ABSTRACT
In principle, joint stock companies are represented by a board of directors. People authorized to represent the company use this authority by signing under the company title. As a rule, using this authority relies on a joint signature, that is, the signature of two representatives. Although controversial, delegation of the power of representation requires a board of directors’ decision, regulated by an internal directive and including a provision regarding this in the prime contract1. With amendments to the Turkish Commercial Code (TCC), the principle of ultra vires was repealed and, therefore, without prejudice to the exceptions, the authority of representation of signatory authorities became unrestricted, fulfilling the aim of protecting third parties. Thus, even if the transaction made by an authorized signatory is not about the business, it binds the company and becomes effective, against which the company may depend on provisions of unauthorized representatives in order to avoid negative consequences.
I. INTRODUCTION
In a joint stock company, the members of the board of directors are entitled to represent the company as soon as they are elected. In order to ensure representation is not interrupted, it is necessary to transfer the authority of representation of the joint stock legal entity, which has a dynamic structure and operates continuously. As a rule, the board of directors has the authority to manage and represent the company, apart from those areas left to the general assembly by law and by the prime contract. According to the preamble of Article 374 of the TCC, every work and transaction required in order to carry out the business of the company is under the authority of the board of directors or, in the event of transfer, under the authority of the management. The inalienable rights of the board of directors are set down in Article 375 of the TCC, and, since the authority of representation is not included in this group, it is possible to transfer it. It can also be argued that the transfer of the authority of representation is mandatory given the functioning, business volume, potential, uninterrupted working and working capacities of today's joint stock companies.
II. REPRESENTATION OF A JOINT STOCK COMPANY BY THE BOARD OF DIRECTORS
A. Practicing the Authority of the Representation by the Board of Directors
Joint stock companies are managed and represented by the board of directors. Even though they can be shareholders in the joint stock company, legal entities cannot be on the board of directors because only real people are eligible to be on the board of directors. For this reason, the representatives of legal entities can be on the board of directors. The board of directors’ most important duty is to manage and represent the company, besides its other duties and authorities such as conducting meetings and taking decisions, holding the general assembly meeting, fulfilling the decisions of the general assembly, and preparing the yearly balance sheet and income statement.
Joint stock companies are represented in internal and external relations by the board of directors. The board of directors of a joint stock company prepares a circular of signatures and has it approved by a notary before setting the work. The circular of signatures indicates the signatories within the company and the scope and degree of their powers. After being approved by a notary, the circular of signatures is delivered to the Directory of Commercial Registry where it is announced and registered. The registry records the name, residence, nationality and the form of representation procedure of the signing authority2. The circular of signatures also serves as proof of the duties and powers of the authorized signatories to enact the transactions3. The circular of signatures is sent to the people or institutions with which the company has business relations to ensure they are informed of the regulations4. In addition, the circular shows the transactions and extent of the authority of representation of company officers other than those on the board of directors5.
Registering and announcing the board of directors and/or establishing a circular of signatures is only illustrative because, once someone is elected as a member of the board of directors, they legally hold the authority of representation6. The acquisition or termination of membership can only be claimed against bona fide third parties after registration and announcement of membership. The second sentence of TCC Article 359/II states that: “…in addition, the registration and the announcement is immediately announced on the company's website”. and this provision brings in a new qualification7.
The rule prescribing that people authorized to sign on behalf of the company shall sign under the title of the company is stipulated in Article 372 of the TCC. This provision has the characteristics of a compulsary legal rule, which, as the Supreme Court prescribes, cannot be altered by the prime contract. The decision of the Supreme Court Assembly of Civil Chambers dated 28.02.1996 and numbered 1995/12993 E. 1996/96 K. stipulates that Article 372 of the TCC is a compulsary legal rule and the stamp term shall be understood as the business name8.
1. The Joint Signature Principle
In principle, authority of representation is exercised by the board of directors. People with signature authority can sign in the name of the company. Unless otherwise agreed, according to the Article 370/1 of the TCC, authority of representation is exercised by the board of directors with joint signatures. In accordance with the joint signature rule, representing the company against third parties requires the signature of representatives on the board of directors who have signature authority.
The joint signature rule can be altered with the prime contract, whereby, with an amendment to the prime contract, the power of representation can be exercised by more than two members or by all members of the board of directors.
