Welcome to the August 2016 issue of the Turkey Corporate Newsletter.

In this issue...
Considering Becoming A Board Member? Read This First.
Sellers: How Long Are You On The Hook?
Tax Incentive on Cash Injections to Capital
Information Exchange between Competitors – A Competition Law Perspective
Employee Issues in Demergers under Turkish Law

Considering Becoming A Board Member? Read This First.

Good corporate governance requires fully informed board members who are aware of their duties and the potential legal implications of their actions.

Under the Turkish Commercial Code ("TCC"), the board of directors ("Board") is broadly responsible for the management and representation of a joint stock company ("JSC"). Board members (or "Directors") are required to either undertake or refrain from undertaking certain actions (separately, "Duties" and Restrictions"). While all Duties and Restrictions are equally important, the following most commonly give rise to issues within JSCs and become the subject of disputes:

  • Treat shareholders equally – Failure to do so may result in Directors’ liability for damages incurred by the JSC arising from potential claims raised by shareholders suffering from mistreatment.
  • JSC’s interests first – Prioritize the interests of the JSC in all transactions undertaken on its behalf. This duty of loyalty may continue to apply after expiry of a Director’s term with respect to certain circumstances (e.g., a Director must continue to keep company secrets confidential).
  • Act as a director would – Directors must perform duties using the standard of care of a "director" (tedbirli yönetici) and protect the interests of the JSC in good faith. This standard, introduced under the new TCC, created more limited and strict liability for Directors, as they are now held liable for their actions (or failure to act) in connection with matters which are or which would be expected to be at their discretion, determined on a case-by-case basis by taking into consideration "the actions expected of a director faced with a similar situation".
  • Be careful with "related party" transactions – Directors are prohibited from entering into commercial transactions with the JSC absent the explicit consent of the general assembly. In addition, (a) Directors who are not shareholders in the company; or (b) their (i) ascendants; (ii) descendants; (iii) spouses; and (iv) blood relatives up to the third degree (including third degree relatives) who are not shareholders in the company are prohibited from borrowing from the company either in cash or in kind. Furthermore, companies are restricted from entering into any transactions with such individuals, including granting security or collateral, assuming any liabilities or acting as surety.
  • Remember you are subject to a non-compete obligation! – A Director cannot (a) enter into a commercial transaction on behalf of himself or a third person which falls within the scope of activities of the JSC; or (b) become a shareholder with unlimited liability in entities such as ordinary partnerships (adi ortaklık) or unlimited liability companies (kollektif şirket) which engage in the same activities as the JSC in the absence of general assembly approval.
  • Take action in the event of loss of capital – In the event that there is a loss of at least half of the share capital of the JSC, the Board must call a general assembly meeting and propose measures to rectify the situation. If it is clear from the balance sheet that the assets of the JSC are insufficient to cover its debts, the Board must apply to the court for a bankruptcy decision.

Sellers: How Long Are You On The Hook?

Provided below is a brief synopsis of the key issues in connection with statutes of limitations generally applicable to M&A transactions in Turkey.

A statute of limitation is the period of time prescribed by law within which one must raise a claim in order to enforce his or her rights or receivables. Failure to raise a claim within the time period set forth under the law results in loss of the "right to enforce".

What is the general principle?

In general, pursuant to the Turkish Code of Obligations (the "TCO"), unless a shorter period of time is set forth by law (e.g., the statute of limitations applicable to payment of rent is specifically set at five years), the statute of limitation for exercising a right or initiating a claim arising from a contractual relationship is 10 years. This 10 year period commences on the date the right to claim payment arises. However, time limits applicable to commercial transactions are specifically regulated by the Turkish Commercial Code (the "TCC") where both parties are deemed "commercial persons" (tacir).

Statutes of Limitations in M&A Transactions: Be prepared for a claim; but for how long?

Statutes of limitations applicable to M&A transactions vary based on the nature of the claim. The following are of particular importance:

  • Warranties for the Sale of Shares
    The TCC provides a two year statute of limitation period for warranty claims where both parties are deemed "commercial persons". However, the TCO allows this period to be extended contractually by the parties.

  • Employment Related Claims
    Pursuant to the Labor Law, employees’ salary receivables and all other monetary salary related receivables (e.g. overtime payments, bonuses, etc.) are subject to a five year statute of limitation commencing when the relevant receivable becomes due. However, as there is no specific statute of limitation applicable to severance notice indemnities, unused vacation time payments and compensation for breach of the principle of equality under the Labor Law, the general 10 year statute would apply, commencing upon termination of the relevant employment contract.

