ABSTRACT
Secret partnerships are frequently encountered since they are often preferred by people banned from a particular trade or subject to trade prohibition. However, there is no regulation regarding secret partnerships in Turkish Law.
I. INTRODUCTION
The types of partnerships encountered in Turkish Law are ordinary partnerships (joint venutures), regulated in Article 620 and the subsequent provisions of the Turkish Code of Obligations No. 6098 (“TCO”), unlimited liability partnerships, limited liability partnerships, joint-stock partnerships, cooperatives, and commandite partnerships, regulated from Article 124 to 644 of the Turkish Commercial Code No. 6102 (“TCC”). While secret partnerships are not recognized in the TCC, in practice, it is a preferred method of operating, particularly by civil servants, who are prohibited from trading under Article 28 of the Civil Servants Law No. 657.
A secret partnership is a contractual relationship between an apparent partner and a secret partner that involves participation of a person (secret partner) who does not have the legal appearance of a direct relationship with a particular company in relation to third parties, and/or somone who provides a certain participation share, that can also be qualified as capital, to another person (apparent partner) who is the owner of all or part of the company's shares. The contractual agreement covers issues such as receiving a share of the company's profits, bearing its losses, and being closely involved with the management of the company. A secret partnership is defined as a contract stipulating a share in the gains and losses of a company through two or more mutual temporary or permanent business transactions on behalf of the parties to the contract1.
Once the Turkish Commercial Code dated 29.06.1956 and numbered 6762 entered into force, the regulations in the previous laws on private companies were abolished, leaving no regulations regarding secret partnerships in either the TCC or the TCO. Consequently, there are currently no legal obstacles to establishing a secret partnership relationship.
This article discusses the secret partnership relationship regarding joint-stock companies and limited liability companies and disclosures regarding the secret partnership relationships in Turkish Law. It also discusses secret partnership agreements between parties and the financial, administrative, and judicial responsibilities of secret partners in joint-stock and limited liability companies.
II. SECRET PARTNER SHIP RELATION SHIP
The partnership that does not come out as an external partnership while the person (apparent partner) acting on his behalf and has the title of partner in terms of any part nership regulated under Turkish Law and the other person (internal partner) who has the profit, right to examination and management within certain limits, the capital invested becomes apparent partner’s assets, which includes the affectio societatis2. element, is called an internal partnership3.
A secret partnership relationship constitutes a subtype of internal partnership4. In terms of legal appearance, it involves a person (secret partner) who participates in the business activity of another person (apparent partner) based on a mutual contract in which they share the gains and losses, the secret partner’s participation share is transferred to the property of the apparent partner, and the secret partner has the right to participate in management and examination. To a certain extent this can be described as an ordinary partnership in which only the apparent partner is authorized to transact with third parties and can be held responsible5.Contracts regarding a particular contractual relationship between the secret partner and the apparent partner can be qualified as a “secret partnership agreement”. The purpose of secrecy in the definition of “secret partnership” is that the legal relationship between the apparent partner and the secret partner is not reflected as an external partnership; in other words, the secret partner does not participate in transactions as a partner6.
A secret partnership is based on a contract concluded between the parties and there is no form requirement regarding the validity of this contract. However, despite the slight risk of becoming public, notarizing the contract by the public notary can prevent the apparent partner denying the contract's signature.
Within a secret partnership agreement, the main role undertaken by the apparent partner is to manage the company under the instructions of the secret partner or in consultation with the secret partner, and to transfer the profits or share of them to the secret partner. The main role of the secret partner is to carry out any act that has economic value, such as wages or shares, and is necessary for the achievement of the purpose of the partnership. According to the details of the secret partnership agreement between the parties and the form of that agreement, although opinion suggests secret partnership agreements should be subject to the provisions of the Article 620 of the TCO and subsequent ordinary partnership provisions, which do have some weight with the decisions of the Court of Cassation7. others take the opinion that the relationship between the apparent partner and the secret partner can also be described as a “power of attorney” relationship and therefore provisions regarding power of attorney should apply8. According to Barlas, the secret partnership relationship is an ordinary partnership relationship and the provisions of the TCO regarding the ordinary partnership apply where the features within the secret partnership relationship and arising from the existence of an internal partnership are suitable9.