The joint signature rule in terms of written documents and contracts is also valid for verbal agreements or verbal commitments made by members of the board of directors9. But the joint signature rule does not apply in cases of passive representation, such as notification, notice, warning, and declaration. According to Tekinalp, “It is valid even if the notice, notification and notification made to the partnership is made to only one of the members of the board of directors. In other words, the rule of joint representation does not apply to the passive representation of the partnership; each member who has a representative qualification has passive representation authority10.”
2. The Term Ultra Vires and the New Regulation
According to Article 371/1 of the TCC, those authorized to represent the comapany can carry out, on its behalf, all kinds of affairs and legal transactions that fall within the purpose and scope of the company and use the company title for this. In the previous statute, the activities of companies were determined by the prime contract and there was an "ultra vires" rule stating that companies cannot carry out legal transactions other than those within their area of business. For example, a joint stock company handling a textile business could not be involved in chemical industry activities unless regulated within the prime contract, and, in order to make that possible, they needed to change the prime contract. In this way, the rights and liabilities of commercial companies were limited to the field of operation written in the prime contract. Transactions made outside of the business subject were deemed to be non-existent as a result of the ultra vires principle.
The transactions made in the sector and the security of the market were adversely affected due to the fact that transactions contrary to ultra vires were deemed to be non-existent. In order to avoid the effects of this prohibition, companies kept their business subjects very broad and wrote down jobs that they might do in the future in their prime contract. Therefore, the ultra vires rule has been terminated and transactions made by companies other than those in its line of business binds them and those transactions are not deemed to be non-existent. A company is bound by such transactions if it can be proved that the transaction is out of the scope of the business and that the other party of the transaction is known to the third party or that it should be known as required by the situation. A company is not bound by transactions made outside the scope of the business only if it can be proved that the transaction is outside the scope of the business and that the other party to the transaction is known to the third party or that it should be known as a matter of fact.
In addition, joint stock companies are not bound by transactions other than the authority of representation that are specific to the business of the head office or a branch but are registered and announced. Apart from this, a company is bound by all transactions other than the purpose of the company and the subject of operation, Even if the company is liable to the third party due to these transactions, it may be based on the provisions of the unauthorized representative in accordance with the provisions of the Turkish Code of Obligations (“TCO”) against the person who exceeds their authority of representation and the company has recourse to the representative.
Thus, transactions made by representatives appointed by the board of directors outside the subject of the company are also effective and binding for the company. In this case, the company shall apply the provisions of unauthorized representatives. Therefore, it can be alleged that problems arising due to transactions that were formerly accepted as ultra vires will continue within the framework of the objection that the transaction will not bind the company for the reason of "exceeding authority of representation" rather than the "non-existent" sanction11. In addition, the company's right of recourse is reserved in the event of representative acts against the law, mandatory provisions, or the prime contract. This situation shows that the provision is valid for the internal relations of the company12.
With the termination of the ultra vires principle, the right of joint stock companies has been expanded unlimitedly, and, with the new regulation, transactions made outside the scope of the business have become binding on the company13. The addition of provisions limiting the company's capacity to subjects within the prime contract is null and void. Because a provision regarding the ultra vires principle cannot be included in the company's prime contract, it will be deemed to have not been written. In this case, it is not possible to limit the subject of the business with the prime contract. On the contrary, although the limitation of the business to the subject has been lifted, the company must specify in the prime contract of the company and have this subject registered and announced, in accordance with Article 339 and 354 of the TCC.
III. TRANSFER IN GAUTHORITY OF REPRESENTATION
There is no consensus in the doctrine considering the necessary conditions for the transfer of the power of representation. In the new TCC, which differs from the previous one, the transfers of the authority of representation and that of management are regulated separately and there is a debate about whether the provisions in Article 367 regulating the transfer of the authority of management apply to the transfer of the authority of representation. According to TCC Article 367 of the TCC, which regulates the transfer of the authority of management, there should be a provision in the prime contract that allows for the transfer of authority, an internal directive should be prepared by the board of directors, and the board of directors should take a decision on this issue. In Article 371 of the TCC, which regulates the transfer of the authority of representation, there is no provision regarding any obligation to issue an internal directive.
