Before the 'group of companies' concept was introduced by the new Commercial Code on July 1 2012, a subsidiary company was considered to be an independent legal entity, despite being required to exercise all parent company policies without regard to their adverse impact on its own wellbeing. The code has clarified this area of corporate law by introducing the concept of a group of companies and attributing certain duties to controlling individuals and legal entities.
According to the code, a group of companies is composed of a dominant (controlling) company and its subsidiary companies. A company is deemed to be 'dominant' if it directly or indirectly holds:
- the majority of a company's voting rights;
- the power to elect the number of board members required to form a decision quorum in a company in accordance with that company's articles of association; or
- a majority of a company's voting rights, by itself or together with other shareholders based on a contractual arrangement.
Dominance can also be established through contractual arrangements (ie, dominance agreements) although this has yet to be used in practice. Further, a company that owns the majority of another company's shares or enough shares to enable it to manage the other company is presumed to be dominant. If at least one of these companies is located in Turkey, the group of companies provisions will apply.
The code attributes various duties to all members of a group of companies, ranging from the preparation of periodic reports to the notification of certain share transfers. The most notable of these duties is the prohibition of abuse of dominance by a controlling company. According to the code, a dominant company cannot exercise its dominance in a manner that results in a loss to its subsidiary. The code provides a list of transactions that are most likely to result in such a loss for a subsidiary, including:
- asset transfers;
- provision of security;
- transfer of profits; and
- establishment of encumbrances over assets.
If a dominant company forces a subsidiary to participate in a transaction that is likely to result in a loss, the dominant company must:
- compensate for this loss during the year in which it occurred; or
- grant the subsidiary a right of claim equal to the amount of loss incurred, provided that the date and method of compensation is established.
If the dominant company fails to do so, the subsidiary's shareholders and/or creditors can sue the dominant company and those board members who caused the subsidiary's losses. Rather than awarding compensation for losses, a court may order an equitable remedy, such as requiring the dominant company to purchase the claimant shareholders' shares in the subsidiary.
The code also prohibits a dominant company from engaging the subsidiary company in material restructuring transactions (eg, mergers, spin-offs, conversion transactions or amendments of the articles of association) without just cause. If it does so, the subsidiary's shareholders who voted against the general assembly resolution approving the transaction or objected in writing to the board resolution in favour of the transaction can sue the dominant company and request compensation for their losses or the purchase of their shares at market value. If market value is unavailable or inequitable, the subsidiary's shareholders can request that their shares be purchased at their actual value or a price determined by a generally accepted valuation method.
The subsidiary's shareholders must file suit within two years of the general assembly meeting where the negative votes were cast against the transaction or the announcement of the board resolution relating to the transaction. As security for the event of a lawsuit, the dominant company must deposit an amount equal to the claimants' presumptive loss or the purchase price of their shares into a court-designated bank account. If not, the dominant company cannot execute the transaction based on the applicable general assembly or board resolution.
In addition to establishing circumstances in which a controlling company may be at risk of abusing its dominant position over a subsidiary, the code sets out an exception to the abuse of dominant position prohibition. If a dominant company directly or indirectly holds 100% of a subsidiary's shares and voting rights, the dominant company's board of directors may instruct the subsidiary to follow group policies and the subsidiary's board of directors must comply, even if this could result in a loss for the subsidiary. However, a dominant company may not give instructions that would cause losses exceeding the total value of the subsidiary's assets or the loss of any significant assets.
The duties and obligations established by the code have helped to restore the balance between dominant companies and their subsidiaries. Ultimately, the group of companies concept is likely to have a positive impact on the well being of a subsidiary operating in Turkey.
For further information on this topic please contact Umut Kolcuoglu, Asli Tamer or Aytug Güllülü at Kolcuoglu Demirkan Koçakli Attorneys at Law by telephone (+90 212 355 9900) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Kolcuoglu Demirkan Koçakli Attorneys at Law website can be accessed at www.kolcuoglu.av.tr.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.