Rights and Responsibilities of Board Members in Joint Stock Companies

Duty of Care in the Boards of Directors of Joint Stock Companies

According to Article 369 of the Turkish Commercial Code (TTK), which regulates the "duty of care and loyalty" of the board of directors, board members and third parties involved in management are obligated to manage the company's interests in accordance with the principle of honesty while performing their duties. In practice, discussions regarding the violation of this provision mostly involve cases where it is alleged that board members caused damage to the company without the intention of causing such damage. However, in cases where it is proven that a board member acted "intentionally" against the company's interests, there is no doubt that they have acted contrary to their legal obligation under Article 553/1 of the TTK due to the violation of Article 369, and therefore can be held legally liable.

According to Articles 553 et seq. of the Turkish Commercial Code (TTK), in order for a liability lawsuit to be filed, the board member(s) must not only have acted unlawfully but also be at fault, have caused damage to the company/shareholders/company creditors, and there must be a causal link between the damage and the fault. In a situation where the profit margin and equity are eroded, the company will suffer direct damage, and the company's shareholders will suffer indirect damage as a result of this loss. According to Article 555 of the TTK, shareholders can file a lawsuit against the board members for the damages they have suffered, demanding that compensation be paid to the company.

However, in order to invoke the legal responsibility of a board member, the plaintiff must prove the damages incurred. Although there is no unified view in legal doctrine regarding whether the burden of proof of fault rests with the defendant or the plaintiff, there is no doubt that the plaintiff must prove the damages incurred.

According to Article 374 of the Turkish Commercial Code (TTK), the board of directors is authorized to make decisions regarding transactions that constitute the realization of the company's business purpose, unless these decisions are left to the general assembly in accordance with the law and the articles of association. When making these decisions, the board of directors must act as a prudent manager in light of the "duty and loyalty obligation" stipulated in Article 369 of the TTK, and protect the company's interests in accordance with the rules of honesty. As stated in the rationale of the provision, the "obligation to act as a prudent manager" is important in determining the limits of the provision's application. Unlike the old law, the new law replaces "duty required by the business" with "the diligence of a prudent manager," thus both extending the manager's responsibility beyond sectoral issues and broadening its scope, and determining the limits of responsibility according to the criterion of "objectivity." As supported by Article 553/3 of the TTK, the limits of a board member's prudent behavior are objectively assessed and should be interpreted in light of the business judgment rule. At this point, according to the reasoning, "In accordance with the generally accepted rule, if appropriate investigations have been conducted, information has been obtained from relevant parties, and a decision has been made by the board of directors, even if developments take a completely opposite direction and the company suffers losses, negligence cannot be claimed." 

Board Members' Right to a Share of the Company's Profits

According to Article 507 of the Turkish Commercial Code, each shareholder has the right to participate in the profits distributed in proportion to the shares decided upon in accordance with the law and the articles of association. A shareholder has the right to claim their share of the distributed profits in light of the principle of proportionality. If this claim is not fulfilled, and if a decision to distribute the profits has been made, the shareholder may file a lawsuit for performance of the claim.

On the other hand, Article 511 of the Turkish Commercial Code (TTK) stipulates that profit distributions can be made to board members from the net profit under the name of "profit share". According to the provision, profit distribution can be made a) after a certain percentage is set aside for the legal reserve fund, and b) to the beneficiaries of profit shares, provided that at least 5% of the paid-up capital is paid, unless a higher price is agreed upon in the capital. The percentage determined for the legal reserve fund is shown in Article 519/2-c of the TTK. Accordingly, if profit shares are to be distributed, first, at least 5% of the paid-up capital must be paid to the beneficiaries of profit shares, then 10% of the remaining amount must be set aside as the legal reserve fund, and the remaining amount must be used for profit share distribution.

According to Article 408/2-d of the Turkish Commercial Code (TTK), decisions regarding the disposition of profits and the distribution of profit and earnings shares are among the non-transferable powers of the general assembly. As stated in Article 394 of the TTK, the distribution of profit shares to board members can only be made if determined by the general assembly or the articles of association. Therefore, the process for the distribution of profit shares by the board of directors, pursuant to Article 394 of the TTK, is stipulated by law, including the general assembly's decision on the distribution of profit shares, the determination of the minimum amount to be given to dividend recipients in accordance with Article 511 of the TTK, and the allocation of legal reserves.

The Right to Peace

Article 394 of the Turkish Commercial Code, under the heading "Financial Rights of Board Members," stipulates that board members may be paid attendance fees and salaries, the amount of which shall be determined by the articles of association or a general assembly resolution. While the definition of attendance fee is not explicitly provided in the law, the 11th Civil Chamber of the Supreme Court of Appeals defines it as a right determined by a general assembly resolution and usually paid monthly to managers as compensation for their labor (E:2010/5400, K:2010/5060). In this sense, attendance fee differs from profit sharing, which refers to the payment of a percentage of the company's profits to the manager. Attendance fee can be paid to managers regardless of whether the company has made a profit and is exempt from the limitations of Articles 511 and 519/2-c of the Turkish Commercial Code, as explained in paragraph "2" regarding the distribution of profit sharing. Due to this characteristic, as the plaintiff also stated, the practice of paying board members amounts that should essentially be paid as profit sharing from the company's profits under the guise of "attendance fees," thus circumventing the law, is a common occurrence in practice. Since attendance fees, by their nature, usually involve a lower amount than profit sharing, decisions taken by the general assembly determining the amount of attendance fees may be subject to a lawsuit for annulment of the general assembly decisions due to their violation of the principle of good faith (Article 2 of the Turkish Civil Code) if the amount is excessive (Article 445/1 of the Turkish Commercial Code).

If the annulment lawsuit is decided in favor of the plaintiff, the company's general assembly decision determining the amount of "attendance fees" will become invalid, and the board members who received the payment may be required to return the amount. However, even in this latter case, this return will not mean that the company will be compensated for the damage suffered by the plaintiff through the enforcement of the legal responsibilities of the board members; rather, it will mean the fulfillment of the obligation to return the acquisitions made by the board members who have a contractual relationship with the company, regardless of the contract to which they are a party or any other valid reason. It will not be a matter of liability for the board members, but rather the application of the principle of unjust enrichment.

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STJ. AV. Burak Yıldırır