ABSTRACT
The aim of this article is to examine the dominant position (in the negation process) which unfolds after drawing a “domination agreement” in group companies which is regulated in the Turkish Commercial Code (“TCC”). Furthermore, we will determine the scope of domination agreements; we will particularly scrutinize the relationship between the dominant and the affiliated company by evaluating the formation of group of companies and the application of the subsequent regulations.
Accordingly, obligations of the parties will be primarily dealt within the scope of domination agreements and their legal nature pursuant to the TCC and other related legislations. Additionally, we will also address the obligations that arise out of domination agreement which are executed by the dominant company and the affiliated company. Lastly, we will evaluate the domination agreement’s effects on the formation and management of group of companies.
I. INTRODUCTION
Although the concepts of “dominant” and “affiliated companies” are introduced in the Turkish Commercial Code1 (“TCC”), the bases determining their relationships are not regulated.
Domination agreement entails an agreement whereby the dominant company acquires the rights and obligations with which the affiliated company can be controlled. “Dominant company” acquires an administrative authority over the affiliated company with the domination agreement. Hence, by transferring the administrative authority of the affiliated company to the dominant company, it is ensured that the affiliated company is kept under control. The domination of the dominant company over the affiliated one as a result of the agreement is established regardless of the actual use of its powers.
Domination agreements are subject to certain conditions by the Turkish Commercial Code. The first requirement is that these “domination agreements” have to be conducted in a written form. Also, as a condition of validity, these agreements have to be registered and announced in trade registry2. By doing so, third parties will be notified of the existence of the relevant domination agreement. In addition, even if the domination agreement is considered as invalid, parties cannot relieve themselves from the obligations arising out of the mentioned agreements as a consequence of the relevant provision which indicates that “invalidity of agreement shall not prevent the application of other provisions regarding the liabilities and obligations on the group of companies set forth in this law and other laws.”
All the rights of the managing body of the affiliated company except for the non-assignable rights can be fully or partially assigned to the dominant company through a domination agreement. Although all alienable rights of the managing body of the affiliated company may be fully assigned, partial domination agreements are also executed for a specific field or activity, e.g., financing, purchase and staff recruitment4.
Besides, the decision to provide instruction to the affiliated company is in dominant company’s own discretion and non-use of this right will not affect the validity of the agreement. Moreover, denotation of the aforementioned agreement as “domination agreement” is not required. Hence, any agreement whereby an executive power is assigned to another company, fully or partially, shall be considered as a domination agreement.
Furthermore, the agreements which oblige a party of to obtain the other party’s approval for the decisions to be taken by the managing body or agreements that grant veto power to the other party, are also considered as domination agreement.4 For instance, in a loan agreement executed between a bank and a company, the veto power regarding significant decisions to be taken by the company may be granted to the bank. In such case, the bank has a dominance position over that company.
In domination agreements, there may be a relation between the parties or an agreement may be executed between two companies with no relation at all. In the Commercial Registry Regulation (“Regulation”), domination agreement is defined as “an agreement that unconditionally entitles one of the companies to instruct the managing body of the other equity company regardless of the relationship between them, if any, or between two parties that there is no direct or indirect subsidiary relationship, at all”5.
Domination agreements are subject to law of obligations. Moreover, domination agreements are reciprocal and istin synallagmatic6 agreements. With the domination agreement, parties enter into an obligation of performance to each other. As a consequence, both the dominant company and the affiliated company shall conform the liabilities determined in the domination agreement.
II. OBLIGATIONS OF THE PARTIES IN THE DOMINATION AGREEMENT
Domination agreement is an istin synallagmatic agreement, meaning that the dominant company and the affiliated company mutually undertake to incur a debt and perform some specific obligations.
A. Obligations of a Dominant Company
According to the domination agreement, the dominant company is under obligation to comport in a cautious and prudent way to the affiliated company as the dominant agreement’s aim is to ensure joint interest of all the companies that form group of companies by consolidating management of these companies. Pursuant to principle of bona fides7, the dominant company shall exercise its executive authority granted to itself in accordance with the law. If the dominant company abuses its aforementioned authority, it shall be obliged to compensate the damages suffered by the affiliated company.
On the other hand, the dominant company is obliged to report its relations conducted with the affiliated company. The content of these reports is indicated in Article 199 of the TCC. A request is required for the preparation of these reports. The right to request the preparation of these reports is granted to the members of the board of directors of the dominant company. The affiliated company is obliged to submit necessary information and documents required for the preparation of such report unless the affiliated company proves a valid ground not to do so. It must be taken into consideration that the aforementioned information can only be received so as to use in the dominant company reports8. If aforementioned information is received for a third party’s usage, the member of the board of directors who made the request shall be legally liable9.
