Domination Agreements
Introduction
Group companies are regulated for the first time under the Turkish Commercial Code No. 6102 (“TCC”). Although no definition of group companies is specified, its types and principles are expressed in the TCC. Group companies come into existence when there is more than two commercial companies that are directly and indirectly affiliated with a commercial company or an enterprise. In such cases, the parent company constitutes the dominant company and the dependent companies constitute the subsidiary companies.
The concept of dominance has been introduced with the regulation of group companies. Dominance may be established through shareholding, contractually and in other ways. This newsletter article treats contractual dominance and domination agreements, which establish such contractual dominance.
Definition of Domination Agreements
Domination agreements are defined in Article 106 of the Trade Registry Regulation (“Regulation”) published in the Official Gazette dated 27.01.2013 and numbered 28541. A domination agreement is defined as an agreement whereby one of the parties has unconditional authority to instruct the managing body of the other party which is an equity company; without there being any direct or indirect participation relationship between said parties.
In the domination relationship, the company giving instructions is the dominant company and the one receiving instructions is the subsidiary company. As a result of the dominance relationship between the parties, the dominant company leads and manages the subsidiary company by giving instructions.
The domination relationship between the dominant company and the subsidiary company provides uniform management within the group companies. Therefore, the uniform management resulting from the domination agreement benefits the group companies[1].
The dominant company gives instructions to the subsidiary company on basic matters such as the management of the company, determination of targets, coordination of enterprises’ activities and designation of high level management and does not interfere with the daily activities and operation of the subsidiary company[2].
The transfer of control of all the authority of the subsidiary company to the dominant company is not required in order to establish a domination relationship. When the dominant company leads and directs the management of the subsidiary company in one or more areas, a domination relationship may be considered to exist as well.
Legal Nature of Domination Agreements
The domination agreement between the dominant and subsidiary companies is formed pursuant to the law of obligations. Contractual rights and obligations arise from domination agreements. Domination agreements thereby constitute the basis for contractual group companies.
Domination in contractual group companies is based neither on capital nor on the majority of members in the managing body; it only depends on the domination agreement concluded pursuant to the law of obligations between two or more companies[3].
Approval of General Assembly in Domination Agreements
Domination agreements are subject to the approval of the subsidiary company’s general assembly. When the domination agreement is concluded, the subsidiary company starts to act for the benefit of the group of companies by changing its management structure.
The subsidiary company, no longer being managed by its own bodies, is operated and controlled by another company and therefore becomes dependent through a domination agreement, which must be submitted for the approval of general assembly[4].
Moreover, as is frequently observed in practice, the dominant company may be the shareholder of the subsidiary company as well. In such cases, the shareholder dominant company is required to vote in the subsidiary company’s general assembly. However, pursuant to Article 436 TCC, the shareholder of a company cannot vote with respect to personal acts and transactions between itself and the subsidiary company under its dominance. Therefore, the dominant company that is the shareholder of the subsidiary company can only vote on acts and transactions in which it holds no special interest.
Registration of Domination Agreements
As per Article 106/2 of the Regulation, in order to gain validity, domination agreements must be approved by subsidiary company’s general assembly; and then registered and announced. This registration and announcement of the domination agreement enables third parties to become aware of such agreement.
Domination agreements shall not be considered valid and effective until registered and announced in the trade registry. However, the invalidity of a domination agreement shall not prevent the liabilities and responsibilities regulated under the provisions of the TCC and other Codes. Therefore, as per Article 198/3 TCC, even if the domination agreement is not registered and announced in the trade registry, the dominant company and its managing body shall be held liable and responsible.
Liability Arising from a Domination Agreement
Liability of the Dominant Company
The dominant company must not use its control illegally against the subsidiary company through the domination agreement. Preventive measures are foreseen against the dominant company’s illegal use of domination with Article 202 TCC.
In cases where the dominant company causes its subsidiary to incur losses, the dominant company shall be obliged to compensate such losses. In the event that the determined compensation is not paid, each shareholder of the subsidiary company may claim compensation from the dominant company and from members of its board of directors. If the subsidiary company is not compensated, the shareholders and creditors of the subsidiary company may file suit for the damages incurred.
The illegality herein results from a transaction by the dominant company, which damages the subsidiary company, its shareholders and creditors.
The members of the subsidiary’s board of directors are obliged to execute transactions as instructed by the dominant company even if they would prefer not to do so. In such circumstances, members of the subsidiary’s board of directors may conclude an agreement with the dominant company in order to make the dominant company liable to shareholders and creditors for any legal results.
Liability of the Subsidiary Company
In accordance with the domination agreement, the subsidiary’s board of directors shall be responsible for complying with the dominant company’s instructions; otherwise they may be held liable. However, where the dominant company gives illegal instructions, the managing body of the subsidiary company shall neither be held responsible for nor obliged to exercise such instructions.
However, pursuant to Article 203 TCC, when the dominant company establishes full domination over the subsidiary company, which means, when the dominant company directly or indirectly holds one hundred percent of the shares and voting rights in the subsidiary company, the members of the dominant company’s board of directors may give instructions to the subsidiary company with respect to its operations and management, even if such instructions cause the subsidiary company to incur losses; under the condition that such instructions stem from specific and concrete policies of the group of companies. When directors of the subsidiary company obey the instruction of the fully dominant company, they shall not be held liable to the shareholders or subsidiary company.
Conclusion
The existence of contractual group companies may stem from a domination agreement established between the companies. As a result of the domination agreement concluded between the dominant company and subsidiary company, the beneficial aim of the group of companies can be reached by forming a uniform managing structure.
- YANLI, Veliye, “Hâkimiyet Sözleşmeleri”, Regesta Cilt: 3, Sayı: 1, Yıl: 2013, p. 6.
- YANLI, Veliye, “Hâkimiyet Sözleşmeleri”, Regesta Cilt: 3, Sayı: 1, Yıl: 2013, p. 6-7.
- PULAŞLI, Hasan, Yeni Şirketler Hukuk Genel Esaslar, Ankara 2012, p. 226.
- PULAŞLI, Hasan, Yeni Şirketler Hukuk Genel Esaslar, Ankara 2012, p. 225.
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