Representation in Joint Stock Companies

Exercise of Representative Authority

As a rule, the representation of the joint stock company in external relations belongs to the board of directors. A joint stock company is a merchant, and pursuant to Article 39/1 of the TCC, merchants are obliged to carry out the transactions related to their commercial enterprises under their commercial titles and to affix their signatures under the title. The “signature” of the joint stock company is the signature of its representatives. The power of representation is exercised through the signatures of authorized signatories under the trade name of the joint stock company. This rule is repeated in Article 372/2 of the TCC.

As a rule, the joint signature (double signature) of two of the representatives authorized to sign on behalf of the company is required. However, Article 370 of the TCC provides two exceptions to this rule. The first exception is where the articles of association of the company stipulates a different rule than double signature. The second exception is when the board of directors consists of a single member.

As a rule the board of directors appoints the authorized signatories who will represent the company with their signatures under the company title. Likewise, the board of directors also determines whether the authorized signatories are authorized to represent the company with their single signatures or jointly.

Pursuant to Article 371/7 of the TCC, the board of directors may appoint non-representative members of the board of directors or persons bound to the company by a service contract as commercial agents or other merchant assistants with limited authority, except for the representatives specified pursuant to Article 371/1 of the TCC. The duties and powers of the persons to be appointed in this manner must be clearly defined in the internal directive to be prepared in accordance with Article 367 of the TCC, and must be registered and announced in the trade registry. Commercial agents and other merchant assistants cannot be appointed with the internal directive specified in Article 371/7 of the TCC. It is considered that what is meant here is “commercial agent” and “other merchant assistants”, the general scope of which is regulated under the Turkish Code of Obligations No. 6098 (Art. 551 and 552).^[2] Pursuant to Article 371/7 of the TCC, commercial agents or other merchant assistants with limited authority shall also be registered and announced in the trade registry. The board of directors is jointly and severally liable for any damage caused by these persons to the company and third parties.

Article 373 of the TCC requires the board of directors to register and announce the persons authorized to represent and the form of representation.

Limitations to the Representative Authority

As a rule, the authority of authorized signatories to represent the company cannot be restricted, except for the exceptions specified in the Law. Thus, it is aimed to protect third parties who will make transactions with the company. Restriction of the representation authority in excess of the exceptions specified in the Law, even if this restriction is registered and announced in the trade registry, does not bind the bona fide persons who make transactions with the company. These limitations shall only be effective for persons who are aware of the limitation imposed on the representation authority.

As in the abrogated law, excluding the article 371/1 of the TCC, the TCC introduces two exceptions to the principle that the power of representation cannot be restricted. Accordingly, the representation authority of authorized signatories may be limited only by the business areas of the company's head office or branch office, or by introducing a double signature rule. For example, the authorized signatories may be divided into Group A and Group B signatories, and the joint signature of two authorized signatories from different groups may be required.

Pursuant to Article 125/2 of the TCC, transactions that are outside the purpose and scope of business of the joint stock company shall also bind the company. Accordingly, unless it is proved that the third parties transacting with the company knew or could have known that the transaction in question was outside the company's field of activity, transactions outside the field of activity shall also bind the company. Therefore, the ultra vires principle under Article 137 of the abrogated TCC, which renders the transactions outside the company's field of activity null and void, was abandoned with the publication of the TCC in the Official Gazette on February 14, 2011.

A similar situation exists with respect to transactions contrary to the articles of association or general assembly resolutions. Accordingly, bona fide third parties may apply to the company even if there is a transaction contrary to the articles of association or general assembly resolution.

Transfer of the Representative Authority

The TCC allows the board of directors to delegate both management and representative authority. Therefore, the TCC paves the way for a non-executive board of directors.

Article 367 of the TCC regarding the delegation of management authority requires both a provision in the articles of association permitting such delegation and an internal directive. Although Art. 370/2 of the TCC regarding the delegation of representative authority does not require these conditions, it is argued in the doctrine that these two provisions should be evaluated together.^[3] Unlike the delegation of management, the power of representation cannot be delegated entirely to third party managers who are not board members. Pursuant to Article 370/2 of the TCC, at least one member must have the power of representation. In the doctrine, it is argued that this member should not be subject to any restrictions, such as the requirement to act together with another director. In companies where the board of directors is composed of only one person, it is argued that even in the event of a transfer in violation of Art. 370/2, the board of directors has the authority to represent the company due to the nature of the business.^[4]

Transfer of the Power to Appoint or Release Representatives

The non-transferable and inalienable duties and powers of the board of directors are also important for the delegation of representation authority. Pursuant to Article 375/1(d) of the TCC, “the appointment and release from office of the managers and persons with the same function and signatory authority” are among the non-transferable and inalienable powers of the board of directors.

