Distribution of Dividends in Public Companies
The right to dividends under Turkish Commercial Code numbered 6102 ("TCC") is the primary financial right in joint stock companies, and it motivates future or current shareholders to invest capital in the company by rewarding them with dividends. Furthermore, Capital Market Law numbered 6362 (“CML”) regulates public companies in order to oversee and supervise capital markets to ensure the functioning and development of capital markets in a secure and transparent environment, and to protect the rights and interests of investors.
This newsletter article reviews the provisions on dividends under the TCC briefly, and examines the general principles of distribution of dividends in public companies under the CML and secondary legislation. The provisions on advance dividends will not be addressed in this article.
General Principles on Distribution of Dividends under the TCC
Pursuant to Article 408 of the TCC, the general assembly is entitled to dispose the annual profit, to determine dividends and gain margins, and to resolve on the usage of the reserve funds. The dividends may only be distributed from the annual net profit and voluntary reserves. Hence, the dividends cannot be determined unless the statutory reserves, as well as the voluntary reserves under the articles of association have been allotted. Five percent of the annual profit shall be allotted as a statutory reserve until it reaches twenty percent of the paid in capital (primary reserve). It is also possible to establish a higher percentage under the articles of association. After exceeding such percentage, the amounts indicated under Article 519/2 of the TCC shall be added to the statutory reserve (secondary reserve). The right to dividends becomes due the moment that the general assembly resolves to distribute.[1]
As a general principle, the dividends shall be calculated in proportion to the payments made by the shareholders to the company under the capital. However, it is possible to grant privilege regarding dividends to specific shares as set forth under Article 478 of the TCC.
Although there are discussions as to whether it is mandatory to pay dividends in non-public companies, the prevailing opinion that defends this being mandatory relies on Article 519 of the TCC, which states: “After the dividends at the rate of five percent have been distributed to the shareholders (…)”.[2] As examined above, since joint stock companies preserve their continuity by operating the capital invested by shareholders and distributing dividends to them in return, it is reasonable to assert that distributing dividends in joint stock companies is mandatory. Furthermore, if the shareholders file a lawsuit for the rightful termination of the company due to specific reasons under Article 531 of the TCC, the judge may decide to distribute dividends to “offer a reasonable solution.”
Distribution of Dividends under Capital Markets Legislation
Capital Market Law
Distribution of dividends in public companies is regulated under Article 19 of the CML. Accordingly; companies shall distribute dividends within the framework of their dividend distribution policies, which shall be determined by the general assembly. The reasoning of Article 19 states that this provision aims to offer flexibility to public companies by being able to determine their own policies without having to indicate the primary reserve rate.[3] However, the Communiqué on Dividends (which will be examined, below) distinguishes between publicly traded companies and non-publicly traded companies. Therefore, it shall be noted that the explanations in this section apply to publicly traded companies, and that there is a special provision for non-publicly traded companies under the Communiqué on Dividends.
The Capital Markets Board (“CMB”) may identify different principles of companies with similar characteristics with regard to dividend distribution policies of companies. The reasoning of the CML states that “the CMB has been authorized to identify different principles for similar companies in order to prevent the misusage of such flexibility.” In this regard, it is intended for the CMB to give instructions to companies regarding the distribution of dividends.[4]
Pursuant to Article 19/2 of the CML, unless the legal reserves and the dividends determined for shareholders in the articles of association are allocated, no decision shall be made for the allocation of other reserves, transferring profits to the following year, or distributing a share payout of profit to the dividend shareholders, members of the board of directors and the employees of the corporation, and so long as the determined dividend is not paid, no share payout of profit may be distributed to these persons. There is no specific provision regarding the voluntary reserves under the CML, but only references to relevant legislation and the articles of association of such company are made.
Furthermore, it shall be noted that pursuant to Article 136/5 of the CML, the distribution of the dividends and the usage of the equity capital of revaluation funds by banks shares of which have been sold through public offer shall also be subject to its special legislation. Considering the role of banks in respect of the stability and consistency in the financial markets, special provisions under the banking legislation shall be applied.
