ABSTRACT
In a world of increasing economic diversity as a result of globalization, developments in business and finances are continuously increasing in direct proportion to the dynamics of the economy. As the economy and the law are intertwined and complementary, so too are their legal developments. Commercial law is a field of law that protects commercial enterprises, companies, merchants, and other elements that constitute the basis of the economy and includes regulations for the protection of third parties. Companies, on the other hand, are one of the cogs that ensure the systematic progress and continuity of the system driven by the relationship between commercial law and the economy. Companies carry out their operations through mandatory bodies, one of which is the board of directors responsible for the management and representation of the company and the decision making body. The other mandatory body is the general assembly. These are mandatory bodies as set out in the legislation and are the vital organs of the company. This article examines the board of director’s authority to represent the company and the limits of this authority.
I. INTRODUCTION
The Turkish Commercial Code (“TCC”) numbered 6102, which was adopted on 13 January 2011 and entered into force on 1 July 2012, comprises provisions parallel with the abrogated Turkish Commercial Code numbered 6762, which regulated the authority of the board of directors in managing and representing a company. In general, these regulations contain the exclusive powers, obligations, and liabilities of the board of directors, how it can use its authority, the delegation and the limits of its authority and the registration and announcement of board members. Within the dynamically improving and changing economic system and political and social factors, companies have been adapting to this system by increasing their assets and the number of personnel employed. It can be deemed inevitable for a body that controls the legal, administrative, and financial affairs of a company as described above, to not come out. As a result, the board of directors now conducts business in a more practical and faster way and the aspects of commercial law are ensured with various laws, regulations, and statutes. This article analyzes the authority of the board of directors in joint-stock companies to represent the company and the limits of this authority within the scope of the TCC, which is the fundamental source of and contains the regulations related to commercial law.
II. THE BOARD OF DIRECTORS AND THE AUTHORIZATION OF SIGNATURE, REPRESENTATION OF THE BOARD OF DIRECTORS
A. General Information
Article 124 of the TCC limits the types of company to five: collective company, limited partnership, joint-stock company, limited liability company, and cooperative1. Within companies, the general assembly is the decision making and the administrative body where all shares are represented and all shareholders have the right to comment on matters directly concerning company business. The board of directors is the body assigned to elect the members of the general assembly and is the management and the representation body2. In other words, companies are managed and represented by the board of directors while the general assembly makes decisions within the framework of the exclusive competence granted by article 408 of the TCC and conducts the business of the company. In addition, pursuant to the TCC, nothing may limit the representation authority allocated to the board of directors. The scope of management within companies is stipulated in article 223 of the TCC, which states: “The respects within the scope of the management of the company are limited with transactions and works required to be done for the purpose and subject of the company. Those managing the company are authorized to compromise, waive, accept, and arbitrate in the works that they consider appropriate for the benefits of the company provided they are limited with the ordinary transactions and works. Apart from the ordinary transactions and works, unanimity of partners is required for acts such as donating, standing security, giving guaranty for a third party, assigning a commercial representative, selling, purchasing, providing as collateral immovable properties if they are not related to the field of activity of the company, disposing of production vehicles related to the company’s origin, pledging, putting in a commercial enterprise pledge.” As can be inferred from the TCC article referred to, third parties believe that the members of the board of directors may be capable of carrying out any transactional relationship with the third parties and the TCC preserves this belief of third parties3.
There are two main exceptions to the authority of representation given to the board of directors by the TCC. These exceptions are defined in article 371/3 of the TCC. This article states: “Restriction of representative authority is not effectual against third parties in good faith, but restrictions which are registered and announced in relation to limiting representative authority solely to the business of the head office or a branch or to the exercising thereof jointly are valid.” As is understood from the said provision, the authority of representation granted to the board of directors in joint-stock companies can only be limited by “joint representation” and “due to the location”. However, when discussing this situation, it is necessary to mention the positive effect of the registry and the meaning of this statement. The positive effect of the registry means the matters that are required to be registered and announced cannot be claimed as unknown by third parties after the registration and their goodwill is eliminated. The limitations that are counted in article 371/3 of the TCC are also registered in order to ensure the positive effect of the registry and to eliminate the goodwill of third parties. Hence, according to article 36 of the TCC, the basis of the positive effect of the registry is as follows. “It does not matter where third parties are, records of trade registry produce results for them upon their registration in the Turkish Trade Registry Gazette. If the complete announcement of the registration in the Turkish Trade Registry Gazette is not announced in the same issue, it causes legal results for third parties from the day of business following the day of the announcement of final part.”
