law. The prevailing opinion in Germany is that the pre-company is a sui generis communion of persons, which is materially similar to the corporation to be established, independent from the founders, which has its own rights and obligations. Nonetheless, Tekinalp states that the pre-company is an ordinary partnership. Pursuant to Art. 620/2 of the Turkish Code of Obligations No. 6098 (“TCO”), all partnerships that do not constitute a specific partnership as regulated under the law shall be considered as an ordinary partnership.
However, the dissenting opinion states that the TCO Art. 620, on which Tekinalp bases his argumentation, is adopted from Swiss law. Contrary to German law, Swiss law does not have detailed provisions governing pre-companies or the incorporation procedure. In fact, the fact that the prevailing opinion during the enforcement of the aTCC accepted that a preliminary partnership existed prior to the incorporation of the company shows that Swiss law principles were adopted. However, the justifications for TCC Art.335 reveal that the German law model and the prevailing opinion in Germany is adopted. Therefore the pre-company should be accepted as a joint stock company, which is in the process of establishment, having a corporative structure. Indeed, it is argued in Germany that having a corporative structure is not incoherent with the existence of a co-ownership company (Gesamthandsgesellschaft) with the legal authority to assume rights and obligations.
Characteristics of the Pre-Company
Where the prevailing opinion in German law is adopted, the pre-company is a legal being which has its own property, rights and obligations. It has the right to pursue lawsuits or be sued, it may have a bank account established in its name and even own trademarks.
The provisions of the articles of association of the company, and in the absence of any provision thereunder the statutory provisions regarding the company to be established, shall be applicable in internal affairs. The pre-company is accepted as having the same bodies of the company to be established (for example, the board of directors).
Pursuant to German Law, the pre-company is responsible for its debts and obligations, however its responsibility is limited with its properties. The founders or third persons acting on behalf of the company may also be held responsible in relation to their actions at this stage. The founders are responsible for the difference, at the incorporation stage, between the nominal value of the capital and the total value of the assets of the company, and from indebting the company prior to its registration to the registry. Those acting on behalf of the company prior to its registration are further personally and jointly responsible for realizing transactions in the name of the company.
Where Swiss law principles are adopted, the pre-company should be deemed an ordinary partnership and provisions governing ordinary partnerships should be applicable.
The Necessity for Pre-Companies
A Pre-company is a legal institution adopted from German law. German law provides detailed provisions governing the phases of incorporation as a result of which the incorporation process may last for a period from six months up to a year. Certain transactions are mandatory and must be completed prior to registration and the formation of the legal entity, and it is of vital importance that such transactions are realized by an entity, namely the “pre-company”.
As promulgated by the national assembly, the TCC established a long incorporation procedure, as it included an audit by a transactional auditor. The transactional auditor was charged with verifying compliance with laws, whether the incorporation documentation was complete, accurate and fit for purpose, and whether the valuations reflected the reality. Nonetheless, Law No. 6335 abrogated the transactional audit system. Therefore, incorporation procedures entail preparation of the articles of association and notarization of signatures thereon, the founders’ declaration, payment of the minimum subscription fee, obtaining approval for companies whose establishment requires the ministry’s approval, registration and announcement. The procedure established takes no longer than that under the aTCC. Therefore it may be argued that a provision governing the pre-company was not necessary.
Where it is accepted that the pre-company is an ordinary partnership, the necessity of its existence is debatable. Nevertheless, Tekinalp is of the opinion that the pre-company is beneficial because it clarifies the point at which a company is established; and that although an ordinary partnership (a “company”) is established, disputes between the founders will be resolved pursuant to the articles of association, and lacking a provision thereunder, under the statutory provisions governing ordinary partnerships; that once the legal entity is established the pre-company will be deemed liquidated and that the scope of the phrase “those acting on behalf of the company prior to registration” is now clarified by law.
A joint stock company is established through the notarization of the founders’ signatures on the articles of association, in which the founders declare their intention to establish said company. Thus, the TCC regulates the incorporation of the company and the forming of the legal entity through registration as two separate phases. From now on, the existence of a pre-company prior to registration will be acknowledged. Nonetheless the legal regime applicable to such pre-company is highly disputed.
The provision governing pre-companies may be applicable to other companies regulated under the TCC by analogy; however there is debate as to whether or not unlimited liability companies may also benefit from this provision.