What’s New at the New Turkish Commercial Code? (1st of a 3 Part Series) By Sarp Kalkan, TEPAV Economic Policy Analyst

Turkey’s new Commercial Code (TCC) came into force this week. The former Commercial Code (no. 6267) was enacted more than half a century ago, in 1957. Turkey needs this new corporate legal structure in order to catch up with global trends and accommodate its own transformation process.

Over the last three decades, Turkey has transformed from an agricultural economy to an industrial one. Before 1980, the main aim of Turkey’s industry was to substitute import gaps. The state was heavily involved in investment and trade policies. Turgut Özal’s reforms then reshaped Turkey into a free market economy.

Another turning point for Turkey was the 2001 economic crisis. The stabilization program after the crisis and the ensuing political stability directly improved the economy. Turkey rapidly shifted from labor-intensive and low-technology sectors, to technology-intensive ones. Export-oriented industrialization accelerated and the entrepreneurial spirit of the business community grew stronger.

The extent of Turkey’s economic transformation has been staggering. While in early 1980’s we had less than 100,000 enterprises, we now have more than 1.4 million. Our once 3 billion dollars worth of exports are now at 140 billion dollars. 90% of these were agricultural products before the 19080s, while now more than 90% of our exports are manufactured goods.

The new TCC will be a milestone for Turkey’s transformation process. Our old system took us from low-tech into medium-tech, but the new code has the capacity and the tools to drive Turkey up the global value chain, into an innovation-driven economy.

The code aims to develop a corporate governance approach that meets international standards. This way, it means to foster private equity and public offerings activities. Another aim of the TCC is to bring the Turkish business environment in line with EU legislation, and the accession process.

You might be wondering what exactly makes this new commercial code so revolutionary. Starting today, we will delve into that question, and cover the most important aspects of the new legislation from an economist’s perspective.

Improved Corporate Governance

Corporate governance is the main motivation behind the TCC. Sound corporate governance increases investor confidence and thereby ensures firms’ sustainable development. The four pillars of corporate governance – transparency, accountability, fairness and responsibility – are rooted in the more than 1,500 articles of the code. We will elaborate on each, starting from the fairness and responsibility principles:

1. The New Board of Directors (BoD) Structure

Under the TCC, in compliance with the EU legislation, a BoD can be composed of a single person. This new rule is actually a by-product of single shareholder companies, which we will cover later on. The previous provision requiring that a board of directors has to have at least 3 members has been abolished.

The requirement that board members have to be shareholders has also been abolished. Any independent person can now be a member. This paves the way for a professional BoD. A professional BoD can act separately from shareholders, strengthening corporate governance.

Legal entities may be appointed as board members. This means foreign owners no longer have to go through cumbersome bureaucratic steps to change board members. Different representatives can be appointed as a board members each time.

The TCC also increases the legal responsibilities of the BoD members and issues many penalty clauses. BoD members are jointly liable for every transaction of the company. Individual board members have the right to transfer some of their responsibilities to other board members, third parties, or the management through a written statement.

The quorum requirement to take decisions at BoD meetings has been abolished. Reaching a majority of board members is adequate for holding board meeting, and decision can be taken by the majority of those present.

The BoD is under the obligation to prepare the company's financial tables and annual report. It must declare and distribute these to the members of the General Assembly.

1. Shareholder Democracy in General Assemblies (GA)

The TCC introduced an institutional representation mechanism to pave the way for minority shareholders’ representation. An institutional representative is the person who requests authority – with a memorandum – from other shareholders. This mechanism (similar to the proxy mechanism in US law) is an important innovation of the new code, strengthening shareholder democracy.

Special audit is also subject to new principles in the TCC. The practice in the former code, in which the majority appointed the special auditor, has been abolished. Every single shareholder can request special audit. Even if the GA rejects the request and the minority (1/10 of shares for non-listed companies and 1/20 of shares for listed ones) repeats it at the court, the court appoints a special auditor.

This article was published in Hürriyet Daily News on 04.07.2012.

Tomorrow: Online voting, group of companies, disclosure arrangements and more…