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Corporate Governance: Control or Flexibility?

Corporate Governance: Control or Flexibility?

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It is an outdated understanding to think only of public companies when talking about corporate governance principles. Turkey has always been a center of attraction for foreign investors – the last quarter century in particular was a peak point for M&A transactions and helped change the concept of “family-owned companies” to “multinational companies.” Family-owned companies managed according to traditional principles found themselves in the brand-new corporate world of “partnerships” built upon shareholder agreements.  

Is it difficult to establish rules that will ensure rapid and efficient adaptation to the new age and changing needs? Yes and no – but either way, Turkey has passed this test. Various changes introduced through the Turkish Commercial Code (as amended in 2012) confirmed that new concepts were not created after the enactment of the laws, but were in fact already recognized in practice, which forced the legislator to enact new laws. These concepts included voluntary supervisory boards, risk management committees, internal directives, details pertaining to the modus operandi of board of directors and the general assembly, independent audits, and a host of other practices. Now, five years after the enactment of the New Turkish Commercial Code, non-public companies have started to challenge public companies in adhering to corporate principles.       

We can summarize this development based on two goals: (1) effective and efficient management; and (2) checks and balances. 

Effective and Efficient Management

Prior to forming a partnership, effective decision-making mechanisms must be established, especially for joint ventures with foreign shareholders and a hybrid board of directors. The basic goal from day one is to avoid the interruption of commercial operations due to deadlocks or obstruction during the decision-making process. Turkish law foresees a mandatory quorum for the general assembly and the board of directors in certain cases and it is also possible to regulate special quora that aggravate but do not lighten the mandatory quorum. A company can reflect the special quorum regulated under shareholders agreements into their articles of association. Although this is not a requirement, it bears a strategic importance for minority shareholders. A violation of the articles of association by majority shareholders would not be legally effective or result in forfeiture due to impossibility of performance, whereas a violation of the shareholders’ agreement would only constitute a breach of contract and grant the right to claim compensation, but would be legally effective. On the other hand, including deadlock solutions in the articles of association to prevent the minority from intentionally blocking the decision-making process by exercising their veto rights is crucial for majority shareholders.

Certain decisions of the board of directors or the general assembly are classified by law as non-transferable, but it is important to distinguish between internal decision-making mechanisms and representation of the company before external third parties. While the decision-making process is conducted in accordance with the articles of association, external representation is regulated under the company’s internal directive. Internal directives regulate the company’s authorized signatories subject to the limitations of the scope and monetary thresholds. To ensure transparency, companies announce their directives in the Trade Registry Gazette.    

Checks and Balances

Establishing certain control mechanisms is of utmost importance to protect the rights of minority and majority shareholders. In this respect, Turkish law has introduced certain rules for transactions between affiliates and parent companies to prevent shareholders from abusing minority rights by obtaining control. Each shareholder holding more than 10% of a company’s shares is regarded as a minority and has the right to demand information, appoint an independent auditor, and call a general assembly meeting. Companies meeting certain criteria in term of the company’s size are required to appoint independent auditors to control the actions of a board of directors through its review and approval of the company’s financials.  

The need to strengthen the effectiveness of such legal provisions paved the way for the establishment of supervisory boards, and voluntary supervisory boards and risk management or compliance committees may contain third parties who are not board members, with operational procedures determined under special directives.  

Corporate governance principles aim to create supporting bodies for the board of directors, rendering top-level managers a part of the management and representation process, thereby establishing a flexible mechanism able to quickly respond to unexpected and urgent commercial needs rather than a control that complicates the management process. Control without flexibility or flexibility without control is not the solution for long-term continuity and success. 

By Duygu Gultekin, Head of Corporate Advisory & Maintenance, Esin Attorney Partnership 

This Article was originally published in Issue 4.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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