III. SECRET PARTNERSHIP AGREEMENT
In a secret partnership, the mutual acts of the secret partner and the apparent partner should be regulated in a very detailed and precise manner, avoiding any doubt or interpretation, and the legal relationship between the parties should be established on a solid contractual basis.
The “right to manage” constitutes one of the essential acts of a secret partnership agreement and burdens the apparent partner with the obligation to manage the company in line with the requests and instructions of the secret partner. How this right will be exercised by the secret partner and regarding which matters and situations should be clearly regulated under the contract. However, while the right to manage the company belongs to the secret partner and the company is managed by the director or board member upon the secret partner’s instructions may be regulated in the contract, the secret partner does not have any relationship with the company in terms of legal appearance. In the event that the secret partner has no signature authority to represent and bind the company and is elected as a partner and board member of the company, only the apparent partner will be considered the company’s manager and will be able to act without the consent of the secret partner even in extraordinary transactions while conducting joint business.
However, in the secret partnership agreement between the parties, in the case of extraordinary businesses other than the daily activities of the company and/or ordinary businesses related to the daily activities of the company, if the apparent partner is obliged to be burdened with the secret partner’s decisions or at least to take his/ her opinion into consideration, any ordinary or extraordinary transactions carried out contrary to this are not valid10. Nonetheless, in such a case, due to the breach of the secret partnership agreement, there may be a right to claim based on a contractual breach against the apparent partner. In order to, as far as possible, eliminate the risk that may arise due to the validity of the transactions in question, it is possible to determine various penalty clauses in the contract, differing according to the type of violation, as a deterrent to prevent the apparent partner violating the obligation to act on the instructions of the secret partner in managerial matters. However, even in the event of a violation of relevant obligations by the apparent partner where a penalty clause is stipulated in the agreement, there will be no obstacle in terms of the validity of these transactions in the presence of third parties.
IV. SECRET PARTNERSHIP RELATIONS IN THE CONTEXT OF JOINT- STOCK COMPANIES AND LIMITED LIABILITY COMPANIES
Quite often a company that intends to have a legal relationship as a secret partner is a jointstock company or a limited company. Article 336 of the TCC covers joint-stock companies and the establishment of all agreements with the company, founders, and other persons and issues related to establishment, including articles of association, valuation reports, assignment of property rights, and business transfer documents required for the establishment of the joint-stock company. Considering the justification for Article 336, it can be thought of as aiming to prevent the formation of secret partnership agreements together with the necessity of submitting the relevant documents at the establishment stage. Likewise, Article 337 of the TCC aims to prevent secret partnerships by regulating that the third party is responsible for issues arising from establishment if the person who undertakes a share and signs the articles of association performs this transaction on account of a third party. For this reason, if a secret partner requests being a secret partner in a joint-stock company during the establishment phase, the secret partner will be responsible as a shareholder under the articles mentioned above.
Although counter to a secret partnership’s intent of confidentiality, it is also possible for the secret partner to be an apparent partner in the company with which it later enters into a secret partnership relationship. As a secret partner, if the company intended its legal relationship after establishment to be a joint-stock company and the shares under the ownership of the apparent partner are not affiliated with bonds, the said shares can be transferred to the secret partner by the apparent partner upon written agreement of assignment. Since the said “assignment of claims” is a founding element, the record in the share ledger will be explanatory and the secret partner can claim that he/she is a shareholder. If the shares are bearer bonds, there will be no provision in the company’s articles of association regarding the transfer of the shares or that the bearer shares’ price is paid in full, it can be claimed that the apparent partner secretly transfers the bearer shares to the possession of the secret partner. As a legal presumption, the transfer of possession for establishing a relationship between the possessor and the company will bind both the company and the third parties, without entering a share ledger11.
