What’s New at the New Turkish Commercial Code? (2) By Sarp Kalkan, TEPAV Economic Politics Analyst

Yesterday we started to explore the new Turkish Commercial Code, (TCC) which aims to improve corporate governance in Turkish companies. We covered the new rules governing the Board of Directors (BoD) as well as shareholder democracy. Let’s continue with our third item for fair and responsible corporate governance:

3. Online Voting: The TCC does not require directors’ physical presence in BoD meetings. The new code allows them to participate through electronic media. Board resolutions can also be approved through electronic signatures.

The TCC allows online audiovisual gathering of General Assemblies (GA) and the use of online votes during these gatherings. This is important for minority representation, since the availability of online GA option is mandatory for publicly traded companies.

4. Limits to Voting Privileges: In the new code, voting privileges are limited to 15 votes per share. The privileged votes will not be able to block the capital increase. They will also not be used in voting on resolutions regarding the amendment of the articles of the company’s incorporation, filing of discharges or liability cases.

5. More protection and control while changing company structure: The TCC contains important provisions for structural changes such as spin-offs, split-ups, mergers and conversions of capital companies. Those provisions, which are in compliance with EU legislation, are mostly meant to protect the rights and credits of partners, partnership creditors and employees.

6. Provisions for Groups of Companies: The notion of a group of companies, which describes the management of more than one capital stock company, is regulated for the first time. This important regulation covers a significant loophole in our legal system.

Under the TCC, the board of directors of parent and subsidiary companies are required to report their inter-relations annually. There are also several new provisions preventing the abuse of control by the parent company. Moreover, the parent and subsidiary companies managements can now gather under the same management.

Increased Accountability and Reliable Information

In addition to the innovations on the principles of responsibility and fairness, the new code gives special emphasis on disclosure standards and accountability. The first precondition for accountability is reliable information. Most of the investors, especially foreigners, complain that the financial statements of Turkish firms do not reflect their real situation. In order the cope with this problem and make company disclosures more reliable, the TCC has two important innovations:

1. International Financial Reporting Standards: As borders became less of an obstacle in the global economy, the need for a unique financial reporting standard with universal characteristics has emerged in recent decades. This prompted Turkey – as a more integral part of the global business community – to reform its local financial reporting legislation and regulations in conformity with International Financial Reporting Standards (IFRS.)

Starting the financial year of 2013, Turkish firms will report their financial statements according to IFRS. Foreign investors will especially benefit from this, since they found the old accounting procedures mired in Turkey’s tax rules very difficult to understand. Moreover, comparable financial statements will make it easier to engage in M&A activities and to prepare international consolidated financial reports

2. Independent Auditing: In the old code, there was an internal auditing system. The new TCC replaces it with external and independent auditing systems. Originally, the independent audit mechanism was to become compulsory for all joint stock and limited liability companies in Turkey with the new TCC. With the recent amendments to the code however, the extent of the obliged companies is limited and the coverage decision is left to the government. SMEs will most probably be excluded from independent auditing, while limiting coverage to 10-15 thousand large companies.

Disclosure Rules and More Transparency

1. Web Site Requirement: In accordance with the principle of transparency, companies are required to launch web sites, which will be subject to independent auditing. As previously mentioned, recent amendments limit the coverage of independent auditing. Thus, having an official website and the legal disclosure requirements is no longer universal. If a company fails to establish a web site or publish the legally required information, it runs the risk of administrative penalties and sanctions.

2. Declaration of Founder: In order to protect company’s rights and capital, the declaration of founder has been introduced to ensure transparency. If capital contribution is made in-kind, or an enterprise is taken over, the founder’s declaration must include documents clarifying the appropriateness of the share values. In addition, benefits granted to the founders, if any, are to be explained together with the underlying justification.

3. Annual Reports of the BoD: Another important disclosure requirement of the new TCC are the annual reports of the BoD. These reports should reflect company activities and their financial positions in detail. The BoD prepares the annual report together with the financial statements and its attachments, within the first three months of the following year and presents them to the GA. The report provides information on the details of the development of the company and possible risks. Moreover, any significant events following the year-end; research and development activities of the company, wages, bonuses and premiums given to the board members, expenses, other payments and significant events have to be stated in the report.

This article was published in Hürriyet Daily News on 05.07.2012.

Tomorrow: compliance costs and recent amendments to the code.