ABSTRACT
Joint stock companies are established with the aim of actualizing large enterprises by bringing together small-scale capitals that cannot accomplish those investments individually. One of the most essential rights of the shareholders who invest their savings in joint stock companies is the right to a dividend. Various provisions have been stipulated in the Turkish Commercial Code to ensure the continuity and longterm survival of joint stock companies. In this article, we will elaborate on the critical points of the arrangements made to achieve this balance.
I. INTRODUCTION
One of the expectations of shareholders of joint stock companies is to receive a dividend in return for their obligation to commit capital. Indeed, one of the most important rights of a shareholder, who invests his or her savings or any asset value in a joint stock company, is to participate in the annual earnings and take a dividend, unless the company enters the liquidation process.
For any company, it is essential to have good credibility in business life and to ensure the reliability of the company in the market and one way for a joint stock company to do is to embark on enterprises, achieve results, and distribute profits to shareholders. Any company that does not distribute profits for long periods will find less investors willing to invest in the company. Therefore, when considering dividend distribution, company executives must maintain a good balance between the profits allocated for their current investors and reserves separated for maintaining the activities of the company1.
This article closely examines the provisions under the Turkish Commercial Code regarding the right of shareholders to a share of profits and the separation of reserve funds.
II. THE TERM OF DIVIDEND
Receiving dividends is one of the most important rights of shareholders in joint stock companies. Although the consequences of dividends are applied in the Turkish Commercial Code No. 6102 and the Capital Markets Code No. 6362, these provisions do not provide a definition of dividend. In essence, the dividend is that part of the profits, determined in advance, that the general assembly allocates for distribution to the shareholders2. According to another definition, however, the dividend is the money, allocated from the net period profit or free reserves and payable to each partner in cash, that can be distributed at the end of a period in return for a capital share in the joint-stock company3.
A. Profit Types under the Turkish Commercial Code
The terms “net profit for the period”, “profit before tax (PBT)”, “annual profit” and “distributable profit” are used in the Turkish Commercial Code.
1. Net Profit for The Period
Although there is no definition in the relevant legislative provisions regarding the net profit for the period, it can be defined as the amount of annual profit remaining as determined by the annual balance sheet after deducting the losses from previous years and the taxes and financial liabilities that jointstock companies are required to pay4.
2. Profit Before Tax (“PBT”)
Profit Before Tax refers to the portion of assets exceeding liabilities. This profit is an item of the liabilities table of the balance sheet, and annual profit consists of profit transferred from previous years, if any, and any settled reserves5.
3. Annual Profit
Each surplus in the balance sheet's asset statement compared to the liability statement is the period of profit in terms of balance sheet law.6 Annual profit is determined first according to the expense table, where costs and expenses are written reciprocally, and the result is recorded in the balance sheet.
4. Distributable Profit
According to Article 509/2 of the Turkish Commercial Code, distributable profit means the dividend consisting only of net period profit and free reserve funds and the total amount eligible to be distributed as a dividend by the general assembly.
B. Determination of Profit
As stated above, the sources of dividends consist of free reserve funds and net term profit. The Company's free funds consist of more than half of the general legal reserve funds (TCC, art. 519/3), or issued capital, reserve funds allocated under the articles of association (TTC, art. 521), and reserve funds decided to be separated by the general assembly (TCC, art. 532/2).
1. Reserve Funds
a. Definition of Reserve Funds
Reserve funds are assets exceeding the basic capital held in a company by taking the profit from various sources. As per the provision on the association and the decision of the general assembly, these funds are not distributed to shareholders and other right holders. To put it more explicitly, reserve funds are net assets that exceed the basic capital, are allocated in ways stipulated by law in order to protect the net profit of the partnership at the end of the accounting period, keep the company's equity intact, ensure the continuity and development of the business, protect the rights of partners and creditors, and to meet losses that may arise from the equity at the end of the activity7. Joint stock companies that trade in legal entities are under an obligation to act as prudent businessman, as stipulated in Article 18/2 of the TCC. As a requirement of this obligation, joint stock companies must allocate legal and voluntary reserve funds.
