Representation in Joint Stock Companies

December 2013 Özgür Kocabaşoğlu
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Introduction

The Turkish Commercial Code No. 6102[1] (“TCC”) preserves the rule that the board of directors shall represent and manage a joint stock company. The TCC regulates how the right to represent will be exercised, the registration and announcement of the persons authorized to represent the company and the transfer (and limitations to the transfer) of the representative authority. This newsletter article will assess the representative authority in a joint stock company, with a special emphasis on the transfer of this authority.

In General

Exercise of the Representative Authority

In principle, the board of directors shall represent the joint stock company before third persons (external representation). A joint stock company is a merchant and pursuant to Art. 39/1 TCC, merchants are obliged to realize transactions related to their commercial enterprise by using their trade names, and their signatures must be put beneath their trade names. The signature of a joint stock company shall mean the signature of its authorized representatives. Therefore, the representative authority of a joint stock company shall be exercised through the signatures of the authorized signatories of the company beneath the trade name of the company. This rule is repeated in Art. 372/2 TCC.

In principle, two of the authorized signatories of the company shall represent the company with their joint signatures. Nevertheless, Art. 370 TCC provides for two exceptions to this rule of “joint/double signature”. The first exception is the possibility for the articles of association to foresee a different rule of representation. The second exception is the case where the board of directors consists of one director only.

The board of directors shall appoint the authorized signatories who shall represent and bind the company with their signatures beneath the trade name. The board of directors will also determine whether the signatories shall represent and bind the company with their sole or joint signatures. Art. 373 TCC requires that the board of directors registers and announces the signatories and the representation method of the company.

Limitations to the Representative Authority

The representative authority of the signatories of a joint stock company may not be subject to limitations other than those specified in the TCC. This principle of unlimited representation serves to protect the confidence of third parties in their transactions with the company. Limiting the representative authority without respecting the statutory requirements and exceeding the limitation allowed under the TCC shall not be binding on bona fide third persons engaging in transactions with the company, even if such limitations are registered with the trade registry and announced. These excessive restrictions will bear effect only on persons who are aware of the restriction imposed on the representative authority of a signatory.

The TCC regulates two exceptions to the general rule of unlimited representative authority, which were both present in the abrogated legislation as well. Accordingly, the representation authority of signatories may be limited either by limiting the power to the transactions regarding the headquarters or branch offices of a company; or by requiring joint signatures of multiple signatories. For example, signatories may be grouped as Group A and Group B signatories and joint signatures of one signatory from each group may be required for representing and binding the company.

Different from the abrogated code, the TCC foresees that transactions which do not fall within the scope of activities of the joint stock company will bind the company. Accordingly, unless it is proven that third parties transacting with the company knew or were in a position to know that a given transaction fell outside of the field of activities of the company; such activities will bind the company. Therefore, the ultra vires rule, which results in the nullification of any transaction not included in the field of activities of the company, is abandoned.

Transactions which contravene the articles of association or the general assembly resolutions are subject to similar conditions. Bona fide third persons may hold a company accountable for (and request the performance of) transactions they concluded even if such transactions violate the articles of association or general assembly resolutions.

Transfer of the Representative Authority

In General

The TCC enables the board of directors to delegate both its representative and management powers. Thereby, it is possible for the board of directors to be a non-executive board.

Art. 367 TCC governing the delegation of management requires both a provision in the articles of association enabling such delegation of powers and an internal regulation governing how the powers are delegated. Even though Art. 370/2 TCC regarding the transfer of the representative powers does not explicitly regulate the same requirements, it is argued by scholars that these two provisions should be taken into account together, and accordingly the same requirement applies[2].

However, unlike in the transfer of management, the representative authority cannot be fully transferred to non-director third persons. Pursuant to Art. 370/2 TCC at least one director should continue to hold representative powers. It is argued by scholars that no limitation, such as the requirement of joint signatures, should be imposed on the sole director authorized to represent the company. In fact, for companies where the board consists of one director only, even in the event of a delegation contravening Art. 370/2, it is asserted that the sole director will have representative authority regardless of such delegation[3].

Transfer of the Power to Appoint or Release Representatives

The non-transferable and inalienable powers of the board of directors are significant in determining the possibility to delegate the representative authority. Art. 375/1(d) TCC specified “the appointment and dismissal of managers and persons performing the same function and authorized signatories” as one of the non-transferable and inalienable powers of the board of directors.

When assessing the obligation to register and announce signatories under Art. 373 TCC together with the appointment and dismissal of signatories being a non-transferable and inalienable right, it is possible to reach the following conclusion: the legislator might have aimed for a structure whereby all signatories are appointed and are announced by the same body in order for these signatories to be publicly known.

