ABSTRACT
This article’s main goal is to examine the liability regime under Turkish law that results from the wrongful exercise of control and to lay out the compensation claims that the groups whose interests are harmed by the shareholding constitute against the controlling company and its executives.
I. INTRODUCTION
Although there is no definition of a group of companies in the TCC, based on some provisions of the TCC, it can be said that a group of companies is a legal structure consisting of at least two companies, one of which is a dominant company and the other is a subsidiary company, and between which there is a relationship of dominance1. The coming together of companies in different ways in order to establish an economic union with each other has brought the relationship between the parent company and the subsidiary company to the agenda, and this situation has raised the concern that the interests of the subsidiary company will take a back seat to the parent company.
The regulations regarding the group of companies are basically shaped around the concept of dominance. In order for the business to achieve its economic goals, the TCC’s existing system permits the exercise of dominance through certain channels, such as equalization, but certain limitations are introduced in order to protect the interests of the subsidiary company against the interests of the group.
In this article, firstly, the concept of dominance, which is the central concept of the group of companies, will be discussed in line with the definition and elements of the group of companies, and then the concepts of unlawful exercise of dominance and compensation for the loss arising therefrom will be discussed. In the following part of the article, the compensation claims arising from the abuse of dominance by not compensating the loss arising from the direction and instruction, and the compensation claim that may be asserted in the liability arising from the damages caused by the structural decisions taken in the subsidiary company will be examined under three separate headings.
II. CORPORATE GROUP
A. Definition and Elements of a Group of Companies
Although there is no definition of a group of companies in the Turkish legislation, based on Article 195 of the TCC, a group of companies may be defined as a group of companies that are directly or indirectly affiliated with the parent company. Although there are many definitions in the doctrine, the common point of these definitions is that they are based on the management of the parent and subsidiary companies in line with a certain policy2.
Under Turkish law, although it is accepted that a group of companies does not have a legal personality3, it does not have organs independent from its constituent companies and does not have a separate management organization.
In order for the group of company’s provisions to be applicable, the elements set forth in the TCC must be present. In order to clarify this issue, it is necessary to first define the concepts of dominant company and subsidiary company. A subsidiary company is a commercial company that is directly or indirectly dominated by one of the methods set forth in Article 195/1 of the TCC, while a controlling company is a company that dominates another company.
Regarding the elements of a group of companies, some authors accept the classification of formal and functional elements. Accordingly, the formal elements are the actors and number of the group of companies. For the formation of a group of companies, it is accepted that there must be a dominant commercial company and at least two commercial companies that are directly or indirectly affiliated to it. As a functional element, the element of dominance is accepted, and due to the importance of this concept, it should be analyzed under a separate heading.
B. Unlawful Exercise of Dominance and Loss Equalization
1. Control, the Concept of Unlawful Exercise of Control and the Liability Regime Under the TCC
The concept of control, which is the most fundamental element of the group of companies, means that the controlling company may intervene in the subsidiary company through the methods stipulated in the law. This situation, on the other hand, poses the danger of unlawful exercise of control and the controlling company’s influence over its subsidiaries. For this reason, the TCC imposes limitations on the exercise of dominance and provides for a special liability regime based on the unlawful exercise of control.
The liability arising from the unlawful exercise of control has been positively regulated under Article 202 of the TCC. Therefore, situations that exceed the scope of this provision will constitute unlawfulness. Art. 195 of the TCC regulates the manner in which control may be established, and Art. 202 of the TCC prohibits the unlawful exercise of control. In terms of the consequences of the unlawful exercise of control, the TCC introduces a regulation based on the intensity of the participation in terms of the consequences of the unlawful exercise of control, adopts a distinction between partial control and full control, and allows the controlling company to exercise its control in parallel with the intensity of the control. In light of this regulation, in the case of complete control, the instructions of the controlling company that cause losses are permitted, provided that they do not render the subsidiary company insolvent. In the case of partial control, the unlawful exercise of such control is prohibited in principle.
Article 202 of the TCC regulates unlawfulness in two categories. Art. 202/1 of the TCC regulates the intervention of the parent company in the management of the subsidiary company, and Art. 202/2 of the TCC regulates the important decisions taken by the general assembly of the subsidiary company, which are not clearly justified for the subsidiary company. The situations regulated under both Art. 202/1 and Art. 202/2 do not directly constitute a violation of law. The failure of the members of the subsidiary company’s board of directors to act with due care while following the parent company’s instructions and the failure to make up for this loss by causing a loss to the subsidiary company are the elements that make the situations listed under Art. 202/1 of the TCC illegal. The situations listed in Art. 202/2 of the TCC are not directly unlawful. However, in the event that the controlling company actually exercises its dominance in taking these decisions and there is no justifiable reason for the subsidiary company to take such a decision, unlawful exercise of dominance will be in question.