Since there is no specific meeting or decision quorum regarding the distribution of dividends under the CML, the regular meeting and decision quorum under Article 418 of the TCC shall be applied pursuant to the reference under Article 29/3 of the CML.
Communiqué on Dividends
The Communiqué on Dividends numbered II-19.1 ("Communiqué") has been prepared and issued in reliance upon Articles 19 of the CML and published in the Official Gazette dated 23.01.2014 and numbered 28891. The purpose of the Communiqué is to set down the procedures and principles to be followed by corporations in distribution of dividends and in the determination of dividend distribution policies. Profit distribution proposal of the board of directors or decision of the board of directors regarding distribution of dividend advances of the publicly traded companies are disclosed to public, together with a profit distribution statement or a dividend advance distribution statement the format and contents of which are determined by the CMB, within the frame of regulations of the CMB pertaining to public disclosure of material events.
Article 4 of the Communiqué establishes the minimum content of the dividend distribution policies to be determined by public companies. In this regard, it shall be determined whether the company will or will not distribute dividends and the terms and time of these payments. If public companies intend to amend their policies, they shall disclose the decision of the board of directors regarding such revision, and the reasons of revision to the public. There are discussions about the legal nature of dividend distribution policies. According to one view, such policy is a declaration of intention that grants a right to claim to the shareholders. Another view qualifies this declaration as a legal undertaking[5], yet there are other views that assert that this is only an envisioning of the future[6].
For payment of dividends to privileged shareholders, beneficial interest certificates, members of board of directors, employees and other non-shareholders, this should be allowed by the terms of the articles of association of the corporation.
Non-publicly held companies are regulated under Article 7 of the Communiqué. Therefore, the dividend distribution of publicly held companies and non-publicly held companies are subject to different regulations. The rate of distribution of dividends for non-publicly traded corporations cannot be less than twenty percent of the net distributable profit of the period, plus donations as determined pursuant to provisions of the Communiqué. Non-publicly traded corporations are required to distribute their profit shares fully and in cash.
In the event that the calculated amount of dividends is lower than five percent of the share capital shown in the last yearly financial statements to be presented to the general assembly, or the amount of the net distributable profit of the period shown in the said financial statements is below TRY 100,000, the non-publicly traded corporations may not distribute dividends for the relevant accounting period, and this shall be disclosed to the public.
In conclusion, non-publicly traded companies shall distribute at least twenty percent of the net distributable profit of the period unless there is an exceptional case as explained, above.
Dividend Guide
Pursuant to Article 13 of the Communiqué, the CMB prepares a guide regarding sources that may be used for the distribution of dividends, and distribution of dividend and dividend advances, by companies, and has discloses the guide to the public and updates it, when and if necessary to do so.
The most recent Dividend Guide published by the CMB contains the general principles on dividend distribution, as well as the format and content of the above-mentioned dividend distribution statement.
Such guide offers detailed explanations regarding the obligations under the legislation, and assists with its application by example forms.
Conclusion
The distribution of dividends in public companies is regulated under Turkish Commercial Code numbered 6102, Capital Market Law numbered 6362 and the Communiqué on Dividends numbered II-19.1. There are different regulations for publicly traded companies and non-publicly traded companies. Unlike non-public companies, public companies are allowed to determine their own dividend policies in a flexible manner. Unless there is no specific rate for primary reserves under the articles of association of a publicly traded company, it is not mandatory to distribute dividends. However, non-publicly traded companies shall distribute dividends under the conditions provided for in Article 7 of the Communiqué.
- Poroy/Tekinalp/Çamoğlu: Ortaklıklar Hukuku I, 2014, p. 630.
- Poroy/Tekinalp/Çamoğlu, p. 623.
- The reasoning of Article 19 of CML, https://www.tbmm.gov.tr/sirasayi/donem24/yil01/ss337.pdf (Access date: 09.12.2019).
- Karacan, Ali İhsan; Erişir Karacan, Esra: Halka Açık Şirketlerde Kâr Payı Dağıtımı, 2016, p.198.
- Karacan/ Erişir Karacan, p. 220.
- Çonkar, Dr. M. Halil: Halka Açık Anonim Ortaklıklarda Kâr Payı Hakkına İlişkin Bazı Meseleler, 2017, p. 672.
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