Through analysis of the legislative justification of Art. 375 TCC, it could be concluded that the non-transferable and inalienable powers cannot be delegated to one or more directors or third persons. The wording of this article comprises the appointment and dismissal of all signatories, managers and persons performing the same function, and is not limited with the senior managers having the representative authority.

In practice, the board of directors regulates the representation powers of the top management through signature circulars. Nevertheless, the impossibility to delegate the power to appoint and dismiss each and every signatory may result in severe problems in practice. First and foremost, requiring a board resolution for the appointment and dismissal of every single signatory (for instance each person authorized to sign on behalf of one branch of a bank) will result in an immense workload for the board of directors. Additionally, especially in multinational companies, the board members are not in a position to convene and render decisions at any given time. Therefore, the obligation to appoint and dismiss each signatory will be a burden on the board of directors. Therefore, it is crucial to designate the scope and limits of the expression in the aforementioned article which reads: “managers and persons performing the same function and authorized signatories”.

The scope of persons with representative authority is disputed among scholars. Pursuant to an opinion, commercial representatives and agents fall within this scope[4]. Certain scholars state that all signatories fall within this scope, but that the provision should be construed in a limited manner excluding signatories within a company (internal representation) and signatories dealing with daily infrastructure related matters of the company such as signing electricity, water and gas subscriptions[5]. Pursuant to another opinion, the article should be read in compliance with its purpose, its legislative justification should be disregarded and accordingly the prohibition of delegation of the power to appoint or dismiss signatories should be comprised solely of top management[6].

Bearing in mind the possible problems which may arise in practice and the need to adopt pragmatic solutions, this provision could be construed accordingly. In fact, Art. 716a/4 of the Swiss Code of Obligations also specifies the delegation of management and representative powers among non-transferable powers of the board of directors. Nevertheless, the Swiss Federal Court states in several decisions that this provision should extend to the senior management only. In Turkish Law, the scholars and the jurisprudence could also declare that Art. 375/1(d) is limited with the senior management. Or, it could be accepted that this provision should only apply regarding signatories with permanent authority to represent and bind the company. Accordingly, it could be agreed that signatories, commercial agents and representatives authorized to execute or realize transactions on behalf of the company should be appointed by the board of directors, but that these persons could temporarily authorize third persons through proxies to realize specific actions. If this approach is adopted, the signatories authorized by the board may issue power of attorneys authorizing third persons for certain transactions.

Conclusion

The board of directors is authorized to represent and bind a joint stock company. The board of directors shall appoint, register and announce persons authorized to represent the company, determine the means of representation and, if it wishes to do so, delegate representative powers. Nevertheless, at any time, at least one member of the board of directors is required to continue to bear representative powers.

The TCC abandoned the ultra vires principle. Accordingly, any transaction, including those which fall out of the scope of the field of activities of the company, executed by the signatories of the company will in principle be binding and exercisable upon the company.

The appointment and dismissal of signatories is among the non-transferable and inalienable duties and powers of the board of directors. Nevertheless, when assessing this requirement, it is important to determine the scope of this non-transferable and inalienable power. It is disputed whether signatories, other than the top management, also fall within the scope of persons the appointment and dismissal of whom cannot be delegated by the board of directors. This requirement, the scope of which shall be determined by scholars and by the jurisprudence, may be construed in a strict manner for practical reasons.

[1] Official Gazette, 14 February 2011, No. 27846.

[2] Prof. Dr. Ünal Tekinalp, The New Joint Stock and Limited Liability Partnership Law and the Principles of One Man Companies (Yeni Anonim ve Limited Ortaklıklar Hukuku ile Tek Kişi Ortaklığının Esasları), Reviewed and Revised 2. Edition, Istanbul 2011, p. 141 N. 12-75.

[3] Kırca/Şehirali Çelik/Manavgat, Joint Stock Company Law (Anonim Şirketler Hukuku), Volume 1, Fundamental Concepts and Principles, Incorporation and the Board of Directors (Temel Kavram ve İlkeler, Kuruluş Yönetim Kurulu), Ankara 2013, p. 628, 629.

[4] Prof. Dr. Hasan Pulaşlı, Commentary on Corporate Law Under the Turkish Commercial Code no. 6102 (6102 Sayılı Türk Ticaret Kanununa Göre Şirketler Hukuku Şerhi), Volume I, Ankara 2001, p. 958, par. 251.

[5] Tekinalp, p. 130, par. 12-45.

[6] Assoc. Prof. Necla Akdağ Güney, Board of Directors of Joint Stock Companies (Anonim Şirket Yönetim Kurulu), Istanbul 2012, p. 91.

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