However, the limitation of representation authority in terms of quantity and subject matter does not affect the positive effect of the registry. In other words, the limitation of representation authority in terms of quantity and subject matter, cannot be raised against third parties with good faith. By delegating the authority to the board members and company employees who are not authorized to represent the company, certain authority can be given to certain members of the board of directors or other third parties who are not members of the board of directors.4 Also in accordance with the provision situated in article 371/7 of the TCC “Board of directors, in addition to representatives set out above, may appoint board members not having the representative authority or persons who have a contract of employment with the company as a commercial agent with limited authority or as another merchant assistant. Duties and authorities of those so appointed will be expressly determined in the internal directive to be drafted in accordance with article 367. In this case, registration and announcement of the internal directive is obligatory. Commercial agents and other merchant assistants cannot be appointed by the internal directive. Commercial agents or other merchant assistants authorized in accordance with this paragraph are registered and announced in the trade registry. The board of directors is jointly and severally liable for all damages to be caused by these persons to the company and third parties.” Delegation may be made by appointing non-representative members of the board of directors or persons affiliated to the company with a service contract as a commercial agent or merchant assistant. At this point, it is necessary to mention whether the authority to delegate the authority of representation and signature belongs exclusively to the board of directors or not. In accordance with article 375 of the TCC, “non-delegable and inalienable tasks and powers of the board of directors” include “To assign and discharge directors and persons having the same functions and those authorized to sign.” Taking the system of the law, the grounds, and the article title into consideration, it is clear that the signatory authorities must be determined exclusively by the board of directors5.
B. Internal Directive and the Relationship Between the Board of Directors and the Internal Directive
An internal directive is ensured under the TCC, but it is not limited to persons mentioned above in article 371/7 of the TCC.6 According to article 419/2 of the TCC, there are two main subjects for preparing an internal directive: firstly, determination of rules and procedures regarding the operation of the general assembly, and secondly, the distribution of authority and duties among the persons in charge of the management of the company and the structure of the rules to be established.
An internal directive consists of general rules, such as the articles of association, but comes second to articles of association and cannot include provisions contrary to it7. An internal directive to be issued by the board of directors must consist of requirements in form, such as including a provision about the delegation of management, and also any material requirements, such as the authority to delegate is not exclusively an inalienable authority and duties of the board of directors to complete delegation of authority. Thus, an internal directive must consist of both form and material requirements. Furthermore, the preparation of the internal directive is the board of directors’ exclusive competence and it cannot be used by any other body and/ or person. Apart from this, an internal directive cannot be issued based on the decision of the general assembly without being foreseen in the articles of association. First of all, the internal directive shall specify duties and authorities of the chairman of the board, vice president of the board and board members. An internal directive may also specify how the board of directors’ duties and authorities will be delegated and who the authorized signatories of the company are8.
C. Delegation of the Authority to Represent
Regarding delegation of the authority to represent, article 370/2 of the TCC states “The board of directors can delegate its authority to represent to one or more managing member or managing director as third parties. But at least one member of the board of directors must have authority to represent.” As a rule, a company is represented by the board of directors. An exception to this rule is if a company’s articles of association include provisions regarding management or representation of company being delegated to someone else. Persons delegated by this process are called the managing director or managing member9.
It is appropriate here to explain the terms of managing member and managing director with an example of their definitions. Assume that joint-stock company X has five members on the board of directors and, as a rule, each board member has the authority to represent the company. If that company’s articles of association include a provision permitting delegation of authority, the general assembly may limit some of the board members’ signing authority and grant this authority to certain persons only. In this case, a board member can delegate his/her authority to represent to other board members if the general assembly does not want him/her to have this authority. Consequently, in a case where authority to represent is taken from certain board members and given to other board members, those who are able to be authorized are called managing members. If the person whom the delegation takes place is not a member of the board of directors, they are referred as managing director10.
A company’s authority to represent can be delegated as a whole or a certain part of management by assigning a limited authorized representative to the company. According to paragraph 7 of article 371 of the TCC, joint-stock companies’ board members who cannot represent the company by the delegation of authority to represent can be assigned as an authorized commercial agent or other merchant assistant. Moreover, as stated in the last sentence of paragraph 2 of article 370 of the TCC, even if delegation of authority is given, at least one member of the board of directors must have the authority to represent. In conclusion, even if delegation of authority is allowed due to conditions specified in the law being fulfilled, it is clear from the letter of the law that at least one of the members of the board of directors shall have the authority to represent and maintain representation authority.
D. Empowering the Managing Members and/or Directors by Power of Attorney
The delegation of authority to managing members and directors can be done within the scope of relevant provisions of the TCC and persons who are authorized can carry out all kinds of transactions on behalf of the company and for the purposes of the partnership. Paragraph 2 of article 317 of the TCC states that transactions with third parties who are authorized to represent are binding. But if it is proved that the third party knows or is in a position to know that the transaction is outside the scope of the business, the company will not be bound by it. Although the ultra vires principle, which is described under article 137 of the abrogated TCC as a “joint-stock company’s capacity to have rights and to act is limited to the subject which is stated in the articles of association of the company,” is not included in the current TTC (Article 125/2), it does not mean authority to represent can be used without limitation. It asserts that the subject which is stated in the articles of association of the company limits the capacity of the company to act but not the capacity to have rights11.