  • Tax Claims
    Under the Turkish tax system, two main statutes of limitations apply:

    Statute of Limitations on Tax Assessment: The Turkish tax system is based on self-assessment; i.e. tax authorities have the right to conduct tax inspections on tax returns filed by Turkish companies until expiry of the statute of limitations pursuant to the provisions of the Turkish Tax Procedural Law. The limitation period for a tax assessment is five years commencing on the first day of the year after the related tax debt is incurred.

    Statute of Limitations on Collection of Tax Receivables: Pursuant to the Law on the Collection Procedure for Public Receivables, following a tax assessment carried out by administrative authorities, tax receivables, which are deemed public receivables, must be collected within five years commencing on the first day of the year after the tax payment is due.

Tax Incentive On Cash Injections to Capital

A new tax incentive to support capital injections was introduced for corporate tax payer companies last year. This new regulation enables corporations to take advantage of a notional interest deduction, calculated over cash injections to capital, from their corporate tax base. The Turkish tax system has historically favored debt financing as no regulations restricting the deduction of financial expenses from the corporate tax base currently apply.

The notional interest deduction is a regime which supports financing by way of capital injections and will aid in increasing liquidity and the financial robustness of corporations and also in equalizing the tax treatment of capital and debt financing. The Council of Ministers issued a Decree in 2015 determining notional interest deduction rates and the Ministry of Finance issued a general communique on March 4, 2016 setting forth procedures for implementation of the notional interest deduction.

Set forth below is a brief overview of the application and calculation of the notional interest deduction, a discussion of entities and cases where the deduction does not apply and an evaluation of thin capital and the notional interest deduction.

Information Exchange Between Competitors – A Competition Law Perspective

There is no doubt that "information" is a valuable asset in today’s economy and companies must be "well informed" in order to remain competitive. The exchange of information between companies is therefore a commercial reality and a common feature of competitive markets.

It is also widely accepted by both economists and competition law practitioners that information exchanges may have positive effects on competition through the generation of certain gains in efficiency, with a direct benefit to consumers. On the other hand, sharing too much information may lead to restrictive effects on competition and therefore create exposure to the risk of significant penalties through breaches of competition law. It is therefore essential for companies to understand the fine line between pro-competitive and anticompetitive exchanges of information.

This article aims to provide a brief overview of information exchange from a competition law perspective and guidance for companies in managing competition law related risks arising from external communications.

There are various ways for companies to exchange information: they may choose to communicate directly or they may exchange information indirectly through third parties such as professional associations and market research institutions, through a common distributor or supplier, or through public disclosures. Regardless of how information is exchanged, a competition law risk is consistently present if through information received or delivered companies possess knowledge regarding competitors’ market strategies, as this may lead to coordination and collusive behavior.

Responding to a seemingly innocent information request from an industry association; a newspaper article involving a statement by a company executive regarding expected price increases in the market; a benchmarking exercise by a market research company involving detailed, individualized and up-to-date market data or information shared by a common distributor regarding a competitor’s future price increases may create competition law risks for a company. Accordingly, any information inflow to and outflow from companies should be managed with utmost care.

The Turkish Competition Board (the "Board") published the "Guidelines on Horizontal Cooperation Agreements" in 2013 (the "Guidelines"), which is very similar in content to the European Commission’s Guidelines on the same topic. Paragraphs 40 to 90 of the Guidelines specifically cover the competitive assessment of information exchange among competitors.

Employee Issues in Demergers under Turkish Law

Not As Easy As It Looks

For law makers a positive change in law represents progress; however, for legal practitioners unclear provisions lead to long hours of discussions resulting in diverse opinions. Employee issues resulting from demergers is an example of a subject created out of a change in law that has recently been subject to debate.

This topic arose after enactment of the new Turkish Commercial Code numbered 6102 ("TCC") and the introduction of new Article 178, based on the Swiss Code of Obligations, regulating employee issues in demergers. The core incentive for this change in law was to protect the interests of employees; yet the absence of certain important details and conflicts of laws between the Labor Law numbered 4857 ("Labor Law") and the TCC has caused undesired complexity in this area.

Similar employment related issues are regulated under both Article 178 of the TCC and Article 6 of the Labor law - through different rules and methods of application - and the question of which one governs has become an issue.

Article 6 of the Labor Law regulates the general framework of a workplace transfer and the effects of a workplace transfer on employment contracts, whereas Article 178 of the TCC specifically regulates the transfer of business relations and employee issues in case of demerger.