Liability Cases Regarding the Duty of Care and Loyalty of Board Members in Joint Stock Companies

Introduction and Theoretical Framework: Elements of Trust and Caution in Corporate Management

In the system of commercial law, joint-stock companies, which form the backbone of modern economic life, are the most advanced model of capital company, enabling the collection of capital from broad masses and the realization of large-scale commercial organizations. The power to express the will of these enormous economic structures as legal entities, to manage and direct their daily commercial activities, to make strategic decisions, and to represent them to third parties is exclusively the board of directors. The board of directors is both the administrative brain and the decision-making and executive body of the company.

However, this broad and effective scope of authority of the board of directors brings with it very serious legal, financial, and criminal responsibilities. Board members are obligated to protect the company's assets, commercial reputation, shareholders' investments, and the interests of creditors. Within the framework of the Turkish Commercial Code (TTK), the two most fundamental constitutional principles that board members must adhere to in fulfilling these duties the duty of care and the duty of loyalty . These two obligations are not merely moral or professional advice; on the contrary, their violation forms the basis of serious compensation lawsuits and liability regimes that directly threaten the personal assets of the members.

The main objective of this study is to examine, in a comprehensive style understandable to the general public yet maintaining academic depth, the duties of care and loyalty of board members in joint-stock companies; their legal nature, scope, relationship with the business judgment rule, the parties to liability lawsuits arising from the breach of these duties, the legal processes, and the sanctions.

1. The Legal Nature and Scope of the Duty of Care and Loyalty

The Turkish Commercial Code maintains a careful balance in regulating the legal position and obligations of board members towards the company. Board members, when undertaking the management of the company, are not treated as ordinary agents or employees, but as professional managers who must act prudently and like true businesspeople.

A. Duty of Care (Obligation to be Careful and Cautious)

The duty of care refers to the degree of professional attention, prudence, and diligence that a board member must exercise in conducting company affairs. According to the Turkish Commercial Code, board members are obligated to perform their duties with the diligence of a prudent manager

• The criterion of being a cautious manager is not an abstract concept, but rather refers to the level of attention a reasonable and honest business person in the same position, with similar education and experience, would show.

• The duty of care encompasses concrete behavioral patterns such as refraining from signing off on company financial statements without reviewing them, ensuring the flow of necessary information to anticipate risks, seeking expert opinions when making strategic decisions, and managing company resources rationally. Risky decisions made without conducting the necessary research or investigation directly constitute a breach of the duty of care.

B. Duty of Loyalty (Obligation to Protect Interests and Be Allegiance)

The duty of loyalty requires a board member to prioritize the company's interests above their personal interests . The legal relationship established between the company and the board member is based on the highest level of trust.

• In accordance with the duty of loyalty, a board member must protect the company's trade secrets, refrain from using company assets for their own benefit, not take advantage of any company business opportunity for personal gain, and strictly adhere to the non-compete clause.

• Members may not obtain unfair advantage for themselves, their relatives, or other related legal entities from transactions they conduct on behalf of the company. In cases where the company's interest conflicts with personal interest, the member must immediately inform the other members of the board and withdraw from the vote on the relevant decision.

2. The Business Judgment Rule and the Limit of Diligence

Taking risks, making strategic decisions under uncertainty, and investing with the aim of generating profit are inherent in business life. If board members were held directly responsible for every failed business investment or loss-making decision, no rational person would want to manage a corporation, and economic life would come to a standstill. To prevent this danger, the Business Judgment Rule has been accepted in legal doctrine and judicial decisions.

• The essence of the rule: Board members cannot be held liable for any subsequent economic losses if they have made business decisions honestly, with reasonable knowledge, without any conflict of personal interest, and solely in the best interests of the company.

• Limitations: The business decision rule does not grant board members unlimited immunity. A member cannot benefit from this rule if they have conducted no research when making a decision, disregarded market data, acted in their personal interest, or chosen a path expressly prohibited by law. The line between breach of due diligence and commercial risk is determined by the criteria of reasonable preparation and integrity in the decision-making process.

3. Terms and Legal Nature of the Responsibility of Board Members

Board members are legally liable for any damages they cause to the company, shareholders, or creditors due to breaches of their duty of care and loyalty. For this liability to arise, certain conditions must be met simultaneously within our legal system:

• An Act Conduct Contrary to Law or the Articles of Association (Breach): There must be an act or omission by the member that violates their duty of care or loyalty, the provisions of the law, or the articles of association.

• Damage: As a result of this unlawful act, there must be a tangible material loss to the company's assets, the rights of the shareholders, or the ability of creditors to recover their debts.

• Causal Link (Cause-and-Effect Relationship): There must be a direct causal link between the unlawful conduct of the board member and the resulting damage. If the damage stems from other independent external factors, the member cannot be held liable.

• Fault (Intent or Negligence): The board member must be at fault in their actions (failed to exercise due diligence, acted carelessly, or knowingly caused damage to the company). Legally, board members are considered at fault unless they prove their innocence (presumption of fault).