2. Loss and Loss Compensation
Under Turkish law, as a rule, the controlling company may not exercise its dominance in such a way as to cause loss to the subsidiary company; however, in the event that the subsidiary company suffers a loss, liability will not arise immediately4. Article 202 of the TCC stipulates that the parent company shall not be liable for the unlawful exercise of dominance if it compensates for the loss caused to the subsidiary company until the end of that activity year. According to the doctrine that accepts equalization as a ground for compliance with the law, equalization renders the acts and transactions in question unlawful5. According to the contrary view, unlawfulness arises with the realization of the losscausing direction6. For this reason, equalization does not render the act or transaction in question unlawful, but eliminates the liability arising from the unlawful exercise of control.
In the TCC, equalization is only allowed if the subsidiary company suffers a loss as a result of an objective that serves the community’s interests and the loss is measurable7. It is not possible to benefit from the possibility of equalization for an act or transaction that benefits third parties8.
III. COMPENSATION CLAIMS IN CASE OF UNLAWFUL EXERCISE OF AUTHORITY
A. General
The ultimate aim of the legal regulations on the group of companies is to prevent the unlawful exercise of the dominant company’s control over the subsidiary company. It is important to determine who will be liable in this case, the nature of the responsibility, its guiding principles, and who may assert the claims arising from the responsibility in the event that the dominance is taken advantage of unlawfully.
B. Claim for Compensation of Company Damage that may be asserted in Partial Dominance Pursuant to Art. 202/1 TCC
1. Liability for Failure to Equalize Losses in Partial Control
Article 202/1 of the TCC stipulates that a legal entity or undertaking shall be held liable for the damages caused by the direction of another legal entity and shall indemnify such damages. Different opinions have been put forward in the doctrine regarding the nature of the liability arising from Art. 202/1 TCC.
According to the German doctrine, the liability of the controlling company and its legal representatives is a consequential liability that does not require fault, is based on noncompensation and arises from direction9. According to this view, the controlling company and the board of directors of the controlling company are not organs of the subsidiary company and are not authorized to give instructions. This view is criticized on the basis that it is not necessary to have a formal organ title in order to be subject to organ liability.
Another view advocated in the German doctrine is that the legal relationship between the controlling company and its subsidiaries is a legal relationship arising from the law and has unique characteristics10. The reason why the liability of the controlling company regulated under Art. 202/1 TCC is based on the principle of a performance based debt relationship is that the controlling company and its subsidiaries are not in the position of any third party and there is a transactional contact between them that creates a special bond11.
According to the view of organ liability advocated in German law, in the event that the controlling company interferes with the management of the subsidiary company by giving directions, it is argued that the directors ofthe controlling company should be subject to the same legal liability as the directors of the subsidiary company12. According to the prevailing view in Turkish law, although the controlling company is not a formal organ of the group of companies, the controlling company or the controlling shareholder of the subsidiary company exercises the power to instruct and direct, which are powers inherent to an organ. For this reason, it is accepted that the liability stipulated under Art. 202/1 TCC is an organ liability based on fault arising from the management of another company in breach of the duty of care13.
The first element of the liability arising from the failure to compensate the loss is the unlawful exercise of dominance. Under Art. 202/1 of the TCC, the circumstances under which the exercise of dominance may be considered unlawful are listed as transactions that may cause a decrease in the assets of the subsidiary company, prevent the increase of its assets, reduce profitability, and put its assets at risk. This provision is not exhaustive, and the legislator has accepted any loss of the subsidiary company as an unlawful act. Pursuant to Article 202/1 of the TCC, the controlling company is also obliged to prevent the loss from occurring. Therefore, it is also possible for the parent company to cause unlawfulness through its negligent acts.
Another contentious issue in the doctrine is whether the controlling company and the controlling company’s board of directors should specify whether the direction will harm the subsidiary in order for the controlling company and its board of directors’ responsibility to potentially arise in accordance with TCC Article 202/1. According to the prevailing view, fault is not a prerequisite for liability to arise; what is important is whether the action requested from the parent company is understood by the subsidiary company as a direction14. According to the contrary view, the main determinant of the fault of the controlling company and the members of the board of directors of the controlling company is whether they breached the duty of care and loyalty imposed on them by law in the performance of their duties15. By accepting that the liability arising from the failure to compensate for the loss arising from the direction and instruction is organ liability, it must be accepted that the members of the board of directors of the controlling company must be at fault in order to be held liable.
Another element that gives rise to liability within the meaning of Art. 202/1 TCC is the loss incurred by the subsidiary company in case the loss is not compensated. Different opinions have been put forward in the doctrine regarding the nature of the damage. The first of these is that the damage is in the nature of indirect damage. It is clear from Art. 202/1-b of the TCC that each shareholder may request compensation for the company’s loss, and it is clear from Art. 555 of the TCC—which is to be applied with the explicit reference of Art. 202/1-e of the TCC—that “the shareholders may request the compensation to be paid only to the company”—that the legislator has classified the damage in this case as indirect damage. The last element of the liability arising from the unlawful exercise of dominance is the causal link. The damage that has occurred in the subsidiary company as a result of the direction of the dominant company must have occurred as a result of the unlawful act.
