The Members of the Board of Directors' Release: Analyzing Court of Cassation Decisions
Introduction
In joint stock companies, the body in charge of managing and representing the company is the board of directors. The members of the board of directors are liable to the company for the damages caused by their negligence in the performance of their duties. However, under Article 408 of the Turkish Commercial Code No. 6102 (“TCC”), it is possible for the members of the board of directors to be relieved of their liability to the company if the general assembly resolves to discharge them.
Legal Nature and Effect of the Release Decision
The release decision, which has a constitutive novelty, cannot be revoked by a subsequent general assembly resolution. A general assembly resolution to the contrary shall be null and void. However, the right to file an annulment lawsuit for the general assembly resolution to which the release resolution is subject is reserved.
The general assembly resolution of the company to release the company from liability shall extinguish the right of action of the company, the shareholders who voted in favor of the release, and the shareholders who acquired shares with knowledge of the release decision, concerning the material events described in the release. If a liability lawsuit is filed by the company against the members of the board of directors despite the release decision, the defendants may assert the release as a defense. Shareholders who disagree with the release resolution may file a liability lawsuit against the board members whose release has been resolved within six months. Regardless of the release resolution, the right of the creditors to file a liability lawsuit against the board of directors is reserved. The members of the board of directors may not assert the release resolution against the creditors.
Release Decision in Joint Stock Companies and its Scope
Under Article 408 of the TCC, resolutions regarding the discharge of the members of the board of directors are among the duties and powers that the general assembly cannot delegate. In this context, the general assembly resolution to approve the balance sheet shall result in the release of the members of the board of directors, managers and auditors, unless there is an explicit provision to the contrary in the resolution. A resolution of release in the form of approval of the balance sheet is considered an implicit release as per the doctrine. Regardless of the approval of the balance sheet, an explicit release decision may also be resolved by including a separate item in the agenda. Although, the release of the members of the board of directors is included in the agenda of the ordinary general assembly meeting under the Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Ministry Representatives to be Present at these Meetings, it does not have to be included in the agenda of the general assembly meeting but may also constitute the subject matter of the extraordinary general assembly meeting, as it is understood from the wording of Article 424/1 of TCC.
Under Article 424 of the TCC, the approval of the balance sheet shall not give rise to the effect of release, even if the agenda does not include a separate item for release, if certain matters are not stated in the balance sheet at all or as required, or if the balance sheet contains certain matters that prevent the real situation of the company from being apparent, and if this is done deliberately. This regulation is similarly reflected in the doctrine. Tekinalp states that by stating that the balance sheet has been approved, the members of the board of directors cannot claim that they have been released from events that are not directly or indirectly included in the balance sheet, but which give rise to legal liability (such as making an investment decision without conducting a serious market research, not entering a tender in favor of a competitor but related to the controlling shareholder, or withdrawing the joint stock company from the tender, etc.)[1].
The general assembly may adopt a special release resolution by limiting or expanding the scope of release in terms of time, person and subject matter. However, a general release resolution may also be adopted for all members of the board of directors for the relevant accounting period without any limitation. In a case subject to the Court of Cassation Decisions, damages were claimed from a released board member[2]. The defendant board member argued that he was released thus, he was not liable. However, the Court of Cassation ruled that the defendant, who used the budget for his personal expenses without a board decision, was not liable and the decision was reversed in favor of the defendant.
Litigation Rights of the Discharged Board Member
The release of the members of the board of directors has been the subject of many Court of Cassation decisions. The subject of this article is a decision[3] concerning the non-release of a board member who holds a 10% share in a company. In the case in question, the claimant, who is a member of the board of directors, is not released at the ordinary general assembly meeting which he could not attend.
The claimant stated that there was no reasonable justification for not releasing him, that this decision taken by the general assembly was arbitrary and that the major shareholder of the company did not release him to gain unfair advantage. The claimant requested the annulment of the decision since it is contrary to the provisions of the articles of association and especially the rule of honesty.
The Commercial Court of First Instance ruled that since no irregularities were detected in the books and documents of the company, including the annual activity report, income and expense statement, balance sheet and auditor's reports, there is no need to annul the decision of the general assembly regarding approval the financials. The release decision is annulled due to a violation of the rule of good faith. The Commercial Court of First Instance justified by stating the release of the other members of the board of directors other than the claimant, the fact that no irregularity of the claimant was detected in the company records, and the fact that there was no explanation for not releasing the claimant in the decision in question, although it is not a legal obligation to explain the reason for a negative decision taken in the general assembly.
