Privilege to be represented on the Board of Directors

May 2019 Özgür Kocabaşoğlu
% 0

According to Article 360 of Turkish Commercial Code No. 6102 (“TCC”), in joint-stock companies, provided that it is stipulated in the articles of association, a right to be represented on the Board of Directors may be extended to certain share groups, as well as to shareholders forming a certain group with their characteristics and qualifications, or to minority. There is no difference between the members of the Board of Directors to be appointed in accordance with Article 360 of the TCC and the other elected members, in terms of rights and obligations. Members proposed by certain share groups cannot act on the orders and instructions of these groups[1]. However, it is possible for the proposed member to protect the interests of the related share group, only if he/she gives priority to the interests of the company[2].

Certain Share Groups

In practice, privilege is granted to share groups by dividing the shares into (A) and (B) groups, and inserting a provision in the articles of association; for example, a joint-stock company with a three-person board of directors, such as "Two members of the Board of Directors shall be selected among the persons to be recommended by group (A)." In our legal system, it is not compulsory that a share group having privilege over rights, such as dividends, liquidation shares, preemption rights or voting rights (Articles 478 and 479 of the TCC) enjoys the rights as regulated in Article 360[3]. The legislator accepts the concept of "group privilege" in the second paragraph of Article 360 of the TCC by recognizing the privilege to “a certain share group”[4]. Since the privilege is granted to a group shares, not to individual shares, in the case of a transfer of shares, the new owner of the shares is included in the related group in any event, and benefits from the privilege.

Shareholders Forming a Certain Group with their Characteristics and Qualifications

Provided that it is regulated in the articles of association, the privilege of being represented on the board of directors can also be granted to the shareholders who form a group with their characteristics and qualifications. In this case, due to the fact that privilege is not granted to a share or a group to which the shares are included; in the event of a transfer, the transferee cannot benefit from the privilege in the absence of the characteristics and qualifications as regulated in the articles of association. Therefore, the interpretation of the concept of "shareholders forming a certain group" is essential, and determination of it in the articles of association is an issue that needs special attention. It is recommended that the required characteristics and qualifications of the persons to form the group to be regulated in the articles of association should be very clearly set out in a manner so as to leave no doubt[5]. Shareholders who work in the company, who are amongst the founders of the company, and who are members of a family, or who come from the same origin, or who supply raw materials in relation to the activities of the company, who belong to a certain profession, members of a sub-industry, as well as dealers, are considered as shareholders forming a certain group[6].

Minority

Since it is generally accepted in the doctrine that the concept of minority in Article 360 of the TCC is not used in a narrow or technical way (shareholders that constitute 10% of the capital or 5% of the capital in publicly traded companies), the doctrine argues that the shareholder(s) outside of the majority having more than 50% of the votes can be considered as a minority[7]. Clear definition of minority in the articles of association is important. It is also stated in the Code"s preamble that it is not enough to mention the percentages to determine minority status; instead, the numbers of share certificates are a better criterion in terms of distinction. However, it is also stated in the doctrine that as this method already forms a certain share group, the aim of the legislator is not to create a third group, but to state that the right to be represented on the board of directors can be granted to “minorities” in a broad sense[8].

Selection of the Members of the Board of Directors from amongst Specific Shareholders and the Right to Recommend Candidates to the Board of Directors

Article 360 of the TCC states that “… as election of members of the board of directors from shareholders forming a certain group, certain share groups and minority may be stipulated in the articles of association, the right to recommend a candidate for membership to the board of directors may be provided, likewise”.

As is clear from this provision, it is possible to grant the right to be represented on the board of directors through two methods. As election of members of boards of directors from shareholders forming a certain group, certain share groups, and minority may be stipulated in articles of association, the right to recommend a candidate for membership to the board of directors may be provided, likewise. However, as these persons cannot be given the authorization to directly appoint members of the board of directors, it is also possible that the general assembly does not elect the candidate recommended by holders of privilege for justified reasons (for example, the candidate"s lack of competence and personal qualifications, close relationship with competitors, the person"s legal capacity, the financial status, the restraints of election in Article 363/2 of the TCC, or non-compliance with the qualifications set out in the articles of association)[9] In accordance with the Turkish Commercial Code, it is possible to stipulate the right to be represented on the board of directors by electing some of the members of the board from certain groups of shareholders, or granting the right to recommend a binding candidate as specified in the Code"s preamble.

Since the right to recommend candidates for membership of a board of directors is granted to all shares within a group, not to individual shares within a certain group, the shareholders to which the right is granted must convene a meeting. However, there is no regulation regarding this meeting or quorum in the TCC. If the articles of association do not contain any explicit regulations on this matter, according to an opinion in the doctrine, the provisions concerning the special meeting of privileged shareholders (Article 454 of the TCC)[10] should apply; whereas, another opinion defends that the provisions concerning the general assembly meeting is applicable[11].