2. Claim Rights and Scope of Claims Pursuant to Art. 202/1 TCC
In the event that the loss incurred in the subsidiary is not compensated until the end of the relevant activity year, the claim rights stipulated under Article 202 of the TCC may be exercised. The purpose of the compensation of the loss is to restore the situation in which the subsidiary would have been if the control had never been exercised and the act giving rise to the loss had never occurred. Under German law, it is accepted that compensation in kind is the rule and compensation in cash is the exception16. In the doctrine, due to the difficulty of calculating the amount of damages, it is stated that measures such as the revocation or cancellation of the act or transaction that caused the loss should be applied first17.
Article 202 of the TCC primarily aims to compensate the damage of the subsidiary company. It is understood that the legislator primarily aims to compensate the damage of the subsidiary company, since it is foreseen that the damages incurred as a result of the intervention of the controlling company shall be compensated by the controlling company by indemnifying the subsidiary company’s damages, the shareholder and creditor of the subsidiary company may demand the payment of the compensation to the company pursuant to Article 202/1 of the TCC, and theshareholder may claim the purchase of the shares only through the indemnification lawsuit to be filed by the shareholder.
In the lawsuit filed pursuant to Article 202/1 of the TCC, the judge may, upon request or ex officio if it is deemed to be in accordance with equity, decide on the purchase of the rights of the plaintiff shareholders by the holding company instead of compensation. It should be understood from the provision that the shareholders of the subsidiary company may only request the purchase of their shares in the compensation lawsuit filed. Although it is controversial in the doctrine, it is agreed that if it is determined that the subsidiary firm does not have the right to sue on its own behalf, a separate action cannot be filed to request the acquisition of the shares since there is a possibility that the damage will not be able to be compensated18.
Article 202/1 of the TCC stipulates that another solution that is appropriate to the situation may also be granted. In the doctrine, it is stated that the purpose of the provision is to determine the legal remedy that is most appropriate for the parties and best adapted to the concrete facts, considering the characteristics of the concrete case and all relevant interests19. This right of claim may also be asserted in alternating ways in the action for damages to be filed pursuant to Art. 202/1 TCC.
Contrary to German law, Article 202 of the TCC does not regulate the direct damages suffered by the shareholder. Article 202/1 ofthe TCC recognizes that the shareholder of the subsidiary company has suffered a loss by way of reflection. If the view of organizational liability is accepted, the controlling company may be sued pursuant to Art. 202/1-e of the TCC for the direct damage suffered by the shareholder, provided that it is caused by the direction20.
Another controversial issue in the doctrine is whether the fact that Article 202/1 of the TCC does not regulate the shareholders’ direct right to sue, contrary to the German law, can be considered as a negative legal loophole; it is the matter of whether the shareholders can bring a case in line with the general regulations if it is determined that there is a negative legal loophole.
There is no provision in the TCC that provides for the indemnification of the direct damages of the shareholders. However, it is accepted in the doctrine that the provisions regulating the liability of the board of directors of joint stock companies also cover the liability arising from the direct damages of the shareholders21. It should be accepted that Article 202/1 of the TCC primarily aims to compensate the damages of the company; however, since the provision allows the shareholders to demand the appropriate and acceptable solutions, it should also be accepted that the provision also provides for the compensation of the shareholders’ damages22.
3. Determination of Plaintiff and Defendant
a. Plaintiff(s)
Article 202/1 of the TCC stipulates that the shareholders and creditors of the subsidiary company have the title of plaintiff. It is accepted that in order for the shareholders to exercise the rights of action stipulated under Article 202/1 of the TCC, it is necessary to be a shareholder at the time the action is filed and throughout the duration of the action23. Shareholders who acquire the shareholding title after the occurrence of the damage may also file a lawsuit for the damage incurred by the company24. A lawsuit based on the board of directors’ responsibility is prevented by voting in favor of the resolution that releases them from liability and thereafter purchasing the shares with knowledge that the vote was successful. The shareholder who will acquire the share after the decision to release the board of directors from liability must not have known with positive knowledge that the board of directors voted in favor of the decision to release the board of directors from liability25.
Article 202/1 of the TCC also grants the right to the creditors of the subsidiary company to recover their damages from the parent company. Unlike the German law, the right to file a lawsuit granted to the creditors of the subsidiary company is not conditioned on the company’s bankruptcy. This situation is criticized in the doctrine on the grounds that it contradicts Art. 556 TCC26.
Considering that granting the board of directors of the subsidiary company the right to demand equalization would create the danger of pitting the subsidiary company against the controlling company27, it is seen that the provisions of the TCC regarding the group of companies do not allow the subsidiary company to demand its own damages.
Regarding the legal foundation of the subsidiary company’s right of action, doctrine has presented a variety of opinions. According to one of the opinions, the resulting damage is based on tort. The fact that Article 202 of the TCC does not grant a right of action to the subsidiary company does not constitute a negative legal gap, and a lawsuit may already be filed in accordance with the general provisions. The fact that the subsidiary company is not listed among the plaintiffs under Article 202 of the TCC immunizes the subsidiary company from liability actions that may be brought by its own shareholders in the event that it has not filed a lawsuit for damages28.