For this reason, there are different opinions as to whether it is necessary to issue an internal directive in addition to the decision of the board of directors in the transfer of the authority of representation. According to Pulaşlı: “It is a condicio sine qua non that there is no contrary regulation or a positive provision in the prime contract for the transfer of the power to represent and a decision of the board of directors on this matter14.” According to Kırca, an internal directive, which is important in terms of the limits of responsibility, is required in the transfer of the authority of representation. In addition, the transfer of the power to represent is possible without any provision in the prime contract because seeking the condition of having a provision in the prime contract means that the exercise of power is left to the discretion of the general assembly, and this makes the authority of the board of directors in accordance with Article 375/I/d of the TCC from being inalienable and indispensable. As a natural consequence of this, the transfer of the authority of representation cannot be left to the general assembly, and the decision of the board of directors cannot be subject to the approval of the general assembly15. According to Tekinalp, the transfer of the authority of representation means the transfer of the authority of management in the sense of Article 367 of the TCC. Therefore, the transfer of the authority of representation cannot be considered independent of Article 367 of the TCC and the provisions stipulated in this Article should also be included in the transfer of the authority of representation, which, thus, requires an internal directive to be issued16.
The authority of representation can be transferred only to a member or a third party, depending on the request of the board of directors, and can be transferred to both the member and the third party at the same time. Again, depending on the number of members on the board of directors and the size of the company, the member and/or third person to whom authority is transferred may be more than one. In the choice of these alternatives, the issue to be considered legally is that at least one member of the board of directors must have the authority of representation in accordance with the second sentence of paragraph 2 of Article 370 of the TCC. The person to whom the authorit of representation has been transferred is named differently according to the membership of the board of directors17. If the person to whom the authority of representation has been transferred is a member of the board of directors, the executive member is called the director and the third person who is not a member of the board of directors is called manager. Partial transfer of the authority of representation is also possible. However, partial transfer cannot be claimed against third parties in good faith.
IV. INTERNAL DIRECTIVE
A. Legal Status of the Internal Directive
An internal directive is an agreement concluded by the board of directors showing matters regarding the management of the company and how the company will be represented against third parties. An internal directive generally includes regulations that are not fundamental or are only about the decision-making of a specific circle of people within the company (e.g. the board of directors) and it is mandatory that it take the form of a "written decision18".
An internal directive is the "second degree prime contract," which contains issues that cannot be regulated in the prime contract or, even if possible, which are not regulated in the prime contract due to their nature19.
The internal directive cannot be contrary to the prime contract, since it is in a secondary position according to the prime contract. In addition, no internal directive can be issued contrary to the statutes and mandatory provisions, and the matters that are included in any regulation or that should be regulated by the prime contract cannot be regulated by internal directives20.
B. Authority to Issue an Internal Directive and Decision Quorum
An internal directive regulating the assignment of a representative with limited authority within Article 371/7 of the TCC shall be prepared by the board of directors. This constitutes a mandatory provision and this authority cannot be transfered to the general assembly nor can it be subject to the approval of the general assembly because corporate senior management and giving directives in this regard constitutes an inalienable duty of the board of directors and preparation of internal directive is an extension of this duty.
Since internal directives are based on a decision of the board of directors, in accordance with Article 390 of the TCC, if no higher quorum is stipulated in the prime contract, the board of directors convenes with the majority of the total number of members and an internal directive is issued upon the decision of a majority of the members present at the meeting.
C. Form, Content, Registration, and Announcement of an Internal Directive
As per Article 390 of the TCC, the decisions of the board of directors must be written and signed. In this regard, an internal directive, which is a board decision, has to be written and signed by the members of the board of directors. An internal directive composed of the management of the company, in this regard, describes the required tasks, shows their location, in particular determines who is connected to whom and who is responsible for providing information. The provisions of this internal directive, counted by way of examplification in Article 367 of the TCC, constitutes the minimum level provisions for each internal directive issued for the purpose of the transfer of authority21. Also, new provisions may be added to these mandatory provisions, provided they do not contradict the law and the mandatory provisions of the law.
The internal directive in question solely comprises matters such as signature groups and authority framework; the names of the people assigned to these authorities cannot be included. Identifying the names of these people is handled through a board of directors’ decision referencing the internal directive. Also, in the event that a company wants to change the limited authorized representatives they have appointed, it is sufficient simply to refer to the acceptance decision of the internal directive; it is not necessary to issue another internal directive22.
