Corporate Group Law: Responsibility and Checks and Balances Mechanisms in Parent Company-Subsidiary Relationships

What we call a group of companies is the “invisible normal” of modern commercial life. Consider a large holding company: strategy is established at the top company, while production, sales, technology, logistics, and other functions are carried out by the subsidiaries. From the outside, they operate like a single organism; but legally, each is a separate legal entity. The law governing groups of companies arises precisely from this dual tension: economic unity and legal separation must be protected simultaneously.

The Turkish Commercial Code (especially Articles 195 and onwards) also acknowledges this tension and states:

“If one company effectively controls another, the law cannot ignore this relationship; it establishes a special regime that balances both the one wielding power and the one being controlled.”

In this article, I explain the relationship between a controlling company and its subsidiaries, why we need private law, how control is established, and, most importantly, when a controlling company becomes liable, all within a fluent yet in-depth framework.

1) Why is there a separate field called "corporate group law"?

In classical corporate law, each company makes its own decisions and is responsible for its own debts. In societies, however, the practice is different:

The parent company (controlling company) makes the investment decision.
The affiliated company uses its resources for the benefit of the community.
Profits are centralized in one place, while losses can be left elsewhere.
Sometimes, a subsidiary company is driven to act in the "group interest" rather than its own business interest.

If the law simply stated, "Each company is a separate entity; no one should interfere with anyone else," then the shareholders and creditors of affiliated companies would often be left unprotected, paying the price for the strategies of the dominant company.

Therefore, community law aims at two things simultaneously:

Enabling coordination within the group (in accordance with economic realities)
To prevent the abuse of power (protection and balance)

2) How does dominance arise? (Who is the controlling company, and who are the subsidiary companies?)

According to the Turkish Commercial Code, a company doesn't necessarily need to hold a 51% stake to be considered "dominant" over another. The basic idea is this:
if one company can determine the management of the other, then dominance exists.

This can happen in different ways:

Dominance by majority vote: The dominant company holds the majority of votes in the subsidiary company.
Control over determining the governing body: Even with a low shareholding, they can appoint and dismiss the board of directors/managers.
Dominance through contract or de facto situation: For example, there is a "dominance contract" or a continuous instruction relationship.
Indirect control: The dominant company establishes a chain of control through another subsidiary company.

So what the law looks at is not the "paper ratio," but the actual power of control.

3) Is there such a thing as "group interest" in the community?

Yes, there are… but not unlimited.

Groups grow economically with a single strategy; therefore, it is commercially normal for affiliated companies to sometimes act in the group's interest rather than their own short-term interests

The Turkish Commercial Code does not prohibit this entirely.
However, it sets a condition:

The parent company may give instructions to the subsidiary that are in the "group interest," but it must compensate or offset any losses incurred by the subsidiary.

So, "group interest" is a gateway to permission, but it also carries a balance of compensation .

4) The heart of the controlling company's liability: "abuse of control"

This is the most critical sentence.

If the dominant company uses its power in the following way:

If he/she gives instructions that will cause harm to the affiliated company ,
the affiliated company transfers its resources free of charge/without any precedent ,
the affiliated company shifts investment/business opportunities to itself or another company,
If a company knowingly puts its subsidiary into debt and diverts profits elsewhere for its own benefit,

This constitutes "abuse of control," and the controlling company faces liability at various levels.

The law states here:
"If you have control, you cannot simply shift the consequences onto a subsidiary."

5) Balancing mechanism: Compensation for losses (compensation principle)

The collective logic of the Turkish Commercial Code functions somewhat like a "science of commercial justice.".

If a subsidiary suffers a loss due to a transaction that benefits the group, there are two possible outcomes:

Equalization within the same fiscal year:
The parent company balances the losses by providing a benefit to the subsidiary within that year.
For example, a loss-making project is given to the subsidiary, but a profitable project is also given to the subsidiary in the same year.
Explicit compensation in cases where equalization is not possible:
If the damage has not been compensated, the parent company is obliged to compensate the subsidiary for its losses.

The crucial detail:
This compensation must be clear, measurable, and real. A promise of "we'll make up for it in the future" is not enough.

6) How are the shareholders and creditors of the affiliated company protected?

Community law doesn't just regulate relationships between companies; it also protects third parties.

Minority shareholders:
When the controlling company exploits its subsidiary for its own benefit, it stifles the minority shareholder. Therefore, the minority shareholder has the right to compensation and legal action under certain conditions.
Creditors:
If a subsidiary is deliberately weakened, it may become unable to pay its debts. In this case, creditors can pursue legal action to hold the parent company liable.

Thus, the Turkish Commercial Code (TTK) considers the community as a "special power relationship," and expands the balance of power in favor of partners and creditors as well.

7) Reporting and transparency: Community relations cannot be hidden

The parent company-subsidiary relationship cannot be conducted in secrecy.
For community transparency:

Subsidiary management is required to report their relationships and transactions with the parent company
It is explained whether or not equalization is performed in specific transactions
The community structure becomes visible through the trade registry and financial statements.

This transparency also forms the "proof basis" for any future liability lawsuits.

8) Conclusion: The philosophy of community law

Corporate law is actually based on a very simple philosophy:

"Where there is power, there is responsibility."

The parent company can direct its subsidiary; this is part of business reality.
But it cannot use the subsidiary as a "free source of resources."
A subsidiary cannot be sacrificed for the sake of group growth.
The cost of growth must be shared fairly.

Therefore, community law is a system of checks and balances in the modern corporate world, enabling coordination while preventing exploitation.

Compensation of subsidiary losses, group interest and directive, dominant company-subsidiary relationship, abuse of dominance, corporate group law, minority and creditor protection in a group, Turkish Commercial Code Articles 195 and onwards.

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