Another opinion, on the other hand, accepts that the right of claim granted to the subsidiary company and its creditors is essentially a right of claim belonging to the subsidiary company, that the granting of a right of action to the subsidiary company on the basis of tort may result in the application of different provisions in terms of the same receivable, and that the right of action should be recognized by applying the community provisions by analogy, and that the members of the board of directors of the subsidiary company will be liable under the general provisions if they do not compensate the damage of the subsidiary company29.
The main importance of the debate on whether the right of action is granted to the subsidiary company arises in the liability regime to be applied to the board of directors of the subsidiary company. If the view that the damage is based on tort is accepted, a contradictory picture regarding liability emerges. Furthermore, in the event that the subsidiary company is accepted as the plaintiff, the subsidiary company will not be able to claim irresponsibility against its own shareholders, considering the fact that there is no legal regulation abolishing the liability of the members of the board of directors of the subsidiary company. This is because the TCC does not envisage a structure that would relieve the board of directors from liability, as in the case of full control30. Since there is a connection between authority and liability in the liability law provisions of the TCC, if it is accepted that the right to file a lawsuit is granted to the subsidiary company, it must be accepted that the subsidiary company will be liable if it fails to file this lawsuit. The view that the members of the board of directors of the subsidiary company are granted the right to sue according to the general provisions is not justified since there is no reason to resort to the general provisions when there are special provisions regulated on this subject.
There is no separate provision regarding the liability of the board of directors of the subsidiary company in the regulations of our Law regarding the group of companies. Therefore, the liability of the board of directors of the subsidiary company arising from the general provisions continues to exist. It should not be assumed that the subsidiary company’s right of claim has been terminated just because there is no specific legal provision that does so. Based on the fact that the responsibilities of the board of directors of the subsidiary company within the scope of general provisions have not been eliminated by an explicit provision, it should be accepted that the board of directors of the subsidiary company will be held liable if the subsidiary company does not file a lawsuit for compensation of the damage, provided that other conditions are also present.
b. Defendant(s)
The controlling company and its board members are held liable for the unlawful exercise of control pursuant to Art. 202/1 TCC. It has been proposed that those who participated in the realization of the manipulation that resulted in the loss should be held jointly and severally liable for the loss in accordance with Art. 557 TCC, which will be applicable with reference to Art. 202/1-d of the TCC31. This doctrine is based on the idea that the will of the person who made the manipulation is significant in determining the status of the defendant. Contrary to the establishment of dominance under the TCC, the actual exercise of dominance is sought in the unlawful exercise of dominance. Art. 557/1 of the TCC is interpreted to mean that in the case of multiple controlling companies, only the companies that have actually exercised the control unlawfully shall be liable. Under Art. 202/1 TCC, the members of the board of directors of the controlling company are also listed among the defendants. In the doctrine, it is stated that no claim other than the indemnification of the decisions of the subsidiary company can be asserted against the board of directors of the controlling company within this scope32. The liability regime of the members of the board of directors of the controlling company, who are jointly and severally liable for the damage, shall be determined by the judge within the scope of the differentiated succession principle stipulated under the TCC33.
The provisions of the TCC regarding the liability of the group of companies do not include a provision regarding the subsidiary company. Therefore, it is accepted that the provisions of the TCC regarding the liability of the board of directors of joint stock companies shall apply to the board of directors of subsidiary companies34. However, considering that the regulations on joint stock companies are based on the idea that each company is independent, it is important to consider to what extent the application of these provisions in terms of the liability of the directors of subsidiary companies will lead to accurate results.
The TCC’s regulations on the group of companies stipulate that the board of directors of the subsidiary company cannot be held liable only in case of full control. In the case of partial control, the board of directors of the subsidiary company shall continue to be liable, but the board of directors of the subsidiary company may request the controlling company to assume the liability through an agreement. Since the positive regulation of the TCC does not provide for a special provision regarding the liability of the board of directors of the subsidiary company, it should be accepted that the provisions of Art. 553 et seq. of the TCC will be applicable.
C. Compensation Claim of the Creditor of the Subsidiary Company Due to the Liability Arising from the Failure to Compensate the Loss Arising from the Instruction
1. General
Under Turkish law, it is accepted that if a commercial company directly or indirectly owns one hundred percent of the shares and voting rights of a capital company, the instructions of the controlling company shall be binding for the subsidiary company35. In this way, the relations between the controlling company and its subsidiaries are designed in such a way that the controlling company can act flexibly in its instructions and the subsidiary’s creditors are protected. While in partial control, as a rule, the negative consequences that may arise for the subsidiary company as a result of the abuse of dominance are foreseen to be eliminated through the equalization system, in full control, some additional measures are needed to protect the relevant parties. In full control, the board of directors of the subsidiary company is obliged to fulfill the directives of the parent company. In full dominance, the liability of the controlling company for the negative consequences that may arise in the subsidiary company due to the directives of the controlling company is similar to partial control due to the references made to Art. 553 et seq. of the TCC. However, it is possible to make some special assessments regarding the liability of the controlling company within the framework of the special liability provisions foreseen for full control.