B. Obligations of an Affiliated Company
Pursuant to the domination agreement, the affiliated company is obliged to perform the instructions given by the dominant company within the frame of obligation of diligence and fidelity. The affiliated company performs this obligation in accordance with the instructions of the dominant company. On the other hand, it is stipulated in the TCC that “The board of directors of the affiliated company shall draw up a report within the first three months of the activity year on company’s relations conducted with the dominant companies and affiliated companies. In the report, all legal proceedings performed with the dominant company or any of the affiliated companies or all legal proceedings performed in favor of the dominant company or any of its affiliated company through the instruction of the dominant company and as well as all measures taken or avoided to be taken in favor of the dominant company or its affiliated company in the last activity year shall be stated.”10
It is indicated in the aforementioned provision that the affiliated company is obliged to provide an affiliation report which has to be prepared based upon the domination agreement executed between the dominant company and affiliated company. Furthermore, the affiliated company is also obliged to submit its financial information to the dominant company due to the domination agreement.
III. OBLIGATIONS IN ACCORDANCE WITH THE DOMINATION AGREEMENT
According to the provisions regarding obligations arising out of the domination agreement stipulated under the TCC11, the affiliated company cannot directly demand of the dominant company equalization of the damages that occur due to the performance of the instructions realized in accordance with the domination agreement. However, parties may agree in the agreement on a provision which regulates that the affiliated company may directly demand of the dominant company the damages arising out of the agreement12.
A. Obligations of a Dominant Company and the Members of a Dominant Company’s Board of Directors
1. Obligations in Partial Dominance Status
The fact that the dominant company takes over the control of the management board of the affiliated company does not entail that the dominate company has a free ride, and may take decisions that might harm the affiliated company. The dominant company cannot force the affiliated company to perform legal transactions such as assignment of business, personnel, receivable and debt, to reduce or transfer its profit, to restrict its assets with real rights or personal rights, to make payments, to take a decision or measures that will negatively affect its activity or productivity or to avoid taking measures which will provide the development of the affiliated company by the way of setting restrictions on investments of affiliated company without having a valid reason13. If the dominant company causes losses to the affiliated company, the affiliated company can claim compensation from the dominant company in the year of activity. However, the dominant company and members of the dominant company’s board of directors will not be held liable for the damages arising out of the instructions given to the affiliated company, provided that the losses of the affiliated company shall be compensated or entitled with the right of claim with an equal value. Otherwise, if a dominant company refuses to compensate the losses of affiliated company suffered in that year or does not grant the right of claim to the affiliated company, all shareholders and creditors of the affiliated company can claim compensation of the damages from the dominant company and members of the dominant company’s board of directors.
Each shareholder and creditor of the affiliated company can file a lawsuit against the dominant company regarding to the damages incurred by themselves14. If the shareholders request compensation through litigation, the judge may decide on request or ex officio to purchase shares of those shareholders of the affiliated company or to have other acceptable solutions instead of compensation. Additionally, the TCC stipulates that “compensation cannot be claimed in cases where it is proven that under the same or similar conditions, the transaction the board members of an independent company, who take care of the company’s interest in good faith and act with the care of a prudent manager, or that it could have been refrained from that transaction.”15 If it is proven that the dominant company and members of the dominant company’s board of directors acted diligently, the aforementioned provision stipulates that the dominant company and members of the dominant company’s board of directors will not be held liable.
Moreover, there are also some regulations protecting the rights of the shareholders of the affiliated company. According to the TCC, the shareholders of the affiliated company can assert some of their claims to the dominant company in certain conditions. In transactions realized through performance of dominance and which do not have an understandable valid ground such as merger, demerger and material amendments of articles of association, shareholders rejecting general assembly decision by annotating their rejection to the general assembly meeting minutes or rejecting resolution of the board of directors’ decisions in written in those subjects, may request compensation of their damages or purchase of their shares from the dominant company through filing a law suit. Accordingly, shareholders of the affiliated company are protected considering matters indicated in the TCC16.
2. Obligations in Complete Dominance Status
The obligations of the dominant company and members of the dominant company’s board of directors are stipulated distinctly in the status of complete dominance under the TCC. The TCC stipulates that “If the dominant company, directly or indirectly, holds hundred percent of the shares and voting rights of the affiliated company, dominant company’s board of directors can give instructions to the affiliated company, even if those instructions may cause the affiliated company to incur losses, provided that those instructions are the results of the policies of the group, in which the dominant company is a party of. The bodies of the affiliated company have to comply with such instructions."17 In accordance with the aforementioned provision, in complete dominance status, the dominant company may also give instructions to the managing body of the affiliated company regarding the matters restricted above, in order for the group of companies to procure in a uniform way. Even if there is not a domination agreement executed between the dominant company and affiliated company, the dominant company may give instructions that cause the affiliated company to incur losses, provided that the dominant company directly or indirectly holds shares and voting rights of the affiliated company18.
