INTRODUCTION
Joint stock companies are legal entities founded for the purpose to function under a trade name, with a fixed capital divided into shares and liability from the obligations of which is only limited to their assets. The organ in charge to manage and represent the joint stock company is, however, the board of directors. In other words, the board of directors of a joint stock company, in principle, is entrusted with the management of corporate affairs and business of such company. The main duties of the board of directors are; fulfilment of the executive functions, overall control and supervision of the corporate affairs and representation of the company against third parties. Hence; as per Article 365 of the Turkish Commercial Code numbered 6102 (“TCC”), right to manage and authority to represent a company are granted to the board of directors. However, the members of the board of directors are not expected to devote their whole time and attention to the business of the company due to such rights and authorities. Moreover, unlike the old Turkish Commercial Code numbered 6762, a new distinction between management and representation duties of members of the board of directors has been introduced under the TCC. The TCC classifies the management authority as an administrative duty, whereas the representation authority is put in line with Article 370. In this regard, under the TCC, the members of the board of directors are authorized to, partly or entirely, delegate the management and representation authorities, to one (1) or several members of the board of directors or third parties to the extent permitted by the articles of association.
1. DELEGATION OF THE MANAGEMENT AUTHORITY OF THE BOARD OF DIRECTORS
Unless otherwise prohibited by the applicable private legislation, board of directors may delegate any of its authorities concerning the management. Delegation of the management authority does not only express delegation of the authority to execute resolutions, but it also expresses the delegation of direct management function, in other words, the authority to make decision. Article 367 of the TCC states the manner of delegation as follows; “The Board of Directors may be entitled to delegate its authorities, partly or entirely, to one or several members of the board of directors, or to a third party by inserting a special provision in the articles of association regulating an internal directive…”. According to the respective provision, to delegate the management authority; (i) a provision which permits the delegation of the management shall take place in the articles of association, (ii) an internal directive concerning the delegation of management shall be prepared and (iii) the board of directors shall take a resolution to approve such internal directive. Exception to this general rule is specified under Article 375 of the TCC, considering non-assignable duties and authorities of the board of directors. Such authorities stated under Article 375 are as follows:
a. Top-level management of the company and giving instructions in this regard.
b. Determination of the company’s management organization.
c. Establishment of the necessary systems for accounting and finance audit, to the extent required by the company’s management structure.
d. Appointment and dismissal of managers and persons performing the same function and signatory authorities.
e. High-level supervision of whether the persons in charge of management act in accordance with especially the law, articles of association, internal directives and written instructions of the board of directors.
f. Keeping the share ledger, resolution book of the board of directors and the general assembly meeting and discussion registrar, preparation of the annual report and corporate governance disclosure and submission thereof to the general assembly, organization of general assembly meetings, and enforcement of general assembly resolutions.
g. Notifying the court regarding the Company’s state of excess of liabilities over assets.
As stated above, it is possible to delegate the management authority, partially or wholly, to one (1) or several members of the board of directors or third parties. However, the wholly delegation of the rights and obligations, shall refer to the delegation of the rights and obligations which do not fall within the scope of Article 375 of the TCC referring to the non-assignable duties and authorities of the board of directors. In other words, the rights and obligations specified under Article 375 of the TCC cannot be delegated. The legislator has permitted the delegation of all of the assignable rights and obligations excluding the ones as specified in Article 375 of the TCC. The content and function of the internal directive to be regulated to delegate the assignable rights and obligations is stated under the rest of the paragraph 1 of Article 367 of the TCC as; “…specify the management of the company, define, point out the necessary duties in relation thereto, indicate the association between the divisions by clarifying who is reporting to whom…”. In that case, in drafting such internal directive, the board of directors shall also consider any legal restrictions that may be applied on the company as well as certain relevant regulations in its articles of association. The internal directive should also address the company’s management as a whole including detailed information regarding the structure, operation and functions of departments such as manufacturing, marketing and accounting. The legislator has not prescribed the registration of such internal directive. However, the board of directors shall be obliged to inform the shareholders in writing about the internal directive and the transfer of authority as well as the interested creditors provided that such interest is evidenced by such creditor.
2. DELEGATION OF THE REPRESENTATION AUTHORITY OF THE BOARD OF DIRECTORS
As per Article 365 of the TCC, the joint stock companies shall be represented by their board of directors. This provision refers to the external representation of the joint stock companies, in the widest sense, including without limitation to their representation at courts and governmental authorities, and making legal transactions with third parties and giving undertakings on behalf of such joint stock companies. The representation authority shall be used by the signatory authorities through putting their signature under the commercial name (seal) of the company. Signatory authorities who will sign under the commercial name of the company shall be elected by the board of directors. Such authority is a non-assignable authority of the board of directors. First paragraph of Article 370 of the TCC indicates that the company shall be represented through joint signatures of the members of the board of directors, in principle. In order for a company to become liable with single signature or more than two signatures, a provision shall be included in its articles of association in this regard. Similar to the management authority, the delegation of the representation authority is also permitted. In this regard, under the TCC, representation authority may be delegated to one (1) or several executive director or a third person with the intention of assigning such person as a director in charge. Moreover, second paragraph of Article 370 of the TCC states that, at least one member of the board of directors shall have the authority to represent the company. Delegation of management authority is subject to the presence of a special provision in the articles of association and an internal directive regulating such matter. Even though the delegation of the representation authority is not explicitly subject to such requirements as per Article 370 of the TCC, deemed prevailing opinion in the legal doctrine states that the requirements concerning the delegation of the management authority shall also be applicable to delegation of the representation authority. As per another opinion in the legal doctrine, requirements regarding the delegation of management authority shall not apply to the delegation of representation authority by analogy and hence, an internal directive is not required to be prepared.