2. Special Circumstances in Full Control
The board of directors of the subsidiary company shall not be held liable as a result of the actual unlawful exercise of dominance. Pursuant to Article 203 of the TCC, the legislator has imposed an obligation on the subsidiary company to comply with the instructions of the parent company that may cause loss. This situation, which is referred to as the freedom of instructions, prevents the directors of the subsidiary company from being held liable to the subsidiary company and its shareholders. The loss in the subsidiary company is foreseen to be compensated by the controlling company, and in the event that the compensation is not realized, the creditors of the subsidiary company are only entitled to demand compensation for the loss from the controlling company and its board members.
Another distinctive feature of complete dominance is that the controlling company has the freedom of instruction. Pursuant to Art. 203 TCC, the controlling company may give instructions that may cause loss to the subsidiary company, and the subsidiary company is obliged to comply with these instructions. However, it has been established that providing this instruction must be mandated by the group’s determined and concrete policies. Article 204 of the TCC limits the freedom of instructions by prohibiting the issuance of instructions that clearly exceed the solvency of the subsidiary, jeopardize its existence or cause it to lose its significant assets. Therefore, the limits of the freedom of instructions under full control are constituted by the provisions stipulating that “the instructions must be required by the determined and concrete policies of the group” and “the instructions must not lead to the destruction of the subsidiary company”36.
Article 203 of the TCC regulates the obligation of the subsidiary company to comply with the instructions. In this scope, the board of directors of the subsidiary company is obliged to comply even with instructions that cause loss. Although the concept of instruction has a more mandatory meaning in the doctrine, it is stated that the legislator has used the concept of instruction with a conscious preference here37. In summary, the irresponsibility of the members of the board of directors of the subsidiary company is envisaged in parallel with the obligation to comply with instructions in full control. In full control, the balance of interests is constructed differently from partial control, and a different liability regime is adopted in terms of liability. In parallel with the obligation to adhere to the instructions, the subsidiary company cannot be held liable to its own shareholders for the fulfillment of the instructions.
3. Characterization of Liability
Contrary to partial control, in full control, the controlling company shall not be liable to the board of directors of the subsidiary company, but only to the creditors of the subsidiary company. Article 202/1 of the TCC, which regulates the liability in partial dominance, does not include a provision regarding the board of directors of the subsidiary company, but regulates the liability of the controlling company and the members of the board of directors of the subsidiary company who cause the loss against the shareholders and creditors of the subsidiary company. Pursuant to Article 206 of the TCC, in the event that the losses incurred by the subsidiary company are not compensated until the end of the relevant activity year, the subsidiary company’s creditors may demand compensation from the parent company and its board members who caused the loss.
Different opinions have been put forward in the doctrine regarding the nature of the liability. Göktürk accepts that the liability of the controlling company in full dominance is a liability arising from the nonrealization of the equalization, based on tort and similar to the liability arising from the direction in partial control38. In terms of organ liability, the doctrine asserts that a liability that is closer to de facto organ liability will be in question, since the relationship of dominance is more intense in full domination compared to the liability envisaged in partial domination39.
4. The Right of Suit Granted to the Creditor of the Subsidiary Company and the Problem of To Whom the Compensation Will Be Paid
It is understood that the main interest that the legislator intends to protect in the relevant provisions of the TCC is the interest of the creditors of the subsidiary company; however, it is not clear whether the interests of the subsidiary company are intended to be protected. Article 206 of the TCC stipulates that the loss incurred as a result of the instructions given by the controlling company must be compensated within that accounting year or an equivalent claim right must be granted. If no equalization is made and no equivalent claim is granted, the creditors who have suffered loss may file a lawsuit for compensation against the controlling company and the members of its board of directors responsible for the loss.
The issue of to whom the indemnity stipulated under Art. 206/1 TCC shall be paid is controversial in the doctrine. It is accepted that the wording of the provision implies that the indemnity shall be paid to the company; however, in the absence of an explicit provision in the TCC, it is accepted that an action for indemnity cannot be filed before the subsidiary company becomes bankrupt40. Okutan, on the other hand, accepts that the compensation stipulated herein envisages the payment of the loss of the creditor to the creditor, and therefore the compensation should be paid to the creditor of the subsidiary company41. Considering the fact that the main loss is suffered by the subsidiary company and if the direct compensation of the creditors is accepted, there will be no need for the equalization institution, it should be accepted that the compensation herein should be paid to the subsidiary company42.
5. Compensation
If the controlling company fails to perform the equalization, it shall be liable for the damages incurred by the company’s receivables pursuant to Art. 203 TCC. Since Article 204 of the TCC regulates the situations that will directly result in the unlawful exercise of dominance, unlike partial dominance, compensation in terms of full dominance will only be in question in terms of legally permitted instructions. Legally prohibited instructions will result in the direct unlawful exercise of control within the scope of Art. 204 TCC, and it will not be possible to apply for equalization in terms of instructions that cause the subsidiary to lose significant assets or endanger its existence, or that clearly exceed its solvency. The legislator grants the possibility of equalization only in limited circumstances where the unlawful exercise of control is permitted.
