Legal Requirements for Board of Director Membership of Joint Stock Companies

May 2017 Prof. Dr. H. Ercüment Erdem
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Introduction

Article 363/2 of the Turkish Commercial Code[1] (“TCC”) regulates that if a member of the board of directors of a joint stock company is declared bankrupt, or such person’s legal capacity is restricted, or if a member loses the legal requirements or qualifications set forth under the articles of association necessary for membership, such person’s membership shall automatically terminate without the necessity of any further transaction. As per Article 359/4, reasons terminating a board of director’s membership also constitute a barrier for election. This Newsletter article examines the requirements set forth under special laws, as well as the consequences of not possessing such requirements, from the moment of election to the board of director’s membership.

Election Barriers regulated under the Articles of Association

In joint stock companies, shareholders could benefit from freedom of contract within the limits of the TCC; in this respect, the Articles of Association could provide barriers or terms of competence for the election of boards of directors’ members. These barriers, or terms of competence, may be related to nationality, professional experience, age, or the business of the company. Barriers and terms of competence as foreseen under the Articles of Association are binding.

Election Barriers regulated under the Special Laws

When Articles 363/2 and 359/4 of the TCC are evaluated together, it is clear that non-possession by a member of a board of directors contravenes the necessary legal requirements at the time of election, and constitutes an election barrier. The expression “legal,” as used in the Article, covers both the TCC and other laws and, particularly, special laws[2].

For example, as per Article 23/1 of Banking Law[3] No. 5411, members of the boards of directors of banks are required to possess the qualifications regulated under Article 8/1a, b, c and d. Similarly, Article 4/2 of Insurance Law[4] No. 5684 regulates that the members of the board of directors of insurance and reinsurance companies are required to possess the qualifications necessary to be a founder of an insurance and reinsurance company, except for financial power, and that the majority of the members are graduates of higher education of at least four years, and that the members must be chosen from amongst those who have at least three years of experience in the fields of insurance, economy, business, accountancy, law, finance, mathematics, statistics, or actuary with respect to engineering.

The relevant trade registry officer is responsible to check whether or not the specified requirements are met, and to reject the registration of the relevant resolution in the event of failure[5]. What must be considered here is whether or not the resolution for the appointment of the member of the board of directors made in violation of such requirements, and somehow registered, is valid. It should be accepted that the transaction of appointment of a person not possessing the qualifications required under such special laws would be invalid under the law[6]. In the event that the general assembly, or the board of directors, knowingly or unknowingly, appoints a candidate not possessing such qualifications, the appointment resolution would be null and void, and all concerned persons would be entitled to request the court to render such resolution invalid[7].

Regulatory Provisions under Special Laws

Other issues to be considered are the barriers and limitations set forth under special laws, such as Public Servants Law No. 657[8] (“PSL”), Notaries Law No. 1512[9] (“NL”), and Law on Public Accountancy and Certified Public Accountancy No. 3568[10] (“Law No. 3568”). These laws set forth barriers and limitations for appointment to a board of directors’ membership of joint stock companies as per the TCC, applicable to the persons employed, and who are subject to such laws.

Relevant provisions and exceptions thereto are separately examined, below:

  • Regulation under the PSL: As per Article 28/1 of the PSL, public servants cannot engage in any activity that would make them considered to be a merchant or craftsman, take office in commerce and industry facilities, or be a commercial representative or commercial proxy or partner in companies with unlimited liability, or an unlimited partner in limited partnerships that is divided into shares. In this respect, civil servants may not act as boards of directors’ members in joint stock companies.

An exception to this rule is regulated under the same and second paragraphs of the Article. Duties of public servants on behalf of their institutions in the subsidiaries of the institutions that they work for, as well as memberships in management, auditing and disciplinary boards of a building, development and retail societies, public professional organizations, provident funds established by law, and duties specified under the special laws, are beyond the scope of such ban.

  • Regulation under Law No. 3568: Pursuant to Article 45 of Law No. 3568, public accountants with this title, and certified public accountants with this title and certification authority, cannot work for real persons or legal entities or their workplaces that is based on an employment contract, may not engage in commercial activities and businesses that do not comply with the profession and professional ethics. The Regulation on the Working Methods and Principles of Public Accountants and Certified Public Accountants[11] (“Regulation”) includes a clear provision facilitating the interpretation of this Article, and explicitly states that public accountants and certified public accountants cannot hold positions as a member or chairman of the board of directors of joint stock companies.