b. The Legal Nature of Reserve Funds
Reserve funds are “an additional capital” that are separated, by general board resolution, in accordance with the optional and mandatory or evaluation principles to be made from net profit8.Although reserve funds and the main capital of a joint-stock company are included in the passive part of the balance sheet, the sources of both are different9. While the main capital of a joint stock company consists of the capital shares that the shareholders undertake and pay to the company, the reserve funds consist of partnership profit or other sources that can be described as profit or assumed to be profit. In other words, the source of the reserve fund is not only profit but also the increase in assets of the company.
c. The Purpose of Separation of Reserve Funds
In joint stock companies, reserves must be separated in order to ensure the continuous development of the company and the distribution of stable profit as far as possible (TCC art. 523/2.b). At the same time, while reserves are not a resource that a joint-stock company can always use, they provide a guarantee to the joint-stock company in situations where its assets may decrease due to loss10.
C. Reserve Funds Are Required to Be Reserved According to Turkish Commercial Code
Reserve funds are one of the most important elements of profit distribution because, according to TCC Article 523/1, dividend distribution to shareholders cannot be made without separating optional reserve funds stipulated in the legal and articles of association.
1. Legal Reserve Funds
Legal reserve funds regulated in Articles 519 and 520 of the TCC consist of general legal reserve funds (TCC, art. 519) and reserve funds (TCC, art. 520) allocated for the company's certificates of stock. The law mandates that these reserve funds are allocated by joint stock companies.
a. Funds Required to Be Allocated According to the TCC Article 519/1
Article 519 of the TCC envisages a limit on the reserve funds it is mandatory to separate. The criterion used here is the annual profit. Accordingly, until 5 percent of the yearly profit reaches twenty percent of paidin capital, it is allocated to the general legal reserve funds. If a joint stock company has reached twenty percent of the paid-up capital stipulated by law as a result of the allocation of general legal reserves, and if it continues to allocate reserves, this is considered as an optional reserve fund, which is no longer required as a legal reserve fund. After the 5 percent of the annual profit11 reaches the same amount of 20 percent of the paid-in capital, the legislator envisages the allocation of general legal reserve funds from sources other than profit. The first of these is bonuses. In order to allocate a bonus arising from the issuance of new shares as general legal reserve funds, it is obligatory to deduct the expenses of the issuance of bonuses, performance provisions, and the part used for charity purposes. The second is exclusion. If a share is void due to exclusion, the remaining portion after deducting the bills to be replaced from the amount paid for their costs is added to the general legal reserve funds.
b. Funds Required to Be Allocated According to the TCC Article 519/2
After the first allocation is made and the shareholders are paid a 5 percent dividend, ten percent of the total amount to be distributed to those who will receive the dividend is allocated for the reserve fund. In addition, a joint stock company may allocate reserve funds voluntarily based on the articles of association or the general assembly decision.
III. DISTRIBUTION OF DIVIDENDS
A. Determination of Profit
Under Article 507 of the TCC, the net profit for the period will be decided according to the law and the provisions of association. According to the TCC Article 508, how the profits are shared should be calculated in proportion to the company shareholder payments. However, it is possible to make a different arrangement in the articles of association regarding how the profit will be shared among shareholders. Nevertheless, this arrangement should not be in contradiction to the mandatory provisions of the law and must be arranged within the framework of the TCC Article 340. However, not all company articles of association have to include a profit rate.
The articles of association should not include a lion's share provision that envisages the entire profit being paid to a single shareholder or shareholders. Although the shareholders' shares are equal, it is possible to insert a provision in the articles of association regarding whether the shareholders receive dividends at different rates or a certain part of the annual profit11.