According to the deemed prevailing opinion in the legal doctrine, the delegation of the representation authority shall be taken into consideration within the scope of Article 367 of the TCC. In this regard, similar to the delegation of the management authority, the delegation of the representation authority can be made through including a provision in the articles of association and preparing an internal directive in this regard. Given the reason that such topic is very debatable, it will be useful to have a provision in the articles of association which will allow the delegation of both the representation authority and the management authority and to issue the internal directive in this regard.
It is also significant to note that the TCC no longer includes ultra vires principle (which relates to the restriction of the company to execute transactions falling outside the scope of such company’s field of activity). Therefore, in case of the company’s representatives execute transactions falling outside the scope of company’s field of activity, those transactions shall be deemed to be binding upon the company unless the other party to that transaction is proved to be aware of the scope, or should have known it according to the circumstances. However, in that case, even though such transaction is valid, the company will have the right to recourse. In addition to that, publishing the company’s articles of association in the Turkish Trade Registry Gazette will not suffice to eliminate the good faith of the third parties in these circumstances. The representation authority by using joint signatures or allocated to the branch offices becomes valid by means of the registration and announcement of the articles of association. However, in practice, the authorities are limited by way of signature circular to eliminate the good faith of the third parties. In this regard, third parties cannot claim good faith in cases where the signature circular includes limitations on the representation authority about amount, subject, authority/institution, number of signature etc., and is registered, announced, and submitted to the relevant party. In order for the board of directors to delegate its representation authority by way of signature circular, the board of directors shall make a resolution first, and then register its.
3. LIABILITY IN CASES OF DELEGATED MANAGEMENT AUTHORITY
In principle, if the management and representation authorities are not delegated as outlined above, then they are deemed to belong to all members of the board of directors. If the board of directors delegates and transfers these authorities, then the person who is assigned to that duty or authority will be liable for its performance and consequences, rather than the individual members of the board of directors. Members of the board of directors are responsible for exercising their duties with due care of a prudent executive and to protect interests of the company by acting in good faith. In case that the management authority is delegated to a single member of the board of directors (executive member), such executive member shall be liable for both management and supervision. However, if the management authority is delegated to a third person, members of the board of directors will only be responsible for supervision. It should be noted that, in case non-assignable duties and authorities are delegated, the responsibility in this regard shall remain on all of the members of the board of directors.
The TCC, in this regard, has adopted differentiated liability for members of the board of directors whereas the old Turkish Commercial Code numbered 6762 contained the concept of joint and several liability. Paragraph 3 of Article 553 of the TCC explicitly states that where authorities are delegated on a legal basis to other persons, the delegator shall not be held liable for the delegatee’s actions and decisions unless it is proven that the delegation has not been exercised with reasonable diligence. In other words, no person can be held liable for the other’s illegal acts, which have occurred out of his/her control, and neither the obligation of supervision, nor the duty of care can be used as grounds for holding such person liable. Therefore, it is explicitly understood that in case of a delegation of management authority, the members of the board of directors will only be held liable if it is proved that they did not act with a reasonable duty of care in choosing the delegatees.
On account of these facts, it would be useless to draft an internal directive including only the organizational matters such as staff reports in terms of the content of liabilities. The directive should also include the decision-making, appointment and assignment mechanisms to be applied to the various departments in the company. As a matter of fact, an internal directive prepared in detail both clarifies the emergence of liability in certain cases (such as non-compliance of documents, false declarations regarding capital, false knowledge as to the insolvency, fault on valuation, and collecting money from public without the Capital Market Board’s permission for the purpose, or with the promise, of establishing a company or to increase the capital etc.), and helps the board of directors to better manage, control and take steps to reduce or eliminate these liabilities.
4. CONCLUSION
As explained in detail above, management and representation authority of the joint stock company belongs to the board of directors. Board of directors may, partly or entirely, delegate its management authority, except for the non-assignable duties and authorities, to one (1) or several members of the board of directors or third parties to the extent permitted by the articles of association.
In cases where the management authority is not delegated, then it is deemed to belong to all members of the board of directors. Similarly, the liability arising thereto shall also belong to such members of the board of directors. In the event that the management authority is delegated, the delegator shall be held liable for the delegatee’s actions and decisions unless the delegation has been exercised with reasonable diligence. Additionally, it should be noted that the responsibility for the non-assignable duties and authorities shall remain on the board of directors.
In addition to the delegation of the management authority, representation authority may also be delegated to one (1) or several executive director or a third person with the intention of assigning such person as a director in charge. Delegation of representation authority bears a similarity with the delegation of management authority. In such a case, board of directors shall determine the scope of the representation authority of the company’s representatives and register and announce the said persons in the Trade Registry Gazette. However, in any case, at least one (1) board member shall have the authority to represent the company. Furthermore, the legislation has indicated that the representation authority may only be restricted as the representation authority by using joint signatures or allocated to the branch offices. Therefore, limitations other than such exceptions can be applicable only if it is proved that third parties are aware of the scope or should have known it according to circumstances.
In addition to the foregoing, TCC abandons ultra vires principle. The company, in principle, shall be held liable from all the actions made by the representatives holding the signatory authority on behalf of the company, even though such actions are not within the scope of the field of activity. However, in that case, even if such transaction is valid, the company will have the right to recourse. In other words, the members of the board of directors responsible to make a transaction which does not fall within the scope of company’s field of activity, will also be responsible to indemnify all the losses that the company may incur in relation thereto.