Consequences of Violating Article 360 of the TCC

Although Article 360 of the TCC is mandatory, violating mandatory provisions causes annullability, nullity, or nonexistence, depending on the nature of the violation. Violations referred to in Article 447 of the TCC and other similar reasons result in nullification[12]. If the reasons listed in this article or similar reasons do not exist, the decision of the general assembly is deemed to be an annullable decision, even if it is contrary to a mandatory provision.

The 11th Civil Chamber of the Court of Cassation decided in the files regarding amendments to articles of association[13] that since such rights are not granted to shares, but to shareholders, they cannot be accepted as privilege; but they are vested rights granted through the articles of association that may not be changed without the consent of the shareholders. In its decision, the 11th Civil Chamber states that “Since the vested right granted to the plaintiff through the articles of association cannot be changed without his consent, the provision of the articles of association in this respect cannot be removed by the decision of the ordinary general assembly without the consent of the plaintiff. (Article 452 of TCC numbered 6762; Article 385/1 of the TCC). Considering that Article 5 of the Law on the Execution and Implementation of the Turkish Commercial Code is presumed to protect vested rights, it is inferred that reversing the decision of the general assembly of the said change of the articles of association is necessary.

Conclusion

According to Article 360 of the TCC, provided that it is stipulated in the articles of association, a right to be represented in the Board of Directors may be provided to certain share groups, shareholders forming a certain group through characteristics and qualifications, and minorities. During the period that TCC number 6762 was in force, the privilege regarding the right to be represented could only be granted to a share, but Article 360 of the TCC regulates that this right may be granted to the shareholders forming a certain group with their characteristics and qualifications, and minorities, in addition to certain share groups. The concept of shareholders forming a certain group should be broadly interpreted, and each criterion that enables making a distinction between the shareholders should be considered sufficient to form a group. The right to be represented on the board of directors granted to a certain person through the articles of association, and the rights that are granted through intention of privilege, but do not have the characteristics of privilege, may be eliminated at any time by amendment of the articles of association. The right to be represented on the board of directors, which is granted through the articles of association in accordance with the Law, is a privilege. However, the legal status of the members of the board of directors who are appointed based on the right of privilege, and the members of the board of directors elected in the normal manner, are equal.

As election of the members of the board of directors from shareholders forming a certain group, certain share groups, and minorities, may be stipulated in the articles of association, and rights to recommend candidates for certain numbers of membership of the board of directors may be provided to certain groups, likewise. In order to exercise the right granted in the form of nominating a candidate, if the shareholders to whom the right is granted are more than one, they should hold a meeting. The candidate recommended at this meeting shall be selected by the General Assembly unless just cause to the contrary is given. Although Article 360 of the TCC is mandatory, not all violations of this Article result in nullity. An assessment should be made according to the characteristics of the solid case, the stipulated provision of the articles of association, and the decision of the general assembly.

[1] Rauf Karasu, https://dergipark.org.tr/download/article-file/270563.

[2] Kırca, Şehirali Çelik, Manavgat, Anonim Şirketler Hukuku V. I, 2013 p. 438.

[3] Kırca p. 427, fn. 104.

[4] Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku I, 2014, p. 384.

[5] Poroy, Tekinalp, Çamoğlu, p. 385.

[6] Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, 2013, p. 399.

[7] Pulaşlı, p. 400, Kırca, Şehirali Çelik, Manavgat p. 430.

[8] Kırca, p. 431.

[9] Ercüment Erdem, Türk Ticaret Kanunu ile İlgili Makaleler (2009-2016), 2017, p. 381

[10] Pulaşlı, p. 402.

[11] Kırca, p. 434.

[12] MADDE 447– (1) Genel kurulun, özellikle; a) Pay sahibinin, genel kurula katılma, asgari oy, dava ve kanundan kaynaklanan vazgeçilemez nitelikteki haklarını sınırlandıran veya ortadan kaldıran, b) Pay sahibinin bilgi alma, inceleme ve denetleme haklarını, kanunen izin verilen ölçü dışında sınırlandıran, c) Anonim şirketin temel yapısını bozan veya sermayenin korunması hükümlerine aykırı olan kararları batıldır.

[13] No. 2013/16479 E. 2014/1014 K., 17.1.2014 (Kazancı) and 2015/893 E. 2015/8774 K., 30.6.2015 (Kazancı).

All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.

Other Contents

Newsletter Articles
Parties to a Share Transfer Agreement and Privity of Contract

As a rule, rights and obligations arising from an agreement have legal consequences only between the creditor and the debtor which are parties to the agreement. This principle is referred to as "privity of contract." In general, contracts for the benefit of third parties, where the fulfillment of an...

Commercial Law 31.07.2022
Newsletter Articles
What Changes Does the Amended E-commerce Law Bring?

The rules of e-commerce, which grow and develop with the digitalizing world, are changing. E-commerce has become the driving force of the digital economy. However, considering the growth rate of e-commerce and the transformation it has undergone in a short time, it is obvious that some...

Commercial Law 31.07.2022
Newsletter Articles
Lawsuit for Dissolution of Companies for Just Cause

The dissolution of a company is a specific type of dissolution, which results in the cancellation of the legal personality which was gained by registration at incorporation. The specific proceeding which leads to the dissolution, and thus, the termination of a company upon the constitutive decision...