If the shares in the ownership of the apparent partner are registered shares, the company’s articles of association do not contain any context regarding the limitation of the share transfer, and the registered shares in the ownership of the apparent partner are endorsed to the secret partner. Provided the price of the registered shares is fully paid, it may also be possible for the endorsed shares to be kept by the secret shareholder without reflecting this situation on the company’s share ledger. As a matter of fact, in this case, since the apparent legal status of the company’s share ledger does not constitute an obstacle for the ownership of the shares to be transferred to the secret partner through endorsment, in the event of a dispute between the parties, the company is notified by the secret partner. It is also possible to assert that the joint-stock company is the real shareholder of the company in terms of legal appearance and, by writing the shareholder’s name is on the share ledger, that it is possible to exclude the partner from the view.
However, a different situation arises if the secret partnership is intended for a limited liability company. This is because if a share transfer is desired in limited liability companies, a general assembly resolution approving the share transfer is required. What is more, a general assembly resolution approving the transfer of shares is not sufficient in itself as the share transfer referred to will only be valid after notary approval. In this case, the opportunity valid for joint-stock companies is not also valid for limited companies. However, this does not mean that a secret partnership cannot be established for limited companies.
It should be noted that the provisions in the regarding the partnership relationship between the joint-stock company partners and those provisions regarding the partnership relationship between the limited company partners will find application area, and the ordinary partnership provisions in the TCO apply to a secret partnership between the apparent partner and the secret partner
V. FINANCIAL, JUDICIAL, AND LEGAL DISADVANTAGES OF SECRET PARTNERSHIP RELATIONSHIP IN JOINT – STOCK COMPANIES AND LIMITED LIABILITY COMPANIES
Since the secret partner does not have any legal relationship with the company that can be asserted against third parties and the profit obtained as a result of the commercial activities carried out by the company will arise directly on the legal entity of the company, there is no legal basis for the company’s dividends to be directly demanded by the secret partner. In addition, in joint-stock and limited liability companies, as per the sole obligation principle, neither the apparent partner nor the secret partner are responsible for the company’s obligations arising from the company’s legal transactions with third parties. According to the sole obligation principle, the company may demand the apparent partner fulfill the obligation to pay the subscribed capital share, while such payment cannot be requested from the company’s secret partner. In this regard, the relationship between the apparent partner and the secret partner should be considered independently of the relationship between the company and third parties.
In order for the profit resulting from company activities to be transferred to the secret partner, the profit must first be transferred from the legal entity of the company to the apparent partner, and then the relevant amount or rate, as stated in the secret partnership agreement, must be transferred by the apparent partner to the secret partner. It is possible for the apparent partner and the secret partner to conclude a contract regulating the transfer of all predetermined dividends to the secret partner within the scope of “assignment claims” to provide assurance for the transfer of the relevant amounts to the secret partner by the apparent partner. Alternatively, a provision regarding this can be included in the secret partnership agreement.
However, it should be emphasized that, since the apparent partner has the actual management of the company, even if the claim is assigned, it is up to the apparent partner to make any transfer of company profits direct to the secret partner. In addition, although it may harm the underlying confidentiality of the secret partnership agreement, since it appears in the share ledger, the apparent shares owned by the apparent partner by making a share pledge to the secret partner may be considered as a legal possibility to constitute the assurance of the acts undertaken by the apparent partner under the secret partnership agreement. In the event that establishing a share pledge is not desired, requesting various types of collateral such as a mortgage, surety, bank letter of guarantee from the secret partner is always possible as an assurance of the apparent partner’s obligations in the partnership agreement.
Even though a company may to becomes a party to a secret partnership agreement right after its establishment and acquisition of legal personality to ensure certain obligations in the secret partnership agreement can be asserted against the “company,” it is likely that making the company a party to a secret partnership agreement would not be optimal as the relevant contract may be subject to an invalidity sanction unless it is registered and announced under Article 106 of the Trade Registry Regulation. In this situation, the secret partner will be given the right to have a direct say in the management of the company because of the secret partner agreement.
