Business Law

EXAMINATION OF THE CONCEPT OF DOMINATION IN THE GROUP OF COMPANIES

The concept of Group of Companies is regulated in accordance with the Turkish Commercial Code, although the dominant (controlling) company and affiliated companies are separate legal entities, they are considered a group of companies when certain conditions occur. In order to be able to talk about the fact that one company has established dominance over another company, certain criteria have been created in accordance with the legislation. If a company directly or indirectly owns the majority of the voting rights of another company, has the right to elect a number of board members who constitute a majority that can be decided in the company’s managing body, or has a majority of voting rights based on a contract, it constitutes an indication that a dominance relationship has been established. Although it is not limited to the above-mentioned cases, it is observed that companies establish dominance relations over other companies in other ways in practice. 

The formation of a dominant company and affiliated company relationship will require the parties to be subject to the group of companies’ regime. As there are advantages and disadvantages of this situation, it is important that the parties make decisions in accordance with the common interests and implement valid policies within the established economic and legal integrity. The company’s shareholders and creditors are entitled to compensation and litigation if these structures, which form integrity according to company law, operate and act unlawfully. It should also be noted that these structures also provide significant credit and tax benefits to shareholders if they are not used unlawfully. 

 

Rights and Obligations of the Dominant Company: 

The most important legal right of the dominant company is that it has the right of dominance, and it directs orders and instructions to the company because it has the right of authority in the management of the affliated company. 

 

Obligation to Report: The first of the obligations of the dominant company to other shareholders and the board of directors is the obligation to provide information and report. Reports should be given in accordance with the principle of honesty, minding the duty of care and objective about the transactions, commercial and legal relations and the results and effects. It should be noted that each member of the board of directors of the company and its affiliates has the right to request a report in accordance with the principle of accountability. The information and reports obtained cannot be used by the dominant company in favor of third parties either. 

 

Failure of the Dominant Company to Unlawfully Instruct and Direct the Affiliated Company: In accordance with the Article 2 of the Civil Code, the Dominant Company must comply with the rule of good faith while exercising its rights and fulfilling its obligations. It is required not to abuse the right, not to give instructions contrary to the rules of law and morality. This issue will be written in detail in the rest of the letter.

 

Rights and Obligations of the Affiliated Company: 

The Affiliated Company has obligations to other shareholders, partners, and creditors. Its obligations to the Dominant Company can be exemplified as reporting in accordance with the principles of explicitness and honesty, following the instructions given by the dominant company and acting appropriately, not causing damage to the dominant company and shareholders. The affiliated company is subject to the provisions regarding liability lawsuits that shareholders and creditors can file. 

When it comes to the rights of affiliated companies, they have the right to not comply with unlawful transactions and instructions, the right to demand compensation in case of unlawful instructions, to sign a contract with the dominant company in case an unlawful transaction is given as a directive and to obtain a right of recourse against the dominant company. Finally, the Shareholders of the Affiliated Company have the right to request an auditor in order to identify the risk, prevent unlawful behavior and achieve material truth.

 

Unlawful Use of Dominance:

Pursuant to the Turkish Commercial Code, it is against the law for a dominant company to use its dominance in such a way as to cause losses to affiliated companies. The lawmaker exemplified these situations as follows; 

1) Transfer of business, assets, funds, personnel receivables and debts of an affiliate company to another partnership

2) To make transactions that reduce the profit of the affiliated company or transfer it to someone else 

3) The affiliated company’s assuming responsibilities such as giving surety and guarantee, taking on debt

4) The affiliated company’s closing the facility without any reason, not renovating it, limiting its investments, or taking decisions that reduce efficiency and negatively affect the field of activity

It should be added that it is obvious that depriving the affiliated company of an opportunity without reducing its assets will also prove the unlawful use of dominance. However, if the losses incurred are compensated and equalized within the year of operation, the unlawfulness disappear. 

 

Claims and Lawsuits to be Applied in Case of Unlawfulness:

If the equalization is not performed as a result of the unlawful use of dominance by the dominant company, the following legal procedures may be applied against the dominant company and the responsible members of the board of directors. 

1) Alternative solution compensation lawsuit by shareholders of the affiliated company, 

2) A claim for damages by creditors of the affiliated company,

3) A lawsuit for the inadequacy and inappropriateness of the equalization, 

4) A lawsuit for the nullity or cancellation of the resolution of the general assembly that caused the loss.

Moreover, as a result of the unlawful use of the dominance relationship, as well as the fact that the voting power is used by the dominant company, causing the affiliated company to take decisions on the general assembly or the board of directors, the shareholders of the affiliated company partners are damaged. In cases where the dominant company does not have a justifiable reason, the shareholders of the affiliated company face serious losses as a result of pressure by voting power, changing the partnership structure, dissolution of the partnership, and radical changes made in the articles of association or the financial structure of the company. The following legal procedures may be applied against these resolutions:

1) A claim for damages, 

2) A lawsuit for the acquisition of the plaintiff’s shares, 

3) A lawsuit for the determination of the nullity of the resolution of the general assembly or the case for cancellation of the decision,

4) A lawsuit for the determination of nullity of the resolution of the board of directors


Yağız Öztim

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