Commercial Law 30.06.2022
Newsletter Articles
Parting Ways in Family Businesses

Companies in which shares or authority to manage is held by members of a family are considered to be “family businesses”. Family members can hold shares that control the company, as well as retain management authority. Having a family business means opportunity, security and income for...

Commercial Law 30.06.2022
Newsletter Articles
Carriage of Goods by Road under the Turkish Commercial Code

Turkey ratified the Convention on the Contract for International Carriage of Goods by Road (“CMR”) in accordance with Act No. 3939 dated 7 December 1993, and the CMR entered into force in Turkey on 31 October 1995. In accordance with Article 1 / 1 of the CMR, the carriage of goods by road...

Commercial Law August 2017
Newsletter Articles
Ordinary Partnerships

Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”). An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal...

Commercial Law April 2014
Newsletter Articles
Nationality Of Legal Entities
Commercial Law October 2012
Newsletter Articles
Board Members’ Financial Rights in the Context of Disguised Profit Transfers

The concept of disguised profit transfer in joint stock companies, in its broadest meaning, covers the transfer of company assets to related parties and may occur in different ways. This concept is regulated in detail under capital markets legislation...

Commercial Law February 2022
Newsletter Articles
Newsletter Articles
Newsletter Articles
General Assembly Summons Lawsuits
Commercial Law August 2021
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Actual Carrier in Carriage of Goods by Sea
Commercial Law February 2021
Newsletter Articles
Newsletter Articles
Newsletter Articles
Freight Forwarder Contract under Turkish Law
Commercial Law September 2020
Newsletter Articles
Veto Rights in Joint Stock Companies
Commercial Law August 2020
Newsletter Articles
Newsletter Articles
Ship Hypothéque under Turkish Law
Commercial Law May 2020
Newsletter Articles
Newsletter Articles
Newsletter Articles
Legal Liability of Limited Company Managers
Commercial Law January 2020
Newsletter Articles
Employer’s Remedies under FIDIC Silver Book
Commercial Law October 2019
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Transfer of Seized Shares
Commercial Law July 2019
Newsletter Articles
Newsletter Articles
Corporatization of Football Clubs
Commercial Law April 2019
Newsletter Articles
Newsletter Articles
2016 York Antwerp Rules
Commercial Law March 2019
Newsletter Articles
Newsletter Articles
Amendments on Capital Loss and Insolvency
Commercial Law September 2018
Newsletter Articles
Foreign Currency Payment Ban
Commercial Law September 2018
Newsletter Articles
Newsletter Articles
Installment Sales Agreements
Commercial Law July 2018
Newsletter Articles
Newsletter Articles
Newsletter Articles
Arrest of Ships under Turkish Law
Commercial Law May 2018
Newsletter Articles
Share Pledges in Joint Stock Companies
Commercial Law May 2018
Newsletter Articles
Newsletter Articles
Updated FIDIC Contracts
Commercial Law April 2018
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Features of Joint Venture Contract
Commercial Law October 2017
Newsletter Articles
Newsletter Articles
Stock Option Plans in Turkey
Commercial Law June 2017
Newsletter Articles
Voting Agreements under Turkish Law
Commercial Law May 2017
Newsletter Articles
Newsletter Articles
Pre-emptive Right in Joint Stock Companies
Commercial Law April 2017
Newsletter Articles
Holding Company Structure under Turkish Law
Commercial Law January 2017
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Loss Of Capital in Joint Stock Companies
Commercial Law September 2015
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Non-Compete Obligation Of The Commercial Agent
Commercial Law December 2014
Newsletter Articles
Right To Request Special Audit
Commercial Law October 2014
Newsletter Articles
Special Committee Of Preference Shareholders
Commercial Law October 2014
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Conditional Capital Increase
Commercial Law March 2014
Newsletter Articles
Newsletter Articles
General Communiqué On Electronic Books
Commercial Law December 2013
Newsletter Articles
Domination Agreements
Commercial Law January 2014
Newsletter Articles
Newsletter Articles
Representation in Joint Stock Companies
Commercial Law December 2013
Newsletter Articles
Squeeze-Out in Group Companies
Commercial Law November 2013
Newsletter Articles
Shareholder Agreements
Commercial Law November 2013
Newsletter Articles
The Regulation On Private Health Insurance
Commercial Law October 2013
Newsletter Articles
Newsletter Articles
Newsletter Articles
Freedom of Settlement of Foreign Companies
Commercial Law September 2013
Newsletter Articles
Branches And Liaison Offices
Commercial Law August 2013
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Conversion of the Commercial Enterprise
Commercial Law April 2013
Newsletter Articles
Newsletter Articles
Trade Registry Regulation
Commercial Law January 2013
Newsletter Articles
Newsletter Articles
Financial Leasing Agreements
Commercial Law December 2012
Newsletter Articles
Newsletter Articles
Newsletter Articles
Advance Dividend
Commercial Law September 2012
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles
Newsletter Articles

For creative legal solutions, please contact us.