In addition, as a managerial risk, even if the secret partner is contractually entitled to a say in management through a secret partnership agreement, it is possible that if the apparent partner performs an action for which the secret party has authority, this transaction will be valid for the company and third parties, and can only be considered as a breach of obligations in the internal relationship of the secret partnership.
Even though secret partnership agreements are not regulated under the TCC, TCO, or the relevant legislation, since there are no legal obstacles to establishing a secret partnership, it can be considered a partnership relationship recognized by the law and as a contract that can be concluded within the framework of the principle of freedom of contract. Within this scope, it can be said that being a secret partner of a company under a secret partnership agreement does not lead to criminal liability, except for in regard to company activities that lead to criminal liability.
In addition, joint-stock company and the limited liability company partners are not liable for company debts, as per the sole obligation principle. However, as an exception, in accordance with Article 35 of the Law on the Procedure for the Collection of Public Receivables (“AATUHK”), limited liability company partners are directly liable for the company’s public obligations in proportion to their capital shares. A Court of Cassation decision declared that a secret partner will not be liable for public debts within the scope of a limited company as follows:
According to the scope of the whole file, although there are special regulations regarding the liability of the partners due to the public debt in limited liability companies, this liability cannot be applied to the who does not possess partner title, also, as the status of the secret partner is accepted as ordinary partner and the liability of the limited company partners cannot be extended to the ordinary partnership, it is unclear with which partner the defendant was a secret partner and whether he was previously a shareholder or not. Moreover, if there is evidence of collusive transactions, the authority of provisional seizure and precautionary assessment is at the discretion of the plaintiff administration, and there is no need for a final judicial decision. Also there is no need for a declatory judgement at the discretion of the evidence, what the administration should do is a clear and mandatory provision, the Court decided that the case and the request for precautionary assessment rejected separately due to the lack of legal benefit, on the grounds that there is no legal benefit for the request for precautionary assessment. […]"12
However, although Article 35 of the AATUHK does not apply to secret partners due to the lack of a legal partnership relationship with third parties, it may be possible for the administration to hold the secret partner responsible for public debts if the secret partnership is detected. As a matter of fact, the Court of Cassation refers to this issue in a decision as follows:
According to the scope of the whole case file, the Court decided that the defendant companies are limited liability companies and the company partners are not personally liable for the debts of the company except for public debts, the plaintiff’s receivable is a receivable based on Law No. 6183, the plaintiff “Administration” can execute provisional seizure and precautionary assessments on the personal assets of the partners of the defendant company registered in the trade registry, if the plaintiff is of the opinion that the defendants are secret partners of the defendant company without allowing the defendants to bereave their property, the execution of provisional seizure and precautionary assessments on the property, and the dismissal of the main lawsuit and the merged lawsuits on the grounds that there is no need for a declaratory judgement for the tax office to perform its administrative duties13.
Regarding the partners other administrative liabilities, different consequences may occur depending on the partnership’s subject and/or the partners’ legal status (such as being a civil servant or not being a Turkish citizen).
Ultimately, it can be said that secret partners cannot be held liable as he/she cannot take any legal action to protect the rights of the company in his/her name and/or on behalf of the company, and cannot be a party in any dispute between the company and third parties since the secret partner does not have any legal relationship with the company in the presence of third parties.
VI. CONCLUSION
A secret partner, who is a shareholder in the profit and loss of a company in line with his/her participation share, is not subject to current legal regulations in Turkish Law and therefore does not establish a direct relationship in terms of third parties. A partnership relationship can be established between a secret partner an apparent partner who has the right to manage. As a secret partnership agreement between the parties, it is not subject to any form in terms of validity. Considering these features and that a secret partnership relationship is an internal partnership, the provisions regarding ordinary partnerships regulated in Article 620 of TCO and subsequent articles are the most suitable for application.
