Limitation on Dİstribution of Profits Due To Covid-19

I. Summary
The Announcement has been enacted within the scope of the provisional article brought to the Turkish Commercial Code numbered 6102 (the “TCC”) regulated under “The Law on Commuting the Effects of New Coronavirus on Economic and Social Life and Amending Some Certain Laws numbered 7244” (the “Omnibus Bill”) published on the Official Gazette dated 17 April 2020 and numbered 31102; by taking into consideration the potential uncertainty triggered by the Announcement in terms of the business entities due to having merely the characteristics of an advisory declaration (as being solely a ministerial act and either not constituting a force of law or bearing any power of sanction) regarding taking the particular precautions in order to “bypass” the period of Covid-19 with the least amount of loss as possible.

Following the Omnibus Bill, the Communiqué on the Procedures and Principles Regarding the Implementation of Limitations on Distribution of Profits (the “Communiqué”) was published in the Official Gazette dated 17 May 2020 numbered 31130 and the Communiqué has entered into force as of its publication date. The Communiqué constitutes a part of the set of guidelines providing further details regarding the implementation of this new limitation.

Accordingly, by the precautionary policy, pursuant to the Provisional Article 13 introduced by the Omnibus Bill to the TCC and the Communiqué both having the purpose of not lowering the company resources by means of cash distributions, providing the companies’ current capital maintenance and not arising additional financial needs:

• From the date of 17 April 2020 to 30 September 2020, companies may resolve to distribute only 25% of the net profit gained in the 2019 fiscal year. In other words, the amount of the cash dividends to be resolved for distribution shall not exceed the 25% of net profit of the financial year of 2019, until the date of 30 September 2020.
• Companies cannot resolve on distribution of the previous years’ profits and voluntary reserves.
• Capital increase through internal resources are excluded from the scope of the limitation. In other words, it is not limited by law to keep the dividends within the company and converting dividends into shares through capital increase and distributed to shareholders.
• Companies’ General Assemblies (“GA”) cannot grant board of directors the right to distribute advance dividend.
• Moreover, in case that a resolution regarding the distribution of dividends of 2019 financial year was already taken by the GA, but a payment has not been carried out or partial payment has been made, the payments corresponding to the exceeding part of 25% are to be postponed until the date of 30 September 2020.
• The President of the Republic of Turkey is authorized to extend or shorten the mentioned periods by 3 (three) months.

II. Exemptions to the Limitation
The companies resolving to distribute the profit stated below are exempted from the limitation. Provided that;

• The profit resolved on to be distributed does not exceed TRY 120.000. However; these companies are excluded from the scope of the exemption: (i) the companies employing employees benefitting from short-term working allowance on the grounds of compelling reason arising from Covid-19 and/or wage support who were sent on unpaid leave and (ii) the companies benefitting from Treasury-backed credit warranty and having credit outstanding balance due pursuant to the Provisional Article 20 of the Law on the Regulation of Public Financing and Debt Management No. 4749 and relevant Decrees.
• More than half of the profit resolved on, to be distributed is exclusively used for fulfilling Company’s capital commitments payable in cash and at once to another stock company within the scope of the TCC.
• The profit resolved on to be distributed is used for fulfilling in cash the obligations becoming payable until the date of 30 September 2020 in accordance with the signed loan agreements or project finance agreements.

However; the payments regarding the exceeding amounts of the obligations within the scope of this provision are postponed to 30 September 2020.

Additionally, and importantly; in the scope of the exemption, in order for distribution of profits to be put on the agenda in GA, opinion on convenience of the MoT must be obtained through the application with necessary documentation before the General Directorate of Domestic Trade. For the application, GA documentation and some relevant information has to be submitted to the General Directorate of Domestic Trade. Therefore, the application should be made before the GA.

III. Base of the Financial Statements
For determination of dividend, the following financial statements are based on; (i) Financial statements prepared in compliance with TCC by the ones being under the obligation of preparing statements conforming to the standards set out by the Public Oversight Accounting and Auditing Standards Authority and (ii) Apart from these; statements prepared according to the Tax Procedure Law No. 213 (the “Law No. 213”)

In addition, the profit resolved on to be distributed cannot exceed the total amount of the resources being subject to distribution involved in the records kept according to the Law No. 213.

IV. Comments and Explanations
a. Registration Requirements: The TCC governs that dividend distribution can only be resolved via GA of shareholders authorizing the Board of Directors (or Managers in limited liability companies) for the application and distribution of the dividends. In any case, such GA resolution requires the Trade Registry registration and subsequent the Trade Registry Gazette publication to validly enter into effect.

There exists a probability that the Trade Registries may reject/refuse the registration of any GA resolutions that include any number or ratio exceeding the amount permitted by the Provisional Article 13 even though such distribution is postponed to a date later than 30 September 2020. Since GA resolutions (agenda subjects) are executed as a single procedure, it is probable that the whole procedure may be rejected/refused for registration by the Trade Registry.

In this regard, any GA resolution rendered before 30 September 2020 in which a dividend distribution resolution is present should defer to the 25% limit set by the Provisional Article 13. Otherwise, the procedure may be refused by the Trade Registry.

b. Miscellaneous Aspects: The distribution of dividends/profits essentially holds separate aspects and procedures in financial and accounting activities of a company as well. While the procedure and background process of constructing the basis of distribution is of legal concern, realization and execution of the distribution is a matter of financial and accounting processes. While there are various and multiple options and methods preferred or used by various capital depending on corporate structures, regulations and practices, this paper has only considered the legal basis and aspects of the process in light of the Omnibus Bill and the Provisional Article 13 enacted into the TCC by it.

c. Sanctions or Penalties: Moreover; the course of proceedings to be conducted on detecting the violations or what sanctions to be imposed on the actors have not been set forth under the regulations regarding the limitation.

V. Conclusion

• It should be noted that distribution of profits is not prohibited, only the amount of the profit distribution is limited. In other words, the Provisional Article 13 to the TCC limits the distribution of distributable profits/dividends from the 2019 financial term of stock companies by 25% until 30 September 2020. Further amendment of the deadline is subject to the decision of the President of the Republic of Turkey.
• Capital increase through internal resources are out of the scope of the limitation.
• Any resolution obtained before 30 September 2020 containing a point of order or specific resolution that may be interpreted, especially by administrative authorities and offices, as exceeding the limit of 25% may be considered in breach of the Omnibus Bill and the Provisional Article 13.
• If a profit distribution is in question under the 2019 year-end financial statements; before the GA meetings, it is advised to issue an interim balance sheet so that the financial standing of the company could be ascertained. Accordingly; whether a net profit distribution of 25% will have an adverse impact on the company is to be assessed.
• The board of directors and shareholders hold the liability of adopting resolutions complying with the legislation, regardless of the Trade Registry practices, as profit distribution resolutions are not subject to registration.
• If a resolution on profit distribution has been adopted for the 2019 fiscal year before the enforcement of the limitation, but the payment has not yet made or merely partially made, a new resolution ought to be resolved to postpone the payments regarding any profit exceeding 25% of net profit for the 2019 fiscal year, until 30 September 2020.

Please do not hesitate to contact us for additional and detailed information.

Reşat Moral, Managing Partner, Head of Corporate M&A
Karaca Kacar, Senior Associate
Nur Duygu Bozkurt, Associate
Burak Batı, Trainee Lawyer