Corporate / M&A

Turkey: Liabilities of Members of the Board of Directors in a Joint Stock Company

Liabilities of members of the Board of Directors in a joint stock company are regulated by the Turkish Commercial Code, Tax Procedural Law and Law on Collection Procedure of Public Receivables.

Board of Directors and liability

The Board of Direc­tors (Board) is the admin­is­tra­tive body of a joint stock com­pa­ny respon­si­ble for the man­age­ment and rep­re­sen­ta­tion of the com­pa­ny. It has the right to exer­cise all pow­ers not del­e­gat­ed to and reserved for oth­er bod­ies of the com­pa­ny by law or by the arti­cles of asso­ci­a­tion. Board mem­bers are liable if they breach their oblig­a­tions under the laws or arti­cles of asso­ci­a­tion, unless they prove that they are not neg­li­gent.

Criminal and legal liability

The Turk­ish Com­mer­cial Code (TCC) has sep­a­rate pro­vi­sions for legal and crim­i­nal lia­bil­i­ty for activ­i­ties con­duct­ed while man­ag­ing and rep­re­sent­ing a com­pa­ny. The lia­bil­i­ty under this pro­vi­sion is not exclu­sive to Board mem­bers. If man­agers of the com­pa­ny breach such TCC pro­vi­sions, they may be held legal­ly or crim­i­nal­ly liable. Sanc­tions vary from fines to sev­er­al years’ impris­on­ment. The actions are, inter alia, as fol­lows:

  • inac­cu­ra­cy of doc­u­ments and dec­la­ra­tions;
  • mis­rep­re­sen­ta­tion of share cap­i­tal and aware­ness of inca­pa­bil­i­ty to sat­is­fy cap­i­tal under­tak­ings;
  • irreg­u­lar­i­ty in val­u­a­tion of cap­i­tal in-kind;
  • fail­ure to keep com­pa­ny books;
  • rais­ing mon­ey from the pub­lic; and
  • breach of oblig­a­tions reg­u­lat­ed under the TCC, laws and/or arti­cles of asso­ci­a­tion.

Limitations of liability

Art.553 of the TCC reg­u­lates the lim­i­ta­tion of lia­bil­i­ty of Board mem­bers. Board mem­bers are not liable for ille­gal acts beyond their con­trol. The oblig­a­tion of super­vi­sion and the duty of care can­not be used as grounds for a Board member’s lia­bil­i­ty.

Anoth­er lim­i­ta­tion is set forth in Art. 203 of the TCC for Board mem­bers of group com­pa­nies in which the par­ent has absolute pow­er over the sub­sidiary. Since the Board mem­bers are oblig­ed to fol­low the instruc­tions of the par­ent com­pa­ny, they will not be liable for actions tak­en as a result of the orders or instruc­tions of the par­ent com­pa­ny.

Release of directors

Under the TCC, share­hold­ers and cred­i­tors of the com­pa­ny may file a law­suit against the Board mem­bers. A release of the Board mem­bers is one of the manda­to­ry items to be decid­ed in a gen­er­al assem­bly meet­ing. If the share­hold­ers decide in a gen­er­al assem­bly meet­ing to release the Board mem­bers, the res­o­lu­tion may not be revoked.

On the oth­er hand, share­hold­ers who attend­ed the gen­er­al assem­bly meet­ing and did not vote for the release of the Board mem­bers or reject­ed the release res­o­lu­tion may file a law­suit against the Board mem­bers with­in six months from the gen­er­al assem­bly meet­ing. With­out the affir­ma­tive votes of the minor­i­ty share­hold­ers, a res­o­lu­tion to release Board mem­bers from their lia­bil­i­ty of incor­po­ra­tion and cap­i­tal increas­es may not be adopt­ed.

Liabilities due to non-payment of public debts

The lia­bil­i­ty of a Board mem­ber aris­ing from non-pay­ment of the pub­lic debt of the com­pa­ny aris­es from the Tax Pro­ce­dur­al Law and Law on Col­lec­tion Pro­ce­dure of Pub­lic Receiv­ables.

If the Board mem­bers do not ful­fill their oblig­a­tions, tax­es and the relat­ed receiv­ables, and which are not total­ly or par­tial­ly sat­is­fied by the company’s assets, the Board mem­bers must pay the amount from their pri­vate assets.

The law on the Col­lec­tion Pro­ce­dure of Pub­lic Receiv­ables extends the lia­bil­i­ty of Board mem­bers by con­tem­plat­ing that pub­lic debts oth­er than tax­es will also be col­lect­ed from the pri­vate assets of the rep­re­sen­ta­tives, and that the debts will be paid by the rep­re­sen­ta­tives if the com­pa­ny can­not or if it is pri­ma facie evi­dent that they can­not pay such pub­lic receiv­ables. Board mem­bers are held joint­ly and sev­er­al­ly liable for tax­es and oth­er pub­lic receiv­ables that have accrued dur­ing their term in office.

The liabilities of Board members are regulated by law, and Board members are liable if they breach their obligations under the law or articles of association, unless they prove that they are not negligent.