An exception to this general rule brought by Article 45/1 of Law No. 3568 is regulated under the third paragraph of the same article. This paragraph was amended in 2010, and was not reflected in the Regulation, which omission created inconsistency with the Regulation[12]. Accordingly, membership and chairmanship of a board of directors, auditing, and expert and liquidation duties of charities and scientific organizations, state-owned enterprises, within the scope of the Decree Law on the State-Owned Enterprises, public economic institutions and their facilities, subsidiaries and affiliates, institutions in which public authorities are affiliated with, directly or indirectly, and shareholders, as well as the institutions managed by the Savings Deposit Insurance Fund, are not considered as non-compliant with the profession, provided that such institutions do not perform activities within the scope of Law No. 3568.

  • Regulation under the NL: Provisions of Article 50 of the NL are even more strict. Accordingly, no activity or duty complies with notarial duties. Notaries are banned from conducting stock exchange transactions, engaging in commercial activities in terms of Article 28/1 of the PSL, being a guarantor, making any type of discounts in their fees, using intermediaries, carrying out advertising activities, making written or verbal agreements between themselves as to notarial fees in any way whatsoever. Through the reference to Article 28/1 of the PSL, it is clear that notaries cannot engage in any activity that would make them considered to be a merchant or craftsman, hold office in commerce and industry facilities, or be a commercial representative or commercial proxy or a partner in companies with unlimited liability, or an unlimited partner in limited partnerships divided into shares. In this respect, they may not act as boards of directors’ members in joint stock companies.

An exception to this rule is the freedom to engage in businesses assigned to them by judicial authorities, chairmanship and membership of charities and scientific organizations, and holding office as arbitrator and testamentary executor.

After consideration of these types of special laws setting forth barriers or limitations regarding board of directors membership of the persons subject to such laws, as generally accepted by legal scholars, in the event of appointment of such persons as a member of board of directors, despite the barriers, it is concluded that such an appointment would be valid[13]. Such an evaluation is often made by legal scholars in terms of the limitations set forth under Article 28 of the PSL. Such limitations under these special laws are considered leges minus quam perfecta - in other words, regulatory provisions[14]. Non-possession by the subject member of the qualifications set forth under the TCC do not constitute a barrier in terms of appointment to the board of directors; it may only qualify as a legal situation that would require a disciplinary action regarding the relevant institution to be initiated against the relevant person[15]. The same explanation should also apply to notaries[16]. There is no legal barrier in making a similar evaluation for limitations within the scope of Law No. 3568. In light of this evaluation, one should admit that the provisions under these laws should not be named as election barriers, and that they only constitute a limitation for the persons employed within the scope of such laws.

Conclusion

If a member of the board of directors of a joint stock company loses the legal requirements necessary for membership, such person’s membership shall automatically terminate without any further transaction. Such situation also constitutes a barrier for election of such person. If the provisions of the special laws seek certain qualifications in the persons to be appointed as a member of a board of directors, the appointment of a person not possessing such qualifications would be null and void. On the other hand, in the event the special laws set forth a barrier for the persons employed, subject to such laws that prohibit being a member of the board of directors of joint stock companies, such situation would not have any impact on the validity of the appointment, but would only cause such person to be subject to a disciplinary action regarding the institution that he is subject to.

[1] The TCC (Official Gazette, 14.02.2011, No. 27846) entered into force on 01.07.2012.

[2] Kırca (Şehirali Çelik/Manavgat), Anonim Şirketler Hukuku, C. 1, Ankara 2013, p. 411.

[3] Several articles of the Banking Law (Official Gazette, 01.11.2005, No. 25983, 1st Duplicate) entered into force on different dates.

[4] Several articles of the Insurance Law (Official Gazette, 14.06.2007, No. 26552) entered into force on different dates.

[5] Çamoğlu (Poroy/Tekinalp), Ortaklıklar Hukuku I, Güncelleştirilmiş 13. Bası, İstanbul 2014, p. 359.

[6] Çamoğlu (Poroy/Tekinalp), p. 359.

[7] Çamoğlu (Poroy/Tekinalp), p. 359.

[8] Several articles of the PSL (Official Gazette, 23.07.1965, No. 12056) entered into force on different dates.

[9] The NL (Official Gazette, 05.02.1972, No. 14090) entered into force three months after its publication.

[10] The Law No. 3568 (Official Gazette, 01.06.1989, No. 20194) entered into force through its publication.

[11] Regulation (Official Gazette, 03.01.1990, No. 20391) entered into force through its publication.

[12] This paragraph was amended through Article 35 of Law numbered 6009, and entered into force on 01.08.2010 (Official Gazette, 01.08.2010, No. 27659)

[13] Karahan/Arslan, Şirketler Hukuku, 1. Bası, Konya 2012, p. 412.

[14] Kırca (Şehirali Çelik/Manavgat), p. 412.

[15] Pulaşlı, Hasan, 6102 sayılı Türk Ticaret Kanununa Göre Şirketler Hukuku Şerhi, C. 1, Ankara 2011, p. 894.

[16] Kırca (Şehirali Çelik/Manavgat), p. 413.

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