Right To Request Special Audit
A special audit mechanism is the extension of the right to request information that is granted to each shareholder. A special audit ensures that a shareholder obtains detailed information regarding a specific event, and enables such shareholder to consciously and accurately use his/her rights arising from his/her shareholding in the subject company. The Turkish Commercial Code no. 6102 (“TCC”) sets forth that the appointment of the special auditor shall be made by the commercial court of first instance upon the request of any shareholder, notwithstanding the shareholding percentage, subject to certain conditions.
Request for Special Audit and Appointment
The right to request the appointment of a special auditor can be exercised by a shareholder, only when it is necessary, and if the right to demand information or examination has already been exercised regarding such specific point. In this regard, the requirement of necessity should be evaluated in terms of shareholding rights, and especially the voting rights. In other words, a special audit can be requested if obtaining the requested information is necessary for such shareholder to exercise his/her shareholding rights. The second requirement -first exhausting the right of information- is set forth in order to avoid any unnecessary requests, and to ensure that the relevant shareholder is already informed of the financial situation of the company, and makes a conscious request. A request can be made at the general assembly meeting of the subject company, even if it is not included within the agenda of such general assembly meeting. This provision constitutes a clear exception to the principle of commitment to the agenda.
Approval of the General Assembly
If the general assembly approves the request, either the company or each shareholder can request the commercial court of first instance to appoint a special auditor within the location of the company headquarters, and within 30 (thirty) days as of the date of such general assembly meeting.
At the time of the previous regime, the authority to appoint an auditor was held by the general assembly; therefore, the shareholders constituting the majority of the general assembly had the mandate to appoint their choice of auditor. Through the TCC, appointment of an auditor by the court, instead of the general assembly, brings functionality to the special audit mechanism, and prevents any arbitrary treatment.
Rejection by the General Assembly
In the event of rejection of the request by the general assembly, such request can be raised before the commercial court of first instance within 3 (three) months as of the date of such general assembly meeting, only by the shareholders constituting at least 10% of the share capital (5% of the share capital in public companies), or by the shareholders whose shares equal to at least TRY 1,000,000 in total. Therefore, refusal by the general assembly creates a minority right.
Decision of the Court
If the applicants can present convincing statements to the court that the founders, or the company organs, have caused damage to the company, or its shareholders, by way of breach of law or the company’s articles of association, the court shall rule for the appointment of the special auditor after having heard the company and the applicants. In the case of affirmative decision, the court must determine the subject of the audit, and appoint one or more independent experts depending on such subject.
Duties and Audit Report
Duties of the Auditor
The board of directors of the company is required to allow the auditor to examine the books and records of the company together with the assets – especially the valuable papers, safe deposit box and goods. Not only the board of directors, but also the founders, organs, representatives, employees, custodians and liquidators are also required to inform the auditor with respect to any significant facts.
It is essential that the special audit be conducted within an effective time period, and without causing unnecessary delays or disruptions to the company’s operations. Considering that a special audit significantly relates to the exercise of shareholding rights, such audit must be completed within a time period that is useful for the fulfillment of its goal. Delay in the preparation of the audit report may render the mechanism non-functional.
Scope of the Audit Report
At the end of the audit period, the auditor shall submit a detailed report to the relevant court, subject to confidentiality, after having consulted the company in relation to the outcomes of the audit. Such consultation is stipulated in order to avoid any possible misunderstanding and misguidance. Thus, the auditor will be able to discuss the outcomes of the audit with the board of directors, so as to ensure that the information and findings in his/her report are accurate, not based on misunderstandings, and do not come to the wrong conclusions.
The auditor cannot include all of the company information in his/her report although he/she examines every document and all information submitted to him/her during his/her appointment. At the stage of preparation of the report, the company’s secrets, especially the trade secrets, and other interests of the company must be considered.
Once the report is delivered to the company by the court, TCC grants to the company the right to request from the court the non-submission of the report to the applicants. The court is authorized to determine whether the disclosure of the report will cause damage to the company’s secrets, or company interests which are worth protection and, therefore, whether the report will be submitted to the applicants. In this respect, the court may rule that some points of the report be eliminated, in such a way so as to create a balance between the interests of the applicants and the company.
It is important to state that the auditor cannot include a legal analysis in his/her report; the special audit mechanism aims only to reveal and clarify material facts regarding the operations of the subject company. A special auditor is not authorized to give advice to the company, nor to share his/her opinion on the matters that he/she has examined.
Submission of the Report
Subject to the elimination described, above, if any, the board of directors is required to submit the report and the evaluations in respect thereof to the first general assembly, even if it has not approved the request for special audit in the first place. Submission to the first general assembly is not to be construed as a requirement to call for an extraordinary general assembly meeting. Nevertheless, minority shareholders are entitled to call for such a meeting within the scope of the general provisions.
Each shareholder is entitled to request a copy of the report, and for the remarks of the board of directors, within one year following the relevant general assembly meeting.
As explained in detail, above, request for the appointment of a special auditor was only a minority right under the previous regime. The TCC expanded the scope of the right by way of entitling each shareholder to submit the request to the general assembly for approval. Requirement of a minimum shareholding percentage only arises in the event of the general assembly’s disapproval, in which case the shareholders that constitute at least 10% of the share capital (5% of the share capital in public companies) or the shareholders whose shares equal to at least TRY 1,000,000 in total must convey their request for a special audit to the commercial court of first instance. This arrangement, together with the appointment of the auditor by the court instead of the general assembly, helps to constitute a functional and independent audit mechanism.