Liabilities Of Members Of Board Of Directors In Joint Stock Companies

Introduction

A joint stock company incorporated under Turkish law is managed and represented by a mandatory body of the company, its board of directors.

Members of the board of directors owe the duties foreseen by the relevant legislation and the company's articles of association and are liable for losses incurred by the company, its shareholders and creditors due to any breach of these duties.

Liabilities of board members in a joint stock company are regulated under the Commercial Code 6102, the Tax Procedural Law 213 and the Law on Collection Procedure of Public Receivables 6183. These liabilities can be categorized as civil and criminal liabilities.

Civil liabilities

If members of the board of directors breach their duties under the law and the articles of association due to negligence they will be liable for the losses incurred by the company, its shareholders and company creditors. Each member of the board may be found liable pro rata to the degree of his or her negligence. As a result, while one board member may be liable based on his or her negligence against third parties, other members acting with necessary care may not be liable for the losses.

In the event of a liability claim, the burden of proof for proving the fault of a board member rests with the claimant. However, even if the claimant can prove the likelihood of the liability, a board member may be found not liable if it is proven that he or she fulfilled his or her duty of care regarding the relevant matter that caused the loss for the claimant.

Duty of care and loyalty

Article 369 of the Commercial Code provides that members of the board of directors owe a duty of care and loyalty to the company that requires them to act as prudent executives and to pursue the interests of the company and its shareholders in good faith when carrying out their activities.

The legal justification of the provision provides that a board member acting as a "prudent executive" can take business decisions in line with corporate governance principles and may not be liable for the risks arising from such decisions taken in good faith. The legal justification also outlines that if a board member makes an informed decision following proper research and briefing by relevant persons, he or she may be found not liable even if the company incurs a loss due to such a decision.

Article 369 of the Commercial Code underlines the duty of loyalty of board members by requiring them to pursue the interests of the company. However, the Commercial Code also places more specific duties on board members stemming from the duty of loyalty, including that board members:

• must not attend board meetings that will create a conflict of interest between them and the company;
• must not negotiate or compete with the company, unless the general assembly gives prior approval;
• must keep company documents and information confidential or be liable for damages that the company incurs and be potentially subject to criminal liability.

Liabilities for public debts of company

Article 35 of the Law on Collection Procedure of Public Receivables and Article 10 of the Tax Procedural Law provide that the legal representatives of a joint stock company are jointly and severally liable for the company's public debts.

A joint stock company's legal representatives can be members of the board of directors or third parties appointed as managers by the board of directors. If powers of representation are not delegated as outlined in Section 3, all board members will be considered as representatives.

However, if there is a delegation of powers within the board of directors or to managers, the members of the board with no representation authority may be subject to claims for the collection of public receivables, unless it can be proved that they acted without duty of care when choosing the delegates.

Criminal liabilities

The Commercial Code provides that members of the board of directors – along with any other persons – will be criminally liable for the following actions resulting from an act or omission:

• Failure to keep company books. Joint stock companies must keep:
  • a board of directors resolution book;
  • a general assembly meeting minute book;
  • a document ledger;
  • a general ledger;
  • an inventory ledger; and
  • a share ledger.
• Members of the board of directors who fail to ensure that the required company books are duly kept may be subject to a financial penalty corresponding to at least 300 days' imprisonment. (1)
• Misrepresentation and omission in corporate documents. Any misrepresentation or omission in a company's corporate documents (eg, undertakings and letters of guarantee, incorporation documents and transaction documents for merger, spin-off, capital increase and decrease) will result in liability of the persons preparing and assisting in the preparation of these documents. Anyone that violates this rule will be held liable for the incurred losses and be subject to one to three years' imprisonment.
• Misrepresentation of share capital. Anyone that falsely reports the share capital of a company as being fully paid-up by the shareholders may be liable for the unpaid amount, together with the representatives of the company (members of the board of directors and/or managers), if they were negligent and could be subject to three months to two years' imprisonment. Further, anyone claiming that the value of in-kind capital or the business to be acquired is higher than its actual value or anyone that misrepresents or engages in fraud regarding these values will be liable for the incurred losses.
• Breach of confidentiality. Members of the board of directors must keep company documents and information confidential. In case of a breach of this obligation, the board member responsible may be sentenced to one to two years' imprisonment and receive a financial penalty corresponding to 5,000 days' imprisonment. The sentence may be aggravated if the confidential information is shared with non-resident foreigners or their employees.
• Failure to launch website. The Commercial Code requires that companies subject to audit must have a website featuring the content required by law. The board members of companies that fail to launch a website as required may be subject to a penalty corresponding to 100 to 300 days' imprisonment.

Limitation of liabilities

Exception to liability due to breach of duty of care and loyalty

The Commercial Code includes an exception to liability of members of the board of directors of companies that are owned solely by another parent company.

As a general rule, members of the board of directors of a subsidiary company must comply with the instructions received from the parent company, which holds all shares or voting rights of the subsidiary, provided that these instructions are part of an agreed policy. The subsidiary company and its shareholders cannot hold its board members or managers liable for merely complying with instructions received from the parent company, regardless of the legality of the instructions.

However, the Commercial Code also prohibits a parent company from giving instructions that could jeopardise its subsidiary's financial standing. According to the dominant view among legal scholars, members of the subsidiary company's board of directors are not required to comply with instructions from a parent company in this context.

Liability of board members that delegate powers

The board of directors may delegate its management and powers of representation to certain members of the board or to managers through an internal directive setting out the distribution of these powers, provided that the articles of association allow it. However, in order to delegate powers of representation, at least one board member must maintain full representation authority, without limitations.

The members of the board of directors and managers may be held liable in the event of a breach of their obligations under the law or articles of association. However, in the event of a delegation of powers, the delegate will be liable for the incurred losses and the board members that delegate their powers will be liable only if the claimant can prove a lack of reasonable duty of care in choosing the delegate. For instance, a board member delegating the financial matters of a company to a manager lacking the necessary educational and professional background may still be liable for the actions and decisions of the manager, as he or she did not act with a duty of care when choosing the manager or delegate.

The Commercial Code also provides that directors cannot be liable for violations of the law or articles of association or for fraudulent activities that are beyond their control. A lack of duty of care or supervision cannot be grounds for holding a member of the board of directors liable for violations outside of his or her control. The only grounds for holding a board member liable may be lack of duty of care in choosing a delegate.

Endnotes

(1) The financial penalty for one day is determined between TRY20 and TRY100, considering the financial and personal status of the person in question.

This article aims to endow the reader with a general outline about its subject matter. Each individual case should be evaluated according to its circumstances.