D. Compensation Lawsuit for Liability Arising from Damages Caused by Structural Decisions in the Subsidiary Company
1. General
Article 202/2 of the TCC explicitly regulates the liability of the subsidiary company arising from structural decisions that do not have an understandable justifiable reason. This provision aims to protect the nongroup shareholders. In this context, the nongroup shareholders may demand the compensation of the damage arising from the transaction they oppose and the purchase of their shares, without any loss of the subsidiary company. Contrary to Art. 202/1 TCC, in Art. 202/2 TCC, it is not a determining factor whether the subsidiary has suffered a loss or not in determining the unlawful exercise of control. As it is understood from the preamble and the wording of the provision, the main purpose of the provision is to protect the nongroup shareholders from the loss of the subsidiary company. In the doctrine, this provision has been criticized on the grounds that Article 202/2 of the TCC makes the validity of the general assembly resolutions dependent on the criterion of just cause, that an investigation based on the criterion of serving the interests of the subsidiary company would violate the prohibition of subsidiary control, and that the law already contains regulations protecting the nongroup shareholders in making structural decisions43. Unlike an independent company, the legislator has envisaged a different regulation in terms of the consequences of the general assembly resolutions of the subsidiary company in a group of companies, and based on compliance with the criterion of “serving the interests of the subsidiary company”.
It is observed that Art. 202/2 TCC introduces important exceptions to many principles accepted in the law of partnerships. If it is accepted that the application of Art. 202/2 of the TCC will lead to a review of propriety, all provisions regarding the group of companies will have to be evaluated within this scope. As it is understood from the wording and the preamble of the provision, the companies included in the group of companies are intended to be subject to a different system in terms of general assembly resolutions, and these resolutions are intended to be subject to legal consequences different from the sanction of invalidity under general provisions44. In summary, Art. 202/2 of the TCC introduces the criterion of whether the resolutions are in the interest of the subsidiary company, and obliges the controlling shareholder of the controlling company to utilize its voting rights in a way that doesn’t harm the subsidiary company when voting on structural choices that will be made at the subsidiary company’s general assembly45. In this way, the interests of the subsidiary company are prevented from being sacrificed for the interests of the group.
2. Characterization of Liability
In terms of the types of unlawfulness stipulated by Article 202/2 of the TCC, it is possible to divide the nature of the liability into three categories: the extension of the duty of loyalty, the rule of good faith and the principle of exercise of rights with reserve. On the grounds that the liability of the shareholders against the controlling company and the shareholders is based on the principle of good faith in Turkish law; it is accepted in the doctrine that the liability arising from the vote cast by the controlling company in the general assembly is based on the principle of extension of the duty of loyalty of the controlling shareholder, and the liability for the observance of the rights of the noncommunity shareholders is based on the principle of the exercise of rights by preservation of rights, which is also based on the principle of good faith46.
Pursuant to Art. 202/2 TCC, the duty of loyalty of the controlling shareholder is extended as to how the controlling shareholder votes in the general assembly of the subsidiary company, and the obligation to protect the interests of the subsidiary company is imposed47. Here, the basis of the controlling shareholder’s liability is the breach of the duty of loyalty that is exclusive to him. In the doctrine, it is stated that the limits of the duty of loyalty are drawn by the important decisions set forth in Art. 202/2 of the TCC48.
In the doctrine, there are different views on the nature of liability, such as liability arising from a debt relationship independent of performance, breach of the duty of loyalty, tort and contractual liability. Determining the basis of liability is important in terms of determining which provisions will be applied.
3. Violation of the Conditions Stipulated Under Art. 202/2 TCC
Structural decisions, mergers, demergers, spinoffs, type changes, etc. are listed in the TCC as illustrative rather than exhaustive. In this way, it is aimed to include important decisions that may lead to structural changes in the scope of application of the provision. Regarding structural changes such as mergers, spinoffs and conversion of type, the provisions to be applied in case of breach of law are regulated under Articles 191-193 of the TCC. There is no prioritysubsidiary relationship between these provisions and the provisions stipulated for the community of partnerships. The provisions under Art. 202/2 of the TCC do not overlap with these provisions; however, shareholders are granted more comprehensive application rights in the event that these decisions are taken within the group. In the doctrine, it is accepted that these provisions may be applied together to the extent appropriate to the structure of the group of companies49.
In each concrete case, the consequences of the decision on the subsidiary company should be evaluated and it should be decided whether the decision falls within the scope of Art. 202/2 TCC. The decision must be taken as a result of the actual exercise of control by the controlling company. If the decision giving rise to liability is a general assembly resolution, the controlling company must be able to influence the will of the general assembly by exercising its control. This is possible by holding the majority of the voting rights in the subsidiary company, obtaining the majority votes through voting agreements, and creating a position in the general assembly of the subsidiary company in which it can exercise its control in any way.
