Limitation of Liability of the Board of Directors of Joint Stock Companies by Internal Directive

2/25/2021

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Per article 367 of the Turkish Commercial Code No. 6102 (“TCC”), boards of directors of joint stock companies may transfer some authority related to the management of the company to some members of the board of directors or to third parties who are not members of the board of directors with an internal directive that it will prepare and put into effect.
The transfer of the authority of management allows the creation of an effective management organization in light of corporate governance principles in joint stock companies, it also constitutes a tool that enables the limitation of the liability of the board of directors.

In this context, questions arise as to the limits of the transfer of liability of the members of the board of directors to certain members of the board or third parties, following such transfer of authority, and the principles of general liability concerning the members of the board of directors transfering such authority shall be explained below.

I. Principles of General Liability
Excluding the elements of special liability as set out under the relevant legislation, in general, per article 553 of the Turkish Commercial Code, in case members of the board of directors and managers violate their obligations arising from the law and the articles of association by their own fault, they shall be liable for the damage they have caused, before the company, the shareholders and the creditors of the company. But no fault can be attributed to members of the board of directors regarding the adoption or the implementation of the resolution, even if there is any damage, members of the board of directors cannot be held liable for this damage.

In the determination of fault, which plays an important role in determining liability, art. 369 of the TCC shall be taken into consideration. Per the relevant provision, members of the board of directors and third parties responsible for management are under the obligation to perform their duties with the care of a cautious manager and to protect the interests of the company in accordance with good faith.

Due to the relevant provisions, members of the board of directors may be held liable for damages that may occur in relation with this obligation of care, even if they leave the actual management and administration to third parties in accordance with the legislation and do not participate in the management of the company. In other words, the responsibility of care of the members of the board of directors will remain in the event of a transfer of authority.

II. Non-liability After Transfer of Authority
With the transfer of authority of management, a separation between the board of directors and the management is implemented. In this way, both the duties necessary for effective company management are assigned to authorized experts, and the relevant liability is passed over to those who are thus authorized, while the liability of the board of directors is limited, ensuring that the management of the company be carried out at a high level and the supervision of managers be carried out independently and effectively.

Accordingly, the person who receives the administrative authority replaces the person who transfers the authority and assumes the liability for the transferred authority. In this regard, the one who transfers the authority loses its duties and powers within the scope of the transfer and becomes nonliable.

II. Special Liability After Transfer of Authority
With the transfer of the authority of management, the duties and powers of the board are limited to selecting the persons to whom the management is transferred, determining the management organization and defining their duties, as well as providing supervision.

a) Selection of Persons to whom Authority will be Transferred
Any corporate body or persons transfering any duty or authority arising from the law or the articles of association, per art. 553/2 of the TCC, shall not be liable for the acts and resolutions of these persons, excluding the case in which it is proved that they did not take reasonable care in the selection of the persons to whom authority is transferred.

Accordingly, in case the selection is made while taking into consideration facts such as that the transferee is specialized in his field, has long years of experience in different segments of the same sector, has received awards documenting his success in that period or he has no criminal record, it will be possible to conclude that such transfer was made by taking reasonable care in relation with the persons to whom authority is transferred.

b) Supervision of the Persons to whom the Management will be Transferred
Regarding a complete transfer of the authority of management, per art. 375/1-e of the TCC, the board of directors has the obligation to supervise the managers as to whether they are acting in accordance with the law, the articles of association, internal guidelines and written instructions of the board.

At this point, since the authority has been transferred completely, whether the board of directors will benefit from the provision of art. 553/2 of the TCC and whether they would be held liable only it is proved that they did not take reasonable care in the selection of the person to whom they transferred authority and that the obligation of supervision would disappear or not in such a case.

Per the majority opinion in the doctrine, it is stated that since the obligation of supervision is inalienable, the authority of management will remain with the board in any case, even if the authority of management has been fully transferred, and the liability shall remain.

For this reason, even if the board of directors transfers the authority of management and supervision, the inalienable duty of supervision will remain with the board of directors.

c) Situations Beyond Control
In addition to the effect of the transfer of authority on liability, the legislation also includes, in the same article, a regulation on non-liability for situations beyond control. Accordingly, per art. 553/3 of the TCC, members of the board of directors cannot be held liable for violations of the law or articles of association or corruption that are beyond their control; this non-liability cannot be invalidated on the grounds of the obligation of supervision and care.

III. In Terms of Non-Transferable and Inalienable Authority
The scope of the transfer of authority is, as limited by non-transferable and inalienable authority of the board of directors, consists of authority and powers which allow the company to make decisions within its discretion about all kinds of business and transactions necessary for the realization of the purpose of the enterprise.

These powers are; (i) the management of the company at a high level and the issuance of instructions related to these, (ii) the determination of the organisation of the management of the company, (iii) setting up the structure necessary for financial planning, to the extent required by accounting, financial control, and the management of the company, (iv) appointment and dismissal of the directors and people with similar functions and with signature powers, (v) supervision of whether persons in charge of the management act in accordance with, especially the laws, articles of association, internal guidelines and written instructions of the board of directors, (vi) maintenance of the ledgers of shares, resolutions of the board of directors and resolutions of the general assembly, preparing the annual activity report and the corporate management statement and submitting these to the general assembly and the executions of the resolutions of the general assembly and (vii) in case of insolvency, notifying the court of such insolvency.

Since these inalienable duties and powers belong to the board of directors, members of the board of directors who are not charged with execution are also liable in relation with the performance of duties and powers that are non-transferable.

IV. Proper Implementation of the Transfer of Authority
However, in addition to all these matters related to the transfer of powers and liability, the matter of the board of directors sharing its powers de facto, without transferring powers (without drafting any internal directive). An authorization in this manner fall within the scope of art. 375/1-d.

However, it should be noted that even if a transfer of authority has actually been made in such cases; the transfer of authority carried out therein shall be considered as an internal division of work as set out in art. 366 of the TCC and the board of directors will continue to be liable as if the authority has not been transferred.

Therefore, carrying out the transfer of authority duly per art. 367 of the TCC is of great importance, regarding the limitation of liability of the board of directors.

Conclusion
The transfer of duties and liabilities to the transferee, in accordance with the legislation, excluding the transfer of the powers that are inalienable per the law, will result in the simultaneous reduction of the liability of those who transfer the said authority. However, it should be noted that in any case, the selection and the supervision of the persons to whom the authority will be transferred, and the responsibility of care must always be observed.

Karaca Kacar, Senior Associate
Nur Duygu Bozkurt Kadirhan, Senior Associate
Burak Batı, Associate

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