In addition, if there is no provision in the articles of association regarding the determination and sharing of profit, the authorised body is the general board. It is worth noting that if there is a regulation regarding profit in the articles of association, the general board is obliged to comply with this. Here, the general assembly decision taken should not counter the mandatory provisions of the law, the articles of association that must not contradict the mandatory provisions of the law, and the good faith rules12.
The annual balance sheet is organized to explain the annual result, and valuation, activation and passivation rules of it shaped according to the result disclosure principle13. The annual balance sheet essentially means the business year balance sheet, and the business year in question generally corresponds to the calendar year. However, the balance sheet does not have to correspond to the calendar year. In fact, there is no regulation in the TCC regarding when the fiscal period should start and end14. However, it does state in the 174th Article of the Tax Procedure Law that the accounting period is the regular calendar year.
The balance sheet consists of assets and liabilities. On the passive side of a company balance sheet, there are elements that create resources for the investments of the company. On the liabilities side, basic capital, reserves, partnership debts, and balance sheet profit are included. Therefore, in the balance sheet of a joint stock company, the balance sheet items include the balance sheet profit and does not include the net profit for the period15. Commercial books and financial statements are kept in compliance with the Tax Procedure Law16.
B. Principles Regarding Profit Distribution
1. The Principle of Capital Maintenance
The shareholders of a joint stock company do not have direct responsibilities for the company’s debts. The shareholders are solely responsible to the company for the amount of capital that they are committed to bring. For this reason, company creditors cannot apply to the shareholders due to their receivables. The only guarantee of their receivables is company assets17. Therefore, the principle of capital maintenance has been adopted in joint stock companies. The sole purpose of the law is not to protect shareholders but also to protect others who have partnerships and interests in the company.
2. The Principle of Proportionality
The measure in the exercise of shareholder rights is based on the rate of participation in capital. Shareholders can enjoy these rights in proportion to their share of total capital. The share is the only measure of participation in profit in joint stock companies. The TCC Article 507 adopts the proportionality principle. The rationale for adopting this principle is that the shareholder who takes a risk by bringing capital to the company should benefit from the company in proportion to the ratio of capital share.
C. Competent Body in Profit Distribution
The general board of joint stock companies decides how to distribute profit. Although the profit distribution proposal is made by the board of directors, the authorised body for profit distribution is the general board.
D. Obligation to Distribute Dividends
The Turkish Commercial Code has no provision regulating the liability of joint stock companies’ profit distribution.
Article 466/1 of the Commercial Code No. 6762 states that “(e)very year, one-twentieth of the net profit is compulsory to be allocated as public reserves until it reaches one-fifth of the paid-up capital.” Accordingly, some argue that it is mandatory for joint stock companies to distribute the 5 percent dividend, while others argue that distribution of 5 percent profit is not an annual obligation for joint stock companies.
The Supreme Court considers it mandatory to distribute the 5 percent dividend in its rule dated 12.5.1970, and in 1976 it rules that the 5 percent dividend included in the articles of association can not be distributed. However, the Supreme Court has determined various measures in favor of the right to a dividend and set out rules regarding whether to distribute of profit or not within the framework of these criteria18.
Article 519 / 2-c of the Turkish Commercial Code No. 6102 states that “(a)fter paying five percent dividend to the shareholders, ten percent of the total amount to be distributed to those who will receive a dividend, after the dividend is paid.” Tekinalp is of the opinion that shareholders cannot be deprived of dividends for a number of years as the distribution of 5 percent of profits became compulsory with the relevant provision, and now every joint stock company has to distribute at least 5 percent of its profits every year.
The justification of Article 519 of the TCC states that this provision was taken from Article 466 of the old Turkish Commercial Code, and while significant changes were made in the wording and language, no changes were made in the ideas and provisions that dominate the content.
