What’s New at the New Turkish Commercial Code? (3) By Sarp Kalkan, TEPAV Economic Policy Analyst

Compliance cost matters: Recent amendments to the code

As our column for the past two days have shown, the new Turkish Commercial Code (TCC) will bring numerous innovations to Turkish business life. Lately these changes have been discussed extensively among Turkey’s business circles. Although the business community has praised the improvements of the corporate legal structure, they have also complained about its compliance costs.

A recent TEPAV study[1] calculates an annual compliance cost of more than 6.3 billion TL. The study also claims that SMEs are the most disadvantageous group, bearing 85% of this cost. It identified the main compliance cost items as independent auditing, transaction auditing, book approvals, website obligations, and disclosure requirements. However, there are also other implicit costs associated with the new rules and regulations, such as increased liabilities and penalties, borrowing bans, etc.

This huge compliance cost and the upcoming slowdown in the global economy increased the complaints about the new code among the business community. The Union of Chambers and Commodity Exchanges of Turkey (TOBB) has coordinated the concerns of the business community to ensure that they were heard by the government. Last week, after 3 successive Economic Coordination Council meetings, the parliament amended the new TCC. 109 articles of the TCC changed just 3 days before the code came into force. These changes have removed most of the compliance costs by dissolving some of the rules or granting SMEs exemptions.

The amendment package became effective after President Gül’s approval on Saturday. Let me summarize the most important changes below:

• The scope of independent auditing has been narrowed. The Cabinet will have the authority to decide upon the scope of independent auditing. SMEs will most probably be excluded. The changes decrease SMEs’ associated auditing costs by more than 4.5 billion liras annually.
• Transaction auditing was completely abolished. Originally, the new code was going to control important structural transactions. This new instrument was removed in order to decrease red tape and associated costs.
• The book approval requirement was relaxed. Before the amendment, the TCC required 7 legal books to be approved biannually (opening and closing) by a notary. The recent amendments scrapped one of those requirements. The closing approval is limited to only 2 books, and the annual opening approval is no longer required for running books. This changes is expected to decrease companies’ annual notary costs by about 300 million TL.
• The web site requirement was limited. Originally, each company, irrespective of its size or operations, was obliged to build and operate a website through which it was to disclose certain legal documents. This has changed, and only companies with independent auditing requirements will have the website requirement.
• The mandatory disclosure of financial statements was scrapped. The Turkish business community spoke out very aggressively against the new rule to disclose all financial statements (to be disclosed in detail on their website and at the Turkish Trade Registry Gazette.) This rule was aiming for greater transparency, but the business community claimed that it would lead to the abuse of company secrets. The publication costs of financial statements were expected to exceed 600 million TL.
• Borrowing limits were relaxed. Originally, the new code had prohibited the shareholders, the members of the Board of Directors (BoD,) their relatives and their associated firms to borrow from the company. The recent amendments changed this, and shareholders can now borrow from their company if it satisfies two conditions: Firstly, shareholders need to fulfill their capital commitment. Secondly, the firm needs to have a net cumulative profit. Additionally, the ban on borrowing in kind for independent board members and their relatives was removed.
• The protocol following a negative audit opinion was changed. Originally, The BoD was required to resign and call the General Assembly (GA) in case of a negative audit opinion. With the recent amendments, the BoD will call for the GA without resignation, and the GA may ask the same board to continue its operations.
• Discrimination against LLCs was scrapped. As you may know, there are two major company types in Turkey: Joint Stock Companies (JSCs) and Limited Liability Companies (LLCs.) The new code removes most of the dissimilarities between these two types of companies, but there were originally two important new distinctions working against LLCs. With the recent amendments, LLCs will not be required to pay all of their capital in advance. A down payment of 25% and a capital commitment of up to 24-months will be enough to form an LLC. LLCs will also be able to distribute advance dividends.
• BoD membership was widened. The requirement of at least one member of the BoD being a Turkish citizen or have his/her domicile in Turkey; and the obligation of at least one-fourth of BoD members to be graduates of higher education, were abolished.
• Penalties were reduced. The most important argument against the new code was that the increased penalties of imprisonment were excessive. The recent amendments changed penalties for 32 crimes into administrative fines. The penalties for 5 acts likewise changed from prison sentences to judicial fines. Only the penalties for 7 acts have remained unchanged.

[1] http://www.tepav.org.tr/tr/haberler/s/2933

This article was published in Hürriyet Daily News on 06.07.2012.