The decision should not have a justifiable reason that is clearly understandable for the subsidiary company. According to an opinion in the doctrine, the concept of just cause here is not used in a technical sense, and what is meant here is that it is understood that the transaction will cause damage for the subsidiary company and that it is not obligatory for the group to carry out such a transaction50. According to another opinion, the concept of just cause is not only related to the interests of the company; it is also obligatory to consider the interests of the objecting shareholders. Since the interests envisaged to be compensated in the provision are the interests of the shareholders of the subsidiary company, it is not possible to make an assessment only with respect to the subsidiary company51.
In order for the liability arising from Article 202/2 of the TCC to arise, the controlling company must have caused the general assembly resolution of the subsidiary company to be adopted without a justifiable reason, which is clearly understandable for the subsidiary company. Although it is not explicitly stated in the law, the decision in question must serve the interests of the community. Otherwise, this situation means a clearly unlawful exercise of dominance and may be annulled on the basis of the principle of good faith.
In the doctrine, it is stated that the general assembly resolution of the subsidiary company, which does not have a clearly understandable and justifiable reason for the subsidiary company, shall not necessarily cause a loss for the subsidiary company. Accordingly, the fact that the resolution does not benefit the subsidiary company and does not serve its interests is also deemed sufficient for the liability to arise. Finally, there must be a causal link between the decision taken in the general assembly of the subsidiary company by the dominant company through the exercise of its dominance and the damage suffered by the shareholder of the subsidiary company.
4. Claim Rights and Scope Pursuant to Article 202/2 of the TCC
Article 202/2 of the TCC stipulates that the controlling company shall be liable to the shareholders of the subsidiary company in the event that the controlling company exercises its control by taking structural decisions without a clearly understandable justifiable reason. In this case, the shareholders of the subsidiary company may demand from the controlling company the indemnification of the damage incurred as a result of the decision or the purchase of the shares.
Pursuant to Article 202/2 of the TCC, in the event that the controlling company exercises its dominance unlawfully, the shareholders of the subsidiary company may file a lawsuit for damages against the controlling company or request the purchase of their shares by the controlling company. The purpose of this provision is to compensate the shareholders of the subsidiary company rather than the subsidiary company. The possibility of a general assembly resolution, which does not have a clearly understandable justifiable reason for the subsidiary company, causing a direct damage to the shareholder of the subsidiary company is limited. In terms of indirect damages, the fact that the reference to the liability of the board of directors of a joint stock company in Art. 202/1 TCC is not made in Art. 202/2 TCC raises the issue of whether indirect damages can be claimed under these provisions. If the view of organizational liability is accepted, this will not constitute an obstacle for the compensation of indirect damages. The danger of damage is sufficient for the shareholder to bring this claim, but the damage must have occurred in order for the court to award compensation.
Another right that may be asserted based on Article 202/2 of the TCC is the purchase of the shares by the controlling company at the stock exchange or real value or at a value to be determined by a generally accepted method. What needs to be proved here is not that the decision may cause a possible damage, but that the decision has damaged the rights and interests of the shareholders to an unbearable extent. In order to assert these claims, the shareholder of the subsidiary must vote against the resolution at the general assembly meeting where the resolution is adopted and have his/ her opposition recorded in the minutes of the meeting or object to the board of directors’ resolution in writing.
In the event that the lawsuit stipulated under Article 202/2 of the TCC is filed, the court orders the controlling company to deposit as collateral an amount of money that covers the potential damages and the purchase value of the shares. Unless the collateral is deposited, no action may be taken regarding the general assembly resolution or the board of directors’ resolution. The court will rule on the collateral ex officio and no demand is required. In case the lawsuit is filed in bad faith, the controlling company may also demand the deposit of collateral.
IV. RESOLUTION
It is accepted that the controlling company may exercise control over the subsidiary company through the use of the control instruments stipulated in the TCC. The exercise of dominance does not necessarily constitute a violation of law. In the regime envisaged under the TCC regarding the group of companies, the exercise of dominance through certain instruments such as equalization is permitted, but certain limitations are stipulated in order to prevent unlawful exercise of dominance. As a result, if the loss resulting from the direction and instruction is not made up for and the subsidiary company suffers harm as a result of making structural decisions within the subsidiary company, the controlling company and the members of the controlling company’s board of directors will be held accountable for the unlawful exercise of control.
BIBLIOGRAPHY
ABUZER KENDİGELEN, New Turkish Commercial Code: Amendments, Innovations and First Determinations, 3rd Edition, İstanbul 2016.
ERSİN ÇAMOĞLU, Liability Cases Arising from Abuse of Dominance in a Group of Companies, S. 2, 2013.
FATMA BERİL ÖZCANLI, Unlawful Exercise of Dominance in a Group of Companies, 1st Edition , İstanbul 2021.
GÜL OKUTAN NILSSON, Corporate Group , 1. Baskı, İstanbul 2009.
