Limited Liability in Turkish Law Muzaffer Eroglu CCLS, Queen Mary College m'erogluqmul'ac'uk Corpora

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Limited Liability in Turkish LawMuzaffer
Eroglu CCLS, Queen Mary Collegem.eroglu_at_qmul.ac.
uk Corporate Accountability, Limited
Liability, and the Future of Globalisation
Conference SOAS, 20-21 July 2007
W1-B
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Structure

• Turkey and Turkish Law
• General principles and company types
• Protection of creditors
• - Case law
• - Statutory law
• Future Draft Bill, 2005
• Conclusion

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Turkey

• 18th largest economy in the world
• Emerging market economy
• Upper-middle income economy
• High growth rate (7 annual)
• FDI, 20 in 2006
• Turkey and the EU

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Turkish Company Law

• Principles of modern company law
• Westernisation since 19th century (1850)
• Origins from Continental Europe
• Commercial Law (1957) from Switzerland
• Subsequent changes are Turkish

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General Principles

• Six Company Types
• Association of Persons ( General and Limited
  partnerships)
• - personnel elements
• - individual (joint and several) liability
• Associations of Capital (Private Limited and
  Public Limited)
• - Definite amount of capital
• - Limited Liability of shareholders
• - Preferred by foreign enterprises
• - Accountability problems (Corporate
  groups)

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Protection of Creditors

• High Concentration on Corporate Accountability
• Pressure to act
• Protection by Law
• - by Courts
• - by Statutes

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Case Law

• No specific principles
• General principles of Turkish Civil Code
• (Good Faith) art.2 every person is bound to
  exercise his rights and fulfil his obligations
  according to the principles of good faith.the
  law does not sanction the evident abuse of
  persons rights
• No wide Interpretation
• No Piercing the Veil

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Statutory Lifting

• More common and Clear
• In order to solve particular problems
• Examples
• - The Act on the Protection of Competition
• - Turkish Banking Code
• - The Law regarding with the Procedure of
  Collection of the Money Owed to the State

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Competition Act

• Article 6 The abuse, by one or more
  undertakings, of their dominant position in a
  market is illegal and prohibited.
• Article 3 definition of Association of
  Undertakings Any kind of associations with or
  without a legal personality
• Grounds for article 3 a subsidiary will not be
  evaluated independently but together with the
  company or companies it is connected to
• Competition Board Even though, Dogan Yayin
  Holding AS, Hurriyet AS and Hur AS are separate
  legal personalities, these enterprises are under
  the same controlling authority, and therefore
  they are arms of single economic unit of Dogan
  Sirketler Grubu Holding AS. For this reason, the
  claim of Dogan Yayin Holding AS that it has no
  commercial activity in this market is not valid
• Similarities with the ECJ decisions ( Centrafarm,
  Viho)

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Turkish Banking Code

• Art. 71 Revocation of the licence
• Art. 110 Personal Liability of Managers,
  Auditors and Dominant Partners ( if they caused
  the revocation of licence)
• Art. 134 (a) affiliates whose management and
  control are held, (b) legal entity dominant
  partners, (c) companies whose real person and
  legal entity partners are dominant partners, (d)
  partners of companies acting on behalf of the
  above-listed persons and entities or acquiring
  funds or rights on their accountif deemed
  necessary and useful for collection of Funds
  receivables, and irrespective of their being
  indebted to the Fund or not, the Fund shall be
  authorized (i) to take over their partnership
  rights, except for dividends, associated to all
  and/or some of their shares, and their management
  and control.

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Collection of Money Owed to the State

• Article 35 the shareholders of private limited
  company are liable in accordance in proportion to
  their capital shares for the debt owed to the
  state
• No condition
• Affect on Market and Investment
• - 50.377 new LTD in 1998
• - 42, 751 in 2006 and
• - more than 50.000 in 2007

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Draft Commercial Law Reform Bill, 2005

• WHY?
• Developments in Comparative Jurisdictions
• Globalisation the establishment of the EU and
  the activities of international and regional
  economic unions such as European Economic Area
  and NAFTA have started to create their own laws
  and created international legal regimes. From the
  middle of 60s, free market and economic
  liberalisation have expanded to all over the
  world. And these developments have introduced new
  organisations, theories and legal orders. For
  these reason, the Turkish commercial law is being
  modernised
• EU Candidate country (1999) Negotiation started
  (2005)
• Obligation to adopt the EU regulations

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What is new? (Limited Liability)

• Not Much
• Single Man Companies
• Section for Corporate Groups
• -Comparative examination
• -Mostly from German Stock Corporation Act
• -Forum Europeaum, Rozenblum , Swiss Case Law
  

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Corporate Groups

• Control ( not Domination)
• If a control exercised by one company over
  another
• Article 195(1) there is a control if one company
  directly or indirectly has (A) 1- majority voting
  rights of another company 2- a right to appoint
  directors who has majority of votes in another
  company 3- a rights to use majority voting rights
  in another company
• 195(2), there is a theoretical (supposed) control
  if one company holds majority of shares or shares
  that might have the effect of a majority over
  another company

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Duties of Holding Companies

• Registration duties
• Disclosure Duties
• Liability art. 202 (a) unless it is
  compensated in operating year or it is clearly
  stated how it will be compensated before the end
  of operating year, the holding company cannot use
  its control in a way to put the subsidiary
  company in a disadvantageous situation (b) if the
  compensation is not performed, every shareholder
  can demand from the holding company and its
  directors who have voted in favour of the
  transaction, reimbursement to the subsidiary
  company of the amount it lost. (c) Creditors of
  the subsidiary company may as well demand
  reimbursement of the loss to the company.
• Art 209 creating a group image (Wibru v
  Swissair)

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How Modern is the Draft Bill?

• Combination of the Developments
• Two Questions?
• - Creditor protection
• - Regulation of modern Corporate
• Groups and Multinational Enterprises

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Creditor Protection

• No abolishment of limited liability
• More disclosure requirements
• Audit (International Standards)
• Minimum capital
• And some small changes
• - deferring credits provided by shareholders

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Conception of Modern Enterprises

• Simple Structure v. Modern Complicated Structure
  
• Multinational Enterprises
• 10s of 100s of subsidiaries
• Many sub-groups
• Cross-ownership and managerial relationship among
  the units
• Organising at Local, regional and global levels
• Cross-Border Control

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Simple Structure
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Little Complicated
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Complicated Structure
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Draft Bill and Modern Groups

• Covers
• - Narrow perception
• - Little complicated corporate groups
• - Domestic corporate groups
• Does not Cover
• - Complicated groups
• - MNEs

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Future ( Harmonisation with Europe)

• Emerging Market (Regulatory Competition)
• From Westernisation to Harmonisation
• The EU As a negotiating country, Turkey not
  only has to harmonise its existing laws with EU
  but also has to adopt future directives, follow
  the Action Plan of EU, as well as consider the
  recommendation produced by Commissions expert
  committees. Thus, the new commercial law must be
  in harmony to other European commercial laws and
  it has to be dynamic and flexible, and thus ready
  to be changed frequently
• What is the FUTURE in the EU?

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Thank YouMuzaffer Eroglum.eroglu_at_qmul.ac.uk
muzaffereroglu_at_gmail.com