  The main circumstances and situations that give rise to the legal responsibility of board members are grouped under the following headings:

  1. Breach of Obligations Arising from the Law and the Articles of Association

  Board members are liable for damages arising from their intentional or negligent failure to perform the duties imposed upon them by law or the company's articles of association. Examples include the unlawful implementation of general assembly resolutions, failure to comply with restrictions on share transfers, or neglect of registration and publication obligations.

  2. Breach of the Duty of Care and Loyalty

  Board members are obligated to perform their duties with the diligence of a prudent manager and to protect the company's interests under all circumstances. Irrational use of company resources, making risky decisions without proper research (breach of due diligence), leaking company secrets, exploiting business opportunities for personal gain, and competing with the company (breach of loyalty) are fundamental grounds for liability.

  3. Irregularities in the Preparation of Financial Statements, Reports, and Ledgers

  Maintaining the company's records, preparing annual activity reports, financial statements, and inventories in a legally compliant, truthful, and transparent manner are among the non-transferable powers and responsibilities of the board of directors. Preparing inaccurate balance sheets, distributing dividends with fraudulent documents, or engaging in accounting fraud directly triggers the personal liability of the directors.

  4. Violation of the Notification Obligation in Case of Capital Loss and Insolvency (Turkish Commercial Code, Article 376)

  If a company's assets do not cover its liabilities (insolvency) or if its capital is significantly undervalued, the board of directors must immediately take necessary measures, prepare an interim balance sheet, and, if necessary, apply to the court to declare a composition with creditors or file for bankruptcy. In these cases, board members who fail to convene the general assembly on time or who delay filing for bankruptcy are personally liable for the direct losses of creditors.

  5. False Statements Regarding Establishment and Capital Increase

  If, during the company's incorporation phase or in subsequent capital increases, the founders or board members make false statements regarding the payment of capital, the value of in-kind capital, or the incorporation documents, present fraudulent bank account statements, or fail to comply with regulations, they will incur both civil and criminal liability.

4. Types and Procedures for Filing Liability Lawsuits

Liability lawsuits that can be filed against board members who have acted in breach of their duties of care and loyalty are categorized differently in the Turkish Commercial Code, depending on the identity of the plaintiff and to whom the damage is directed. These lawsuits are basically examined in three groups:

A. Liability Lawsuit Arising from Damages Incurred by the Company (Lawsuit Filed on Behalf of the Company)

If the company's assets have been directly damaged as a result of the unlawful actions of its board members , the right to file this lawsuit generally belongs to the company itself.

• Company management may refrain from filing lawsuits against its own members. In this case, shareholders or minority shareholders step in. They may apply to the general assembly to request that the company file a lawsuit; if the general assembly refuses, minority shareholders, provided they meet certain capital requirements, have the right to file a compensation lawsuit on behalf of the company, demanding payment of damages

B. Liability Claim Arising from Direct Damages to Shareholders

the actions of the board members have harmed not only the company but also directly the shareholder's personal property or rights (for example, unlawfully obstructing the shareholder's pre-emptive rights, fraudulently withholding dividends, or restricting their rights), the shareholder may directly claim compensation from the board members on their own behalf. This lawsuit aims to compensate the shareholder for personal damages.

C. Liability Claim Arising from Direct Damages of Creditors

If a company has gone bankrupt or creditors are unable to collect their debts, and this is due to a breach of duty/loyalty by board members (particularly due to late notification in cases of insolvency or concealment of assets), the company's creditors may file a liability lawsuit directly against the board members.

5. The Institution of Release and Removal of Liability

The general assembly, at its annual meeting, discharges (clears). Discharge means that the general assembly waives any liability claims it may have against the members of the board of directors.

• Effect of Discharge: A duly issued discharge decision eliminates the members' liability arising from their known and disclosed activities up to that point. However, discharge does not cover fraudulent actions that knowingly and intentionally harm the company, forge documents, or evade audits.

• Minority Opposition: If minority shareholders, holding one-tenth (or one-twentieth in publicly traded companies) of the company's capital, vote against the discharge resolution and register a dissenting opinion, the discharge resolution does not affect the rights of these minority shareholders, and they retain the right to file a liability lawsuit.

Conclusion and Evaluation

In joint-stock companies, the duty of care and loyalty of board members is the most fundamental legal guarantee for the safe, transparent, fair, and sustainable conduct of commercial life. The broad powers held by the board of directors necessitate a high level of responsibility and the obligation to act as prudent managers.

Liability lawsuits, which come into play when duties of care and loyalty are breached, not only protect the company's assets but also secure the rights of shareholders and creditors, establishing legal stability in commercial life. While rational and honest business risks are protected under the principle of good business judgment, willful negligence, conflicts of personal interest, and disloyalty are punished with heavy compensation and liability penalties. Board members' awareness of these legal boundaries is the most critical element in ensuring both the longevity of companies and the legal security of their executives.