HAMDİ YASAMAN, The Expanding Role of the Judge in the Draft Turkish Commercial Code, Banking and Commercial Law Journal, S. 4, 2009.
HASAN PULAŞLI, According to the Draft Turkish Commercial Code, the Basic Characteristics of the Group of Companies and Trust Liability of the Parent Corporation , Gazi University Journal of Law Faculty, S. 1, 2007.
İRFAN AKIN, Corporate Group Liability Law, First Press, Ankara 2014.
KÜRŞAT GÖKTÜRK, Principles of Liability in Group Companies, Second Press, Ankara 2022.
MURAT GÜREL, “On the Necessity of Article 202.2 of the TCC Regarding the Liability of the Controlling Company Due to the Structural Change Decisions Taken in the General Assembly of the Subsidiary Company ”, Banking and Commercial Law Journal , C. 32, S. 2, 2016.
NECLA AKDAĞ GÜNEY, Legal Liability of the Members of the Board of Directors of Joint Stock Companies, 2nd Edition, Istanbul 2010.
FOOTNOTE
1 Article 195 of the Turkish Commercial Code (TCC).
2 Fatma Beril Özcanlı, Unlawful Exercise of Dominance in a Group of Companies, 1st Edition, Istanbul 2021, p. 427.
3 Hasan Pulaşlı, “According to the Draft Turkish Commercial Code, the Basic Qualifications of the Corporate Group and the Trust Liability of the Dominant Company”, Gazi University Journal of Faculty of Law, C. XI, S. 1, 2007, p. 263.
4 Article 202 of the Turkish Commercial Code (TCC).
5 Gül Okutan Nilsson, Corporate Group, 1st Edition, Istanbul 2009, p. 281.
6 İrfan Akın, Corporate Group Liability Law, 1st Edition, Ankara 2014, p. 280.
7 Article 202 of the Turkish Commercial Code (TTC).
8 Özcanlı, p.252 cited in Emmerich, Habersack, Munich 2021.
9 Özcanlı, p. 317 cited in Emmerich, Habersack, Munich 2021.
10 Özcanlı, p. 317 cited in Wimmer Leonhardt, Saarland 2004.
11 Okutan Nilsson, p. 324.
12 Özcanlı, p. 317 cited in Altmeppen, Munich 2010.
13 Özcanlı, p. 329.
14 Özcanlı, p. 132 cited in Emmerich, Habersack, Munich 2021, p. 24.
15 Özcanlı, p. 132 cited in Altmeppen, Munich 2010, p. 154.
16 Okutan Nilsson, p. 381.
17 Özcanlı, p. 368.
18 Okutan Nilsson, p. 382.
19 Hamdi Yasaman, “The Expanding Role of the Judge in the Draft Turkish Commercial Code”, Journal of Banking and Commercial Law, V. 25, N. 4, 2009, p. 93.
20 Özcanlı, p. 329.
21 Okutan Nilsson, p. 345.
22 Okutan Nilsson, p. 352.
23 Okutan Nilsson, p. 342.
24 Okutan Nilsson, p. 343.
25 Okutan Nilsson, p. 343.
26 Necla Akdağ Güney, Legal Liability of the Members of the Board of Directors of Joint Stock Companies, 2nd Edition, Istanbul 2010, p. 190.
27 Reasoning Regarding TCC No. 6102.
28 Özcanlı, p. 392 cited in Ünal Tekinalp, Istanbul 2021.
29 Kürşat Göktürk, Principles of Liability in the Corporate Group, 2nd Edition, Ankara 2022, p. 213.
30 Özcanlı, p. 394.
31 Okutan Nilsson, p. 357.
32 Okutan Nilsson, p. 360.
33 Özcanlı, p. 398.
34 Özcanlı, p. 342.
35 Turkish Commercial Code (TCC) Art. 203.
36 Özcanlı, p. 428.
37 Özcanlı, p. 430.
38 Göktürk, p. 277.
39 Özcanlı, p. 435.
40 Abuzer Kendigelen, New Turkish Commercial Code: Amendments, Innovations and First Determinations, 3rd Edition, Istanbul 2016, p. 189.
41 Okutan Nilsson, p. 435.
42 Özcanlı, p. 439.
43 Murat Gürel, “On the Necessity of Article 202.2 of the TCC Regarding the Liability of the Controlling Company Due to the Structural Change Decisions Taken in the General Assembly of the Subsidiary Company”, Journal of Banking and Commercial Law, V. 32, N. 2, 2016, p. 200.
44 Özcanlı, p. 448.
45 Özcanlı, p. 448.
46 Özcanlı, p. 448.
47 Ersin Çamoğlu, “Şirketler Topluluğunda Hâkimiyetin Kötüye Kullanılmasından Doğan Sorumluluk Davaları”, GÜHFD, V. 78, N. 2, Ekim 2013, p. 29.
48 Okutan Nilsson, p. 391.
49 Akın, p. 308.
50 Çamoğlu, p. 25.
51 Okutan Nilsson, p. 310.