The phrase “after payment” is used in place of “after allocation” in the TCC Article 519/2- c. According to the provision, in order to distribute the profit that causes the second reserve fund to be separated, the first dividend, which is 5 percent, must be paid to the shareholder. In other words, if the second reserve fund is to be allocated, the amount should be 10 percent of the total amount to be distributed to shareholders after the payment, not after the 5 percent dividend is allocated to the shareholders. From this provision, it should be understood that if there is a situation requiring the allocation of the second reserve fund, a first profit distribution of 5 percent should be made. If it is not necessary to allocate a second reserve, it should not be understood that profit distribution will be made under all circumstances because Article 519 is about the separation of the general legal reserve fund, not about the profit share19.
In addition, Article 12/d of Implementing the Regulation on the Determination of the Minimum Content of the Companies' Annual Activity Report states that the annual activity report should include information regarding the dividend distribution policy and the reason for not distributing dividends if there is no dividend distribution. Considering both the TCC Article 519/2-c and the regulation, it can be said that joint stock companies are not obliged to distribute profit every year20.
IV. CONCLUSION
This paper provides a general perspective on the distribution of dividends and whether the allocation of the reserve fund is mandatory in joint stock companies. In the literature, distribution of dividends is not compulsory in joint stock companies. However, it is also clear from Supreme Court decisions that shareholders' right to receive a profit share cannot be restricted for long periods of time. In addition, it is mandatory to allocate reserve funds in joint stock companies under the TCC in certain cases to protect the partnership and other beneficiaries of the company. If this balance continues, both large economic enterprises may continue for a long time and therefore contribute to the national economy. Individuals may continue to earn from joint stock companies with their small capital.
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FOOTNOTE
1 Aslı E. Gurbuz Usluel, Anonim Sirketlerde Pay Sahibinin Kar Payı Alma Hakkı, 1st Edition, Ankara, 2016, p.1.
2 Mahmut Tevfik Birsel, Anonim Sirketlerde Kar Kavramı, Ege Universitesi Matbaası, İzmir, 1973, p. 36.
3 Yasar Karayalcın, Muhasebe Hukuku, Bankacılık Enstitüsü, 1973, p. 127.
4 Unal Tekinalp / Reha Poroy / Ersin Camoglu, Ortaklıklar Hukuku I, 13th Edition, 2014, N. 902.
5 Tekinalp / Poroy / Camoğlu.
6 Beeler, Reingewinn in der Bilanz der AG, SJZ 1958, p. 54, noted from Usluel, Kâr Payı Alma Hakkı, p. 13.
7 H. Guzin Ucısık, Anonim Ortaklıkta Finansal Tablolar Yedek Akceler ve Kâr Dağıtımı, On Iki Levha, Istanbul, 2018, p. 184
8 Tekinalp, Bilanço, p. 245.
9 Tekinalp, Bilanço, p. 248.
10 Hasan Pulaslı, Sirketler Hukuk Serhi, 2. Volume, Adalet, Ankara, 2018, p. 51.
11 Birsel, Kar Kavramı, p. 21.
12 Karayalcın, p. 134.
13 Tekinalp, Bilanço, b. 9, n. 902.
14 Ali Ihsan Karacan / Esra Erisir Karacan, Halka Acık Sirketlerde Kar Dagıtımı, İstanbul, 2016, p.178
15 Tekinalp, Bilanço, b. n. 1489.
16 Korkut Ozkorkut, Anonim Şirketlerde Bağımsız Denetim, Bankacılık Enstitüsü, Ankara, 2013, p. 43.
17 Fatih Bilgili / Ertan Demirkapılı, Şirketler Hukuku, Dora Yayınları, 6th Edition, Bursa, 2018, p. 515.
18 Yarg. 11. HD, 12.05.1970, E. 669/2085, K. 70/1970, Bkz. Tekinalp, B.9, N. 906
19 Abuzer Kendigelen, M. Halil Conkar “Zamanaşımına Uğrayan Kâr Payı Alacağı Konusundaki Özel Düzenleme”, İÜHFM 2013, Prof. Dr. Ersin Çamoğlu’na Armağan, Volume: LXXI, Issue: 2, pp. 205-223.
20 Usluel, Kar Payı, p.94.