Registering and announcing an internal directive constitutes an explanatory provision because registration to the trade registry is, as a rule, explanatory and the situations where it is founded are clearly indicated in the statutes. According to an opinion in the doctrine, the appointment of anyone with the authority of representation cannot be mentioned within the internal directive because the general framework of duty and authority is drawn up and the identity of these people is not specified. Since there is no authority of representation appointed, it is not necessary and it does not carry any practical significance to mention, in the registration of the internal directive, whether this registration is explanatory and founded. However, if the adoption of the internal directive and the decision of the appointment of a representative are taken at the same time and both have not yet been registered, the internal directive and appointment decision will become effective at the time they are taken, and therefore their registration and announcement is explanatory23.
In addition, if changes are required within the scope of duty and authority after the representative has been appointed, these changes must also be registered and announced with an internal directive. The internal directive in question is also an explanatory provision, but in order for transactions with third parties to take effect, it is necessary to prove that the third party knows this change within the legal entity of the company. The members of the board of directors are severally liable for any losses incurred by these people appointed as representatives, in accordance with TCC 371/7.
V. REPRESENTATIVE SWITH LIMITED LIABILITY
A. Appointing an Authorized Representative Limited in Terms of People
With an internal directive, the transfer of the authority of representation is limited to two groups of people: these are members of the board of directors who are not authorized to represent and employees who are affiliated with the company through a service contract. Apart from these two groups, a representative cannot be appointed by internal directive because commercial representatives and other assistant merchants cannot be appointed with an internal directive, according to the letter of Article 371 of the TCC. Representatives with limited authorization can be appointed with an internal directive.
There are differences of opinion within the scope of an employee group affiliated to the company through a service contract regarding who can be appointed with limited authorized representatiion. According to one view, the terms of the service contract should be considered within the frameworkof purposeful interpretation and not literally, and it should be sufficient for this employee to continuously serve the company. It is not important that this service is fulfilled within any of the service, work, and power of attorney agreements24.
According to another view, the terms of a service agreement are used on purpose and means the terms of a service agreement within Article 393 of the TCO that defines it as a worker who is bound to the employer, undertakes to work in this way, and is entitled to a salary in return25. As precribed within the verbal interpretation of Article 371 of the TCC, a service agreement literally means a worker who is an employee bound to the employer with an employment relationship26. Among the employees on the board of directors within joint stock companies and who have undertaken to perform the business of the company, those who meet the necessary conditions will be deemed to be bound by the company with a service contract27.
Since the scope of the duties and powers of a person appointed within the internal directive will be shown, it is registered and announced for the knowledge of third parties. In the appointment decision of the board of directors, only the identity of the appointed person should be included, and there is no need to explain the scope of duty and authority.
B. Responsibility of a Representative with Limited Authority
As a rule, with the new regulations introduced in the TCC, the former full succession principle has been abandoned and the differentiated succession principle has been adopted. Accordingly, persons who are the subject of responsibility, together with other persons who caused any negative consequences, will be held liable to the extent that the damage can be personally attributed to them according to their fault and the requirements of the situation28.
Following this general rule, the responsibility of a representative with limited authority is stated in the last paragraph of Article 371/7 of the TCC as "The board of directors is severally liable for all kinds of damages these persons may cause to the company and third parties". Thus, the board of directors is held severally liable for all injuries caused to the company by commercial agents and other assistant merchants. Whether this provision is full or differentiated succession cannot be understood from the verbal interpretation of the judgment. First of all, it should be noted that the regulation in question does not apply to all cases of responsibility of the board of directors, and is only applied in cases of liability due to the injuries caused to the company by persons appointed in accordance with the internal directive29.
On the other hand, any injuries with fault that parties cause to a company should not be understood as the responsibility of members of the board of directors. Damage includes direct and indirect injuries with fault to the company. Deliberate behavior does not create responsibility for the members of the board of directors. Otherwise, for example, there will be a situation that will undermine the security of law, such as members of the board of directors being jointly responsible for money embezzled by a bank branch manager30.
