Corporate / M&A

Executive and Non-Executive Board Members under the New Turkish Commercial Code

The executive and non-executive members of the Board of Directors (Directors) under the Turkish Commercial Code and the requirements to delegate the administrative powers of the Board of Directors.

The new Turkish Commercial Code No. 6102 (TCC), effective as of 1 July 2012, brought significant innovations concerning the structure and authority of the Board of Directors (Board) of joint stock companies (JSC). Beyond the structural changes, the TCC brought innovations to the classification of the management powers of the Board. This article focuses on the new regime regarding the delegation of the powers and authorities of the directors to executive directors of the board (Executive Director).

Brief overview on the structure of the Board

Pursuant to article 359/1 of TCC, the Board of a JSC consists of at least one Director, either an individual or a legal entity (the latter being represented through a designated individual).

The Board is the decision-making and execution authority. The TCC has classified the management powers as administrative powers and power of representation, thus introduced executive and non-executive Directors to the Turkish legal system.

A novelty for Turkish Company Law: executive and non-executive Directors

The relevant provisions of TCC aimed for a more professional management mechanism for JSCs. Article 367/1 enables delegation of management powers to one or more Director(s) or to a non-Director third party.

The TCC splits management powers in two and establishes two different statuses for executive and non-executive Directors. The Directors who have delegated their management powers to another Director or a third party will be identified as non-executive Directors. In that case, the Directors will be entrusted with the representation right of the company. The Directors who have not delegated their management powers will be identified as executive Directors, and they will be granted both power of representation and management power.

Requirements to delegate management power to executive directors

To be regulated in the Articles of Association

According to article 367/1 of TCC, Directors may delegate their management powers only if delegation power is explicitly regulated in the Articles of Association of the company. This is a condition sine qua non, which cannot be avoided.

To be qualified by an Internal Directive

Preparation of an internal directive setting forth details of the administrative subject and the hierarchical structure between the Directors is a further requirement. Beside determining the organisation chart, this internal directive should indicate the technical, commercial, and legal administration principles of the company.

One trouble with the internal directive is the uncertainty of the authorised body for recognition. The related article of TCC authorises neither the Board nor the General Assembly for the execution and approval of the internal directive. When examining the reference law (Swiss Law), approval of the Board will be deemed appropriate. On the other hand approval of the General Assembly will not be contrary to the TCC.

Considering the non-assignable rights of the Board

The non-assignable rights of the Board must be weighed when preparing the internal directive. Pursuant to article 375 of the TCC these are:

  • choosing the top management of the company and instructing it;
  • determining the company’s management organisation chart;
  • setting forth the principles of accounting and financial audit of the company;
  • appointing and dismissing the Directors, authorised representatives, and authorised signatories of the company;
  • supervising persons authorised to manage the company;
  • keeping the books and records of the company, preparing the corporate governance principles, arranging the general assembly meetings, and performing the general assembly’s decisions; and
  • notifying situations of serious debt to the court.

Liability of the non-executive Directors

The TCC sets forth a well-balanced liability provision. According to article 553/2, the non-executive Directors can be held liable for the operations and decisions of the persons who took over administrative power only if they did not take ordinary care while selecting these persons to delegate the administration powers.

Conclusion

The TCC’s management mechanism provides the JSCs the opportunity to take a step forward by engaging professionals as Directors. The non-executive Directors and the delegated Directors are required to cooperate in the management of the company.

The TCC has classified management powers as administrative powers and power of representation, thus introduced executive and non-executive Directors to the Turkish legal system.