Although it is possible for any general manager of a public joint stock company to be also appointed as a general manager and/or a board member of a private joint stock company within the same capital group; the consequences of this situation must be evaluated separately with regards to Turkish Commercial Code (“TCC”) and capital markets legislation.
I. Analysis in terms of TCC
Use of Representative Authority and the Responsibilities of the Directors
While there is no definition of general manager in Turkish Law, it can be described as a manager equipped with powers of a “commercial representative” authorized to conduct every transaction falling under the company’s objective, due to the reason that the general manager is the person responsible for the direction and management of the company and its operations. Pursuant to Article 370 of TCC, the Board of Directors can delegate its representational authority to one or more executive directors or to managers as third parties. Therefore, although appointing a general manager as a commercial representative to whom the power of management may also be assigned, and who generally is a merchant assistant with the widest powers is a common practice, it is not mandatory to appoint a general manager to companies under TCC. On the other hand, there is no provision prohibiting the appointment of the same person in multiple joint stock companies as general manager. In this situation, if the general manager is working in multiple companies with the same title, and when a situation arises which can lead to conflict of interest between said two companies, the general manager must not prefer the interest of one company over another, and must act as a prudent manager to carry out his/her duty of care towards both companies. A prudent manager must simultaneously evaluate the interests of the multiple companies he/she works as a general manager based on risk-return relationship, and avoid proceeding if it is foreseeable that a decision made for one of these companies can harm the other company, and not use any important specific information pertaining to one company when making decisions about the other company. Otherwise, the general manager will be responsible to the company, against which he/she makes a choice, along with said company’s shareholders and creditors under Article 553 of TCC due to losses incurred by such company as a result of violation of general manager’s obligations arising from the laws and the articles of association through his/her fault. The criteria to determine the responsibility herein is the duty of care and commitment, which is measured by the performance of general manager’s duties with the care of a prudent manager and safeguarding the interests of the company with good faith.
If the representative who is appointed as general manager of multiple companies, is also a member of a board of directors in at least one of those companies, permission of the General Assembly must be obtained for at least some actions. Article 395 and 396 of TCC regulate prohibitions for board members to conduct transactions with the company, and their non-compete obligations. Due to the fact that a board member’s entering into a transaction with the company on behalf of another person falls under the prohibition to conduct a transaction with the company, the general manager who conducts transactions between two companies where he/she is a board member in one company and general manager in both companies, will fall under the prohibition regulated by the law. If the fields of activity of the said two companies, where the same person is the general manager of both and board member in at least one of them, are also the same, then the non-competition stipulated in Article 396 of TCC will apply. However, both of these prohibitions can be overridden by a permission given by the General Assembly.
II. Analysis in terms of Capital Markets Regulations
Corporate Governance Principles
Regulations concerning the management structure of public joint stock companies are included in the Capital Market Board’s II-17.1 Communiqué on Corporate Governance (“Communiqué”). In a similar fashion to TCC, Communiqué does not have a provision which mandates that a general manager must be appointed in public joint stock companies. The terms chief executive officer and general manager have been used interchangeably in Corporate Governance Principles (“CGP”), and in several provisions, the existence of a manager who assumes functions similar to those of a general manager have been accepted even when one does not exist. Pursuant to CGP, there is no obstacle prohibiting a person who is a general manager and/or board member in a public joint stock company from assuming similar duties in another company. However, if a person who is the chairman of the board or who has similar managerial responsibilities in a public company is appointed as the general manager, a public disclosure must be made in that case together with relevant justifications and it is mandatory to comply with this principle.
Situations that Require Notification to the General Assembly
As stated above, assumption of duties that have the representative authority in multiple companies, even if they belong to the same capital group, by the same person may lead to conflicts of interest. As a matter of fact, CGP also requires that transactions that may cause conflict of interest need to be notified to the General Assembly and made public.
In parallel with the board member’s obtaining permission from the General Assembly who are in situations regulated in Article 395 and 396 of TCC, said transactions have been regulated in Article 1.3.7 of CGP with respect to the obligation to inform the General Assembly. In CGP, this obligation has been regulated not only for the executive who is the general manager, but for all persons with managerial responsibilities, including the members of the board of directors. (According to Article 4 of Communiqué II-15.1, persons with managerial responsibilities are defined as follows: “1) Members of board of directors of the issuer, 2) Persons who have direct or indirect regular access to insider information of the issuer, though not being a director, and who are authorized to take managerial decisions which impact the issuer’s future development and commercial targets”)
If the general manager conducts transactions with the said joint stock company or its subsidiaries personally or as a representative, the obligation to inform the General Assembly arises, provided that the transaction “is significant” and “might cause a conflict of interest” depending on a concrete case-based evaluation. If the parties to the transaction operate in similar fields of activity, the existence of conflict of interest can be claimed; however, considering the fact that the parties are members of the same capital group, the conflicting interests will serve the benefit of the group in the end. Due to the fact that Article 1.3.7 of CGP is a provision which does not prohibit the performance of a transaction that leads to conflict of interest but one that aims for the shareholders to be notified about the same, the related party transactions where the managers of both parties who have representative authority are the same can potentially lead to conflict of interest even if it do not harm the group interests, thus they can be considered within the scope of Articles 1.3.6 – 1.3.7 of CGP.
The conduct of the transactions which overlap with the works that are actually performed within the field of activity cited in the articles of association of the public company by persons who fall under Article 1.3.7 of CGP for themselves or on behalf of others, or participating into another company which performs the same commercial activities as a partner with unlimited liability, (in other words, when a person cited in the said provision competes with the public company) this is another situation that must be notified to the General Assembly. If the fields of activity of two companies in the same capital group, one of which is public, are in the same sector, and if the actual transactions to be conducted are not so different that they cannot be considered within the definition of competition, it can be concluded that the person who is in the management of both companies (in other words, if the general manager who has a managerial responsibility in the public company also has managerial or representative responsibility in the other company), competes in the field of activity of the said public joint stock company and the obligation to inform the General Assembly arises.
Pursuant to CGP, information about the duties the board members and managers of a listed company perform outside the company – even if they are performed within the same capital group – must be provided in the annual report of the board of directors.
Insider Trading Risk
When a person works as a general manager in multiple joint stock companies at least one of which is public, this increases the risk that information pertaining to the public company can be used in the decision–making mechanisms of other subsidiaries. Therefore, even if this information is not actually used, the person who is a general manager faces the risk of insider trading which is regulated in Article 106 of the Capital Market Law. Gaining benefit for oneself or on behalf of a third party by giving purchase or sale orders for capital market instruments or changing the orders previously given or cancelling them based on information which have not been disclosed to public yet and which can affect the prices or values of such instruments or decisions of investors is defined as insider trading. Therefore, those who work as general manager or director/representative in multiple companies must ensure other companies they work at, not to conduct transactions over the shares of the said public joint stock company. Insider trading crime can also be committed by transferring, significant information which someone possesses and not yet disclosed to public, to others and causing others to gain benefit by conducting transactions based on such information. Therefore, ensuring the confidentiality of the information obtained on account of the managerial position in the public company, and avoiding information sharing which could lead to insider trading risk are of utmost importance regardless of the definition of his/her position in other companies.
MORAL & PARTNERS
Serra Haviyo, Partner
Yelda Yalçın, Associate
Dilara Kürkçüoğlu, Legal Intern