However, an exception has been set forth under the TCC stating that “Dominant company, however, cannot give instructions, results of which will clearly exceed the affiliated company’s solvency, and endanger its existence, or cause a significant loss of its assets.”19 Therefore, even though the dominant company has a complete dominance status over the affiliated company, dominant company cannot instruct in ways that are prohibited by the previous provision. If the dominant company gives instructions causing the affiliated company to incur losses, creditors of the affiliated company may file a law suit regarding compensation of damages from the dominant company and members of the dominant company’s board of directors. However, in case a law suit is filed, the dominant company and members of the dominant company’s board of directors shall not be held liable if they can prove that they acted diligently.
a. Obligations of an Affiliated Company and the Members of an Affiliated Company’s Board of Directors
i. Obligations in Partial Dominance Status
In cases where a dominant company does not hold hundred percent of the shares and voting rights of the affiliated company, directly or indirectly, a complete domination relationship does not to exist. In aforementioned situations, the instructions given by the dominant company should not be to the disadvantage of the affiliated company, or cause the affiliated company to incur a loss. Even in a situation where there is a domination based on a domination agreement between the dominant company and the affiliated company, that domination does not give the dominant company the right to give illegal instructions to the affiliated company. Therefore, a domination relation is illegal when a dominant company causes losses for the affiliated company’s shareholders and the creditors, due to its bad instructions and without valid reasons.
If the managing body of the affiliated company follows the instructions of the instructions based on the domination agreement, that action may bind them. For instance, the managing body of the affiliated company may restrict its investments due to an instruction of the dominant company. However, if these instructions cause losses to the affiliated company, the affiliated company may disobey these instructions and set aside. Also, it must be noted that the members of the affiliated company’s board of directors can be held liable for the fulfillment of such instructions that cause the affiliated company to incur losses.
ii. Obligations in Complete Dominance Status
A complete domination relationship tends to exist in cases where the dominant company, directly or indirectly, holds hundred percent of the shares and voting rights of the affiliated company. In case of a complete domination relationship existing between two commercial companies, the affiliated company is obliged to comply with the instructions, even if it makes them incur losses20. However, instruction which explicitly exceeds the affiliated company’s ability to pay or may endanger the affiliated company’s existence or may cause it to lose its significant assets cannot be given21. If the dominant company does give these kinds of incumbent instructions making the affiliated company incur losses, the board of directors, executives or other relevant persons of the affiliated company may not be held liable for these losses22. However, the company creditors’ right to file a law suit is reserved.
IV. CONCLUSION
The interests of groups of companies have been protected by the TCC and by Regulations which are enacted to serve these purposes. These regulations have defined the term of group of companies and furthermore established provisions for domination agreements that set up a uniformed administrative substructure aims to provide the joint interest. Moreover, the liabilities and obligations of the contracting parties have also been indicated in these regulations. Domination relationship between the dominant company and the affiliated company is established through the domination agreement and some rights are granted and some obligations are imposed on the parties based on the aforementioned domination relationships.
In addition to the domination agreement, one may also find some agreements that establish domination relationship between two commercial companies. The status of these agreements and their scopes are not explicitly regulated in the legislation. Thus, this situation causes disagreements especially on announcement and registration of the aforementioned agreements in the trade registry. Moreover, in case a dominant company is the shareholder of the affiliated company, the existence of the dominant company’s right to vote in the affiliated company’s general assembly needs an approval of the domination agreement. Additionally, the concept of group of companies has been strengthened through domination agreements and a more uniform management of these companies has been procured.
BIBLIOGRAPHY
Neslihan Karataş, “Ticaret Kanunu Kapsamındaki Şirket Toplulukları ve Bunların Vergi Hukuku Karşısındaki Durumları”, I. Ticaret Hukuku Uluslararası Sempozyumu, Ankara 2014
Veliye Yanlı, Hakimiyet Sözleşmeleri, Regesta Ticaret Hukuku Dergisi, Volume: 3 Number: 1, 2013/1 Istanbul p. 6-16
FOOTNOTE
1 Turkish Commercial Code (TCC) numbered 6102, Official Gazette (OG) dated 14.02.2011, numbered 27836.
2 TCC Art. 198/3.
3 LANGERBUCHER,K.Schmidt/Lutter, AktG § 291, N.30, 31. narrated from Veliye Yanlı, “Hakimiyet Sözleşmeleri”, Regesta Ticaret Hukuku Dergisi, Volume: 3 Number: 1, Istanbul 2013, p. 7.
4 Yanlı, p. 7.
5 Art. 106 of the Trade Registry Regulation published in the OG dated 27.01.2013, numbered 28541.
6 Istin synallagmatic means, both parties shall be liable for debt due to relevant agreement.
7 Art. 2 of the Turkish Civil Code numbered 4721.
8 Neslihan Karataş, “Ticaret Kanunu Kapsamındaki Şirket Toplulukları ve Bunların Vergi Hukuku Karşısındaki Durumları” I. Ticaret Hukuku Uluslararası Sempozyumu, Ankara 2014, p. 73.
9 TCC Art. 199/4.
10 TCC Art. 199/1.
11 TCC Art. 202-206.
12 Yanlı, p. 16
13 TCC Art. 202/1-a.
14 TCC Art. 202/1-b.
15 TCC Art. 202/1-d.
16 TCC Art. 202/2.
17 TCC Art. 203.
18 Yanlı, p. 6.
19 TCC Art. 204.
20 TCC Art. 203.
21 TCC Art. 204.
22 TCC Art. 205.