A secret partnership is based on a contract concluded between the parties and not conditioned with a form requirement regarding the contract’s validity. However, the mutual acts between the secret partner and the apparent partner in the secret partnership agreement should be regulated in a detailed and clear manner, avoiding any doubt or interpretation; the legal relationship between the parties should be established on a solid basis in a contractual context.
In practice, the secret partnership relationship is encountered mostly in the context of joint-stock companies and limited liability companies. As a secret partnership relationship within the structure of a joint-stock company, it may be possible to endorse the registered shares, which are issued in the name of the apparent partner, to the secret partner without recording the share transfer in the company share ledger. There is no opportunity for this in limited liability companies since the procedural rules, such as general assembly resolution and notary approval, are required for share transfer. However, there is no obstacle to establishing a secret partnership relationship.
Regarding the financial, administrative, and legal disadvantages of secret partners in secret partnership relationships in joint-stock and limited liability companies, it should be stated that the secret partner does not establish a relationship with the company of which he is a partner in the presence of third parties in terms of legal appearance.
For this reason, as a managerial risk, even if the secret partner is given a say in the company’s management, the ordinary or extraordinary transactions are actually performed by the apparent partner nd any actions the apparent partner takes contrary to this obligation are valid. However, in such a case that breaches the confidential partnership agreement, a claim based on a contractual breach may arise against the secret partner. A penalty clause may be assigned to the secret partnership agreement to eliminate any risk that may occur due to the validity of the specified transactions and to ensure, as far as possible, that transactions are not made without the secret partner’s consent, since it can act as a deterrent to the apparent partner. However, even if the apparent partner acts contrary to the relevant obligations despite the penalty clause, these transactions will be valid for third parties.
A secret partnership relationship known of by third parties or proved of by third parties does not present any change regarding the confidential partner’s rights and obligations under private law. Concerning liability for public debts, a distinction should be made regarding joint-stock company partners and limited liability company partners. While it is accepted that joint-stock company partners are not liable for public debts, limited liability company partners are responsible for public debts in proportion to their shares. However, the Court of Cassation has recorded different decisions regarding the limited liability company secret partner’s liability for public obligations. Nonetheless, if the company and the secret partner’s organic connection is established, the courts may impose obligations on those individuals.
BIBLIOGRAPHY
BÜŞRA BAŞ, “Adi Ortaklığın Yönetimi, Yüksek”, Lisans Tezi, İstanbul, 2019.
EMRE TÜRKMEN, “Adi Ortaklıkta Çıkma ve Çıkarılma”, Doktora Tezi, İzmir, 2019.
FATİH BİLGİLİ, Türk Ortaklıklar Hukukunda Gizli Ortaklık İlişkileri, Ankara, 2003.
NAMİ BARLAS, Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri, İstanbul, 2016
REHA POROY, ÜNAL TEKİNALP, ERSİN ÇAMOĞLU, Ortaklıklar Hukuku I, İstanbul, 2019.
FOOTNOTE
1 Barlas, Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri, p. 185
2 The common will of several legal persons or legal entities to merge into one entity.
3 Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku I, p.47
4 Barlas, Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri, p.220
5 Bilgili, Türk Ortaklıklar Hukukunda Gizli Ortaklık İlişkileri, p.20
6 Barlas, Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri, p.195
7 Court of Cassation 13. HD E.2006/9540 K.2006/14381 T.06.11.2006
8 Bilgili, Türk Ortaklıklar Hukukunda Gizli Ortaklık İlişkileri, p. 131
9 Bilgili, Türk Ortaklıklar Hukukunda Gizli Ortaklık İlişkileri, p. 131
10 Barlas, Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri, p. 115
11 Bozkurt, Şirketler Hukuku, p. 432
12 Court of Cassation 11. HD E.2017/1370 K.2018/6727 T.5.11.2018
13 Court of Cassation 11.HD E.2016/7061 K.2018/2191 T. 21.3.2018