The ultra vires principle needs to be clarified since the new TCC does not contain the rule within itself in contradistinction to the abrogated TCC. The ultra vires principle is a principle that limits a company’s capacity to have rights and capacity to act in fields of business set out in its articles of association, and again limits a companies’ transactions to objects set out in its articles of association.12 So any transactions of a company that are out of the scope of its Articles of Association were declared null and void while the abrogated TCC was in force. The fact remains that if a company is pleased with the representative’s transactions even though they are out of scope of the company’s field of business, these transactions are not declared null and void under the new TCC.
Besides, if it is observed in terms of practice, in addition to the provisions of the TCC, the persons authorized in the transactions carried out between the company and the third parties prove their capableness to carry out related works with their power of attorney. However, generally in a power of attorney, the authorized person is not specifically denoted as a managing member, a managing director, or a commercial representative; only the authorized issues are stated in their power of attorney. Again, in practice, those whose legal qualifications are not specified in the power of attorney are generally designated as the CEO, general manager or manager. This situation gives rise to the English Law phrase “apparent authority”. That is to say, for third parties, when the legal qualification of the persons who carry out the transactions with the third parties is not known or when these persons carry out transactions that are not within the scope of their representation authority, this situation becomes more of an issue in the area of law.
E. Limit of the Authority Where the Contract Value is Indeterminate
Although it is not common today to observe a situation where the contract value is not determined at the start or is indeterminable, there are times when the value of a contract can be determined later on according to some tariff of fares. The Aviation and Terminal Services Contracts signed with companies that organize flights at Istanbul Airport are an example of this. The contract value is not determined in the Aviation and Terminal Services Contracts that are planned to be signed with the airline companies. The value of the contract is determinable in the bills that show the number of flights of the airline company multiplied by the unit costs specified in the Public-Private Partnership (“PPP”) tariff of fares, which is published on the General Directorate of State Airports Operations website.
Where a power of attorney authorizes the member of the board of directors, managing member, or commercial representative to sign a related contract, the authorization is usually made according to the monetary limit of the transactions. When the monetary amount is not specified in the contract and only set according to the PPP tariff of fares, it can only be determined inferentially. And this situation gives rise to the question of who is or will be authorized to sign contracts where the value is not determined at the start or is indeterminable. In cases that also occur in the scope of work at Istanbul Airport, where the value of a contract is determinable according to the tariff of fares, doctrinally, the value of the contract must be specified in the power of attorney of the persons authorized to sign such contracts. In the event of exceeding the monetary limit set to the authorized persons, on behalf of the company, the contract must be signed by the persons who were previously authorized to sign such amounts in the tariff by the power of attorney or an internal directive.
III. CONCLUSION
The authority to represent the board of directors, which is a mandatory body responsible for representing the company, is regulated in the TCC. According to article 367 of the TCC, a company’s articles of association, which is a constitutional requirement, should include a provision on whether the powers of the board of directors can be shared with the members and, if so, they should include a provision on how to transfer this authority. Following the regulation of the transfer of authority in the company’s articles of association, delegated authority of all or a certain part of the representation and management of works may be assigned to the managing director, managing member, or commercial representative. Nevertheless, it is important to note that at least one member of the board of directors should remain authorized to represent the company according to article 370/2 of the TCC. In conclusion, it should be emphasized that in order for the delegation of authority to take place, the company’s articles of association should include such regulation enabling the transfer of the authority, and an internal directive in which the board of directors determines the principles of the delegation of authority.
BIBLIOGRAPHY
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FOOTNOTE
1 Mehmet BAHTİYAR, Ortaklıklar Hukuku, (İstanbul: Beta Yayınevi, 2019), p. 49.
2 Reha POROY / Ünal TEKİNALP / Ersin ÇAMOĞLU, Ortaklıklar Hukuku I, (İstanbul: Vedat Kitapçılık, 2019), p. 358.
3 BAHTİYAR, p. 234-235.
4 Yavuz Selim Günay, Anonim Şirketlerin Temsili, (İstanbul: On İki Levha Yayımevi, 2018), p. 97-109.
5 Hasan Pulaşlı, Şirketler Hukuku Şerhi V II, (Ankara: Adalet Yayınevi, 2014), p. 1365-1366.
6 GÜNAY, p 102-104.
7 GÜNAY, p. 112-113.
8 GÜNAY, p. 111-114.
9 BAHTİYAR, p. 230-235.
10 POROY, TEKİNALP, ÇAMOĞLU, p. 382-383.
11 BAHTİYAR, p. 234.
12 POROY, TEKİNALP, ÇAMOĞLU, p. 113.