VI. RESULT
The appointment of a limited authorized representative through internal directive is of great importance for companies with heavy workloads and those who have to work uninterruptedly due to the nature of the service they provide. In addition, the fact that the identity of the appointed representative is not included in the internal directive, by only drawing up the framework of authority and duty is of great practical importance and makes commercial life easier.
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FOOTNOTE
1 Commentary of TCC 367; Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, 6. Edition, 2020, No. 105, p.409; İsmail Kırca-Feyzan Hayal Şehirali Çelik- Çağlat Manavgat, Anonim Şirketler Hukuku Volume I, 1. Edition, 2013, p.627; Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, 4. Edition, 2015, No. 12-75, p.222-223
2 Himmet Koç, Anonim Şirketlerde İç Yönerge ile Yönetim ve Temsil Yetkisinin Devri, 2018, s.155
3 İsmail Kayar, Anonim ve Limited Şirketlerin Temsili ve İmza Sirküleri, Türkiye Noterler Birliği Dergisi, Number 127, 2005, page 110 ff.
4 Reha Poroy, Ünal Tekinalp, Ersin Çamoğlu, Ortaklıklar Hukuku, 2014, p.348
5 Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku, 2019, p.385
6 Böckli, P. Schweizer Aktienrecht, 4. Edition, Zürich, Basel, Genf 2009, s.1742, N. 496/a by transfer from Veliye Yanlı, Gül Okutan Nilsson, Anonim ve Limited Şirketlerde Sınırlı Yetkili Temsilci Tayini (Temsilci Tayini), Banka ve Ticaret Hukuku Dergisi, Volume XXX, No:4, Aralık 2004, p.10,
7 TBB Dergisi, No.80, 2009, p.343 - http://tbbdergisi.barobirlik.org.tr/ m2009-80-486
8 Günay, Temsil, p.45
9 Hayri Domaniç, Anonim Şirketler Hukuku ve Uygulaması-TTK Şerhi, I-II. İstanbul, 1988, p.518
10 Poroy, Tekinalp, Çamoğlu, Ortaklıklar, 2019, p.385
11 Abuzer Kendigelen, Yeni Türk Ticaret Kanunu Değişiklikler, Yenilikler, İlk Tespitler, İstanbul, 2011, p.100
12 Günay, Anonim Şirketin Temsili, p.47
13 Himmet Koç, Anonim Şirketlerde İç Yönerge ile Yönetim ve Temsil Yetkisinin Devri, 2018, p.157; Sevilay Uzunallı, Anonim Şirkette İşletme Konusu, 2013, p.105
14 Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, 6. Edition, 2020, No. 105, p.409
15 İsmail Kırca-Feyzan Hayal Şehirali Çelik- Çağlat Manavgat, Anonim Şirketler Hukuku Volume I, 1. Edition, 2013, p.627
16 Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, 4. Edition, 2015, No. 12-75, p.222-223
17 Kırca – Şehirali – Çelik – Manavgat, Volume I, p.628
18 Portsmoser/Meier-Hayoz/Nobel, $ 11, N. 4 transferred by, Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, 6. Edition, 2020, No.105, p.411
19 Necla Akdağ Güney, Anonim Şirket Yönetim Kurulu, 2016, p.46.
20 Beşir Fatih Doğan, Anonim Şirket Yönetim Kurulunun Organizasyonu ve Yönetim Yetkisinin Devri, 2011, p.46.
21 Doğan, Yönetim Yetkisinin Devri, p.136
22 Ezgi Korkmaz, Anonim Şirketlerde Sınırlı Yetkili Temsilci Tayini ve Sorumluluk, 1. Edition, İstanbul, 2018, p.43
23 Yanlı, Okutan Nilsson, Temsilci Tayini, p.24
24 Yanlı, Okutan Nilsson, Temsilci Tayini, p.13
25 Özdamar, Temsil, p.158
26 Preamble of the The Statute on the Restructuring of Some Receivables by Amending the Labor Law, Certain Laws and Decree Laws numbered 6552, Article 131, https://www.resmigazete.gov.tr/eskiler/2014/09/20140911M1-1.htm (03.02.2021)
27 Özdamar, Temsil, p.159
28 Özdamar, Temsil, p.160
29 Özdamar, Temsil, p.161
30 Özdamar, Temsil, p.162
