In our daily lives, we often encounter many companies that operate as groups or conglomerates, where one company holds the majority of shares in another company. This practical situation, had no legal framework before the Turkish Commercial Code (“TCC”) was changed in 2012, despite its existence in practise. Therefore, the updated Turkish Commercial Code, which was adopted in 2012, introduced regulations related to Corporate Groups or Controlling and Controlled Companies for the first time in order to fill this legal gap and regulate the relationships between such companies. So, what are these corporate groups or controlling and controlled companies?
The section of our law that defines controlling and controlled companies is essentially divided into two parts. Companies that meet the criteria specified in the first part are directly classified as controlling or controlled companies, while the term “presumption of dominance principle ” is generally used for companies that meet the criteria in the second group.
- A commercial company having, directly or indirectly, the majority of:
- voting rights,
- the ability to select the majority of members in the governing body according to the articles of association, or
- the right to form the majority of voting rights, alone or together with other shareholders or partners, based on a contract, or
- The ability to exercise dominance under an agreement or in another way,
In this context, the first mentioned commercial company is the controlling company, and the second is the controlled company. Furthermore, if at least one of these companies has its headquarters in Turkey, the provisions related to corporate groups are applied to these companies.
Presumption of Dominance
However, even if the criteria specified in the law are not met, in commercial life, some companies appear to be unable to act independently from each other. Our law has not ignored these companies and, in order to define the relationships between such companies and to include them within the legal framework, it has used the term “presumption of dominance principle” for these companies. For the application of this principle, certain criteria must be met by the companies.
These criteria can be summarized as follows: i) one company having the majority of shares in another commercial company or having a sufficient number of shares to make decisions that can govern it, or ii) a controlling company having control over another third company through controlled companies. In the second case, the relationship that arises is described as “indirect control,” and the companies directly and indirectly connected to the controlling company, together, form a corporate group.
Being in a controlling or controlled company position brings significant responsibilities, especially for the controlled company, just by acquiring these characteristics. As the name suggests, a controlled company cannot act independently from the controlling company and, therefore, is obligated to report its actions to the controlling company and follow the path indicated by the controlling company.
So, what are the responsibilities of the controlling company towards the controlled company?
The first obligation that can be provided as an answer to this question, by the nature of the relationship, is the responsibility to comply with requests and instructions from the controlling company. The only exception to this obligation is when instructions are given that clearly exceed the controlled company’s financial capacity, endanger its existence, or could lead to significant asset losses.
The second obligation that awaits controlled companies is the requirement, extensively regulated in our law, for the controlled company’s Board of Directors to prepare a report within the first three months of the fiscal year regarding the controlled’s relationships with controlling and other controlled companies, or any other company in accordance with the directions of the controlling company. This report, called “the Controlled Report”, details all legal transactions made by the controlled company with the controlling company, other controlled companies, or other companies under the direction of the controlling company, including their benefits and disadvantages. However, the controlled company’s reporting responsibility does not end there and they must also account for whether they have received compensation for their transactions and, if they have incurred a loss, whether it has been set-off.
Another responsibility of the controlled company, in line with the controlling company’s right to information, is to provide information carefully, truthfully, and honestly, in accordance with the principles of accountability regarding its financial and asset situation, as well as its financial results, the relationships of the controlling and controlled companies with each other, the relationships of the controlling and controlled companies with their shareholders, directors, and their close relatives, the transactions they have made, and their outcomes, upon the request of any shareholder at the General Assembly. The information provision process will also be carried out through a Third Report prepared in conjunction with annual and audit reports. In the preparation stage of the report, the possibility of appointing an expert may arise when the necessary conditions are met. In this case, the controlled company will also have the obligation to provide the necessary information and documents to this expert. Non-compliance with these obligations leads to legal penalties under Article 562 of The TCC , compelling companies to comply with the regulations introduced later regarding these corporate group arrangements.
According to Turkish Commercial Code, what are the responsibilities of the controlled company towards the controlling company?
When reviewing the obligations of the controlled company, it may seem like the controlling company is granted more rights, while in fact, the controlling company also has an obligation to be responsible for, or cover the losses or insolvency of the controlled. The controlling company, by virtue of its position, should establish effective self-control and act in line with a balance of interests. In this regard, the controlling company has an obligation not to use its dominance in a way that will cause the controlled to incur losses. Our law provides examples of the phrase “causing the controlled to incur losses,” such as reducing or transferring profits, assuming responsibilities such as guarantees or endorsements, or not renewing its facilities without just cause.
There is one way for the controlling company to be relieved of this responsibility as described above: offering a claim option to the controlled in an amount equivalent to the loss. However, how will the controlling company present this claim option, or what will happen if the claim option is not offered?
The right of the claim must be presented within the fiscal year and within the specified timeframe, and it should correspond to the anticipated amount of the loss according to the reports provided by the controlled. If the loss is not remedied during the fiscal year or if the right of the claim is not presented within the specified timeframe, each shareholder and creditor of the controlled has the right to demand the controlling company and its Board of Directors to remedy the loss. Otherwise, the controlling company may face situations such as, rectifying an inadequate compensation, cancellation or annulment of the General Assembly decisions that caused the loss, or covering compensation claims.
While these are potential lawsuits that the controlling company (that has caused financial losses to the controlled through abuse of its dominance) may face, it is evident that the controlling company, with its majority of votes, can also cause further harm to the controlled. In addition to the lawsuits mentioned above, the controlling company may also face lawsuits related to the annulment or purchase of shares, taking advantage of its majority of votes. The lawsuit rights granted to the controlled’s shareholders and creditors aim to prevent the arbitrary actions of the controlling company and protect the controlled by setting boundaries.