Corporate Governance

March 2012
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Preamble

Capital Markets Board of Turkey (“CMB”) prepared recommendatory rules and principles for privately and government-owned companies and especially public companies with the Corporate Governance Rules (“Rules”) published in 2003. Such Regulatory Framework has been prepared and published for the companies that become prominent in the developing, changing Turkish markets and that catches foreign investors’ attention in order to help them to establish and realize a management insight that contributes them to continue their business within international standards and to establish an equal, transparent, accountable and responsible management insight and the free entrance into international finance sources

Such Principles and Rules have been inserted to the capital markets regulation and adopted by many companies from 2003 to date. However, even though such Rules have been adopted by many companies, and significantly seen in the financial sector, the application of them has not been a compulsory requirement and has remained as a voluntary directive practice.

In order to reinforce wider application of the Rules as a legal requirement, “to force the abidance with the corporate governance rules of the public companies traded in the stock exchange and which are in the group, determined by itself by taking into account of the ratios, number and quality of the investors, index, trading density within a specific time to, in whole or in part, in order to determine and announce the corporate governance rules and help the remedy of the investment market” has been embedded to the authorities of CMB with the Statutory Decree No: 654 announced at the Additional Official Gazette dated 11.10.2011, No: 28081 (“Statutory Decree No: 654”).

In line with this, the Rules have been converted into a communiqué by the CMB by taking into account of domestic and global financial developments with the authority granted to it by this Statutory Decree No: 654.

“The Communiqué Regarding the Designation and Application of Corporate Governance Rules, Serial: IV, No: 54’ (“Communiqué”) has been published announced at the Additional Official Gazette dated 11.10.2011.

Rules Introduced By the Communiqué

The Rules for the public companies who shall take them as bases for the determination of their structure and process in relation to their corporate governance have been inserted into the Communiqué.

According to article 5 of the Communiqué, the public companies traded in Istanbul Stock Exchange (“ISE”) 30 Index excluding the banks therein, shall be obliged to apply the articles 3.2.1, 3.2.4, 3.4.3, 3.4.14, 3.6 and 4.7 under Section I (Shareholders) of the Rules and articles 3.3.1, 3.3.4, 3.3.5 and 3.3.6 under Section IV (Board of Directors). In our opinion, such mandatory articles shall be reflected to the articles of association of relevant companies.

The companies traded in the ISE and which do not fall within the scope of preceding paragraph may determine their structure and process related with their corporate governance in accordance with the Rules and by considering their business and type.

According to article 6 of the Communiqué, the companies traded in the ISE shall disclose in the annual report whether the Rules have been complied or not; the reasons of non compliance on the basis of “comply or explain” principle (if any); the conflict of interest which may arise in case of non comply and whether the company is planning to change its corporate governance principles in accordance with the Rules.

The form and minimum requirements with respect to the disclosure in the annual report shall be determined by the CMB.

According to the enforceability provision of the Communiqué, the Communiqué shall be enforceable on the date of the announcement and shall apply to the actions that started before and continues at the time of announcement.

The Mandatory Provisions of the Rules in Section I (Shareholders)

The companies traded in the ISE 30 Index (excluding banks) are obliged to apply the following principles:

Pursuant of article 3.2.1., the announcement of the general assembly meeting shall be made at least 3 weeks prior to the meeting and shall be made to reach all shareholders and with every possible communication equipment including electronic communication; the procedures of the relevant legislation shall be reserved. In our opinion, announcement may be made via web site and by sending electronic mail to the e-mail accounts of the shareholders. In addition, short message service may be used for the announcement to the shareholders.

According to article 3.2.4., following matters shall also be noted to in the general assembly meeting announcement to be made on the web site of the company besides the ones to be announced and disclosed in accordance with the relevant legislation.

  1. i. Total amount of share capital and voting rights of the shareholders to reflect the ownership structure of the company at the time of disclosure and privileged share group and their shares and vote rights, if any,
  2. ii. Changes in the management and business organization of the company or its subsidiaries or affiliates realized in the past financial period or planned to be realized within the next financial period, the reasons of such changes, annual reports for the last 3 financial period of the parties involved in the organizational changes and annual financial statements and pro forma financial statements.
  3. iii. The reasons of dismissal, changes or appointment of board members if such has been stated in the general assembly meeting minute and the names of the nominees and their resumes shall be noted. In order to apply this, the names and resumes of the nominee; his/her previous duties within last 10 years and reasons of leave; whether they have the independency criteria and other matters that may reflect to the company in case of appointment shall be informed to the company by the shareholders nominating the new members within 1 week from the date of announcement of the general assembly meeting, for the announcement to public.