When the obligation to register and announce the authorized signatories introduced by Art. 373 of the TCC, and the fact that the appointment and release of authorized signatories is considered as an inalienable and non-transferable power are evaluated together, the following conclusion may be drawn: The legislator may have aimed to appoint all persons authorized to represent the company with their signatures from a single source and to ensure publicity by announcing these persons.

An examination of the justification of Article 375 of the TCC leads to the conclusion that these non-transferable and inalienable powers may not be delegated even to the managing directors or third parties through delegation of authority. Literally, this provision of the TCC covers not only the appointment and removal of the persons authorized for high-level representation, but also the appointment and removal of the manager and all persons with the same function, and all authorized signatories.

Currently, in practice, the board of directors regulates the senior signatories with signature circulars. However, the non-transferability of the authority to appoint and remove all authorized signatories causes significant problems in practice. First of all, the appointment and removal of all persons authorized to sign on behalf of the company (for example, the authorized signatories at each branch in banks) individually, and seeking a resolution of the board of directors for their removal, causes a significant increase in workload. In one of its decisions, the Court of Cassation alleviated this burden to some extent by deciding that commercial representatives may be appointed by the articles of association of the company in all commercial companies.^[5] In addition, considering that the members of the board of directors, especially in multinational companies, cannot take decisions at any time, seeking a board resolution for each authorized signatory creates a significant difficulty. Therefore, it is very important to determine the scope of the expression “managers and persons with the same function and authorized signatories”.

The scope of authorized signatories is controversial in the doctrine. According to one opinion, commercial agents and commercial representatives are within this scope.^[6] One opinion argues that all authorized signatories fall within this scope; however, this expression should be interpreted narrowly and the signatures remaining in the internal relationship and the signatories authorized to sign documents regarding electricity, water and natural gas subscriptions should not be considered within this scope.^[7] According to another opinion, the interpretation should be made in accordance with the purpose and it should be accepted that this article covers only senior management, regardless of the justification.^[8]

There is no clear solution to this debate in the doctrine in the case law. To exemplify this situation in the case of banks, the Istanbul Regional Court of Appeals ruled in one of its decisions^[9] that bank branch managers are of a different nature from the concept of “manager”, for the appointment of which a resolution of the board of directors is required under Article 375 of the TCC, in accordance with the banking legislation, and that a resolution of the board of directors is not required for their appointment. However, since the Court of Cassation has adopted a very inclusive application of Article 375 of the TCC, it requires the appointment of branch managers of banks by a resolution of the Board of Directors without evaluating their duties and definitions.^[10] In the doctrine, there are authors who argue that branch managers and other managers defined in the Banking Law should be evaluated differently from the concept of “manager” under Article 375 of the TCC^[11]. Accordingly, branch managers are the managers who are authorized to manage and represent the branch and do not have any authority covering the entire company, whereas Article 375 of the TCC refers to the managers who are authorized to manage the entire company. However, the current case law of the Court of Cassation does not accept this view.

Considering the difficulties that may arise in practice and the need to act pragmatically, this provision may not be interpreted strictly. As a matter of fact, Article 716a/4 of the Swiss Code of Obligations includes the delegation of management and representation authority among the non-transferable powers of the board of directors. In some of its decisions, the Swiss Federal Court states that this provision covers only senior executives. In Turkish law, doctrine and jurisprudence may decide that this provision should be applied only to senior executives. Similarly, it may also be argued that this provision should be applied only to persons who are permanently authorized to sign. Thus, it may be argued that signatories, commercial agents and proxies authorized to perform a business shall be appointed by the board of directors itself; however, these persons may temporarily authorize third parties. If this interpretation is adopted, the persons authorized by the board of directors may only grant power of attorney to third parties for certain works.

Conclusion

The authority to represent joint stock companies belongs to the board of directors. The board of directors registers and announces the persons authorized to represent, determines the form of representation and may transfer the representative authority if it wishes. However, at least one member of the board of directors must be authorized to represent the company.

The TCC has abandoned the principle of ultra vires. Accordingly, all transactions made by authorized signatories are binding on the company, even if they are not within the scope of the company's field of activity.

The appointment and removal of authorized signatories are among the inalienable and non-transferable powers of the board of directors. However, when evaluating this obligation, it is very important whether all authorized signatories are within the scope. Except for the senior signatories, it is controversial whether it is obligatory for the board of directors to appoint all authorized signatories for certain works. This obligation, which will be shaped by doctrine and case law, may be interpreted narrowly for practical reasons.