Pursuant to article 3.4.3., if the general assembly have consented to the transactions between the company and the board member(s) and consented to the member(s) to work in the business competing with the company then such board member(s) shall inform the general assembly of their actions regarding the said transactions between the company and him and competing business.

According to 3.4.14., the remuneration principles of the board members and directors shall be in writing and the shareholders shall be given the opportunity to give their opinion. Remuneration principles to be prepared shall be announced in the web site of the company and shall be submitted to the shareholders by a separate article to be noted in the general assembly meeting minute.

According to article 3.6., the articles of association of the company shall be amended to include the participation of the shareholders in to the following decisions: any spin off or share exchange resulting a change in the capital or management structure of the company, sale/purchase, rental or donation of tangible /intangible assets in the significant amount, granting security such as suretyship and establishment of mortgage. The parties and related persons involved in such transactions cannot participate to the decisions in the general assembly. The board of directors’ decision with respect to such matters shall not be realized without the consent of the general assembly until a provision with respect to the matters described in the preceding paragraph has been inserted to the articles of association.

In accordance with article 4.7., if mutual subsidiary relationship between companies also brings control relationship then the companies with a mutual subsidiary relationship shall refrain to vote in the general assembly of the other and shall disclose such to the public provided however it is mandatory to do so such as to meet the quorum.

The Mandatory Provisions of the Rules in Section IV (Board of Directors)

The companies traded in the ISE 30 Index (excluding banks) are obliged to apply the following principles:

Pursuant to article 3.3.1., at least 1/3 of the members of board of directors shall be independent board members. The fractions shall be completed to the following number.

Pursuant to article 3.3.4., a member who served for 6 years in the board of directors cannot be appointed as the independent board member.

According to article 3.3.5., a member with the following criteria shall be deemed as an ‘independent board member’:

  1. i. No employment, capital or commercial relationship, direct or indirect, shall have been formed between the company, a person related with the company or with the legal entities having a management or capital interest by the shareholders holding 5% (direct or indirect) in the company and the member or any spouse or persons with blood or affinity relationship (to the third degree) for the last 5 years,
  2. ii. Shall not have been appointed to the board for the representation of a share group,
  3. iii. Shall not have been employed in the firms conducting the business and organization of the company, in whole or in part, especially audit firms or consulting firms, and shall not have served as a director in such companies for the last 5 years,
  4. iv. Shall not have been employed in the independent audit firm or shall not have been involved in the auditing service for the last 5 years.
  5. v. Shall not have been employed in the companies who supply significant services or products to the company and shall not have served as a director in such companies for the last 5 years,
  6. vi. Any spouse or persons with blood or affinity relationship (to the third degree) shall not be a director to the company, and shall not be a shareholder of the company holding more than 5% of the company’s share capital or shall not hold the control of the management whatsoever,
  7. vii. Shall not have been paid other than the remuneration and attendance fee; if the member is also a shareholder because of its being a board member, such member shall not hold more than 1 % of the issued share capital and such shares shall not be privileged (this provision is not in harmony with the new Turkish Commercial Code because the board members are no longer obliged to be a shareholder under the new Turkish Commercial Code).

Member(s) who do(es) not meet the above criteria may be temporarily appointed as the independent board member for a term of maximum 1 year provided there is a valid ground of such appointment and with the consent of CMB.

According to article 3.3.6., independent board members shall submit a representation letter to the board of directors regarding his independency at the time of his nomination in accordance with the legislation, articles of association and criteria described above.

The board of directors shall evaluate the independency of the member nominated for the ‘independent board member’ seat in the board and shall report to the general assembly of its evaluation. The general assembly decision with respect to the appointment of ‘independent board member’ to the board shall be announced in the web site of the company alongside with the reasons and the report of the board of directors.

In case the nominee for the ‘independent board member’ in the board nevermore has been appointed against the negative votes of the shareholders representing the 1/20 of the share capital of the company then CMB shall evaluate and decide whether such nominee meets the independency criteria.

Conclusion

The provisions under the Communiqué are fundamental and necessary; and an important step for the companies to abide with the corporate governance rules. However it should be noted that, the mandatory provisions for the companies traded in the ISE 30 Index (excluding banks) may lead to problems in the practice.

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