The defendant submitted the file before the Criminal Court of First Instance as evidence in his defense. The case before the Criminal Court of First Instance was filed for the alleged abuse of power of attorney by the plaintiff board member and the crime of abuse of office. The Commercial Court of First Instance, on the other hand, determined that the filing of this lawsuit was not sufficient because the suspect's powers were based on a special power of attorney, there was no action of the suspect that would cause damage to the company, and there were no irregularities in the books and documents of the company in the financial examination of the company. Upon the appeal of the case by the defendant, the issue of release was examined by the Court of Cassation.
The Court of Cassation underlined that the general assembly has a wide discretionary power for determining release by stating that this power is not unlimited. The Court of Cassation stated that the general assembly is obliged to release a board of directors that accounts for the transactions of the activity period with an unproblematic balance sheet and annual report, and that refraining from releasing the board of directors without any concrete reasons would be contrary to the rules of honesty.
Conclusion
Release is an institution that ends the liability of the members of the board of directors. However, the release should not be a guarantee that removes all kinds of responsibilities for the board members. Board members should consider the possibilities where the approval of the balance sheet may not be deemed as a release resolution, and the limited circumstances where the release resolution may be limited. As a rule, a resolution of release prevents the company and the shareholders who voted for the release from bringing a liability action against the board members, but it does not in any way prevent creditors from bringing a lawsuit.
- Tekinalp Ünal: New Law of Capital Partnerships, Vedat Kitapçılık, İstanbul 2013, p. 413.
- 4. th Civil Chamber of the Court of Cassation, E. 2016/5104 K. 2017/7925 T. 5.12.2017.
- 11th Civil Chamber of the Court of Cassation E. 2015/10277 K. 2016/5229 T. 9.5.2016.
All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.
Other Contents
Sales contracts are the most common and most important contracts of commercial life . Determining the rights and obligations of the parties as a result of the defects encountered in the goods subject to the sale is one of the most common legal problems in commercial sales...
Under Article 365 of the Turkish Commercial Code No. 6102 ("TCC"), each member of the board of directors, which is the body responsible for the administration and representation of a joint stock company, is obliged to fulfill their duties arising from the law and the articles of association within the limits...
Law No. 7262 dated 27.12.2020 introduced an obligation to notify the Central Registry Agency (“CRA”) regarding the issuance and transfer of bearer shares under the Turkish Commercial Code No. 6102 (“TCC”) and stipulates that those who violate the notification requirement under Art. 486/2 of the TCC shall be...
Similar to previous years, in 2024, mergers and acquisitions (“M&A”) transactions continue to be shaped by global economic dynamics, geopolitical risks and technological innovations...
The common goal (in the ideal world) of people who become shareholders by participating in the capital of a company or managers by participating in the management body is to manage the company in the best way and to obtain maximum economic benefit...
The most common forms of agency agreements can be categorized under three main headings. These can be listed as an Agency Agreement, Distributorship Agreement, and Franchise Agreement...
Employee shareholding, which means the ownership of some or all of the capital of a publicly traded or closed company by employees, has attracted great interest in many countries around the world, particularly in the United States of America, due to the advantages it provides to the national economy, the...
There are many different rules that newly established companies must consider and comply with when starting their commercial activities. One of these rules is the "Evasion of Law" article regulated under Article 356 of the Turkish Commercial Code No. 6102 ("TCC"). The relevant rule aims to prevent the...
The Turkish automobile and light commercial vehicle market left the 2000s behind with steadily rising sales figures and the 2010s with high and stable sales figures as well. In this period, the growth of the market was driven not only by high purchase power but also by easy access to credit and product diversity...
Turkish Commercial Code No. 6102 ("TCC") provides the right to exit from the company to the shareholders of limited liability companies and the right to squeeze out the shareholder from the company, unlike the structure of joint stock companies, with the exit and squeeze out institutions specially regulated for...
Turkish Commercial Code No. 6102 (“TCC”) preserves the rule that the board of directors shall manage and represent joint stock companies. The TCC regulates how the power of representation shall be exercised, the registration and announcement of the persons authorized to represent, the transfer of the...
Ordinary partnerships are regulated under Turkish Law between Articles 620 and 645 of the Turkish Code of Obligations No. 6098 (“TCO” or the “Code”). The Law defines an ordinary partnership contract as a contract where two or more persons undertake to combine their labour or property to achieve a common...
Merger and acquisition processes are one of the legal processes that most seriously affect the identities and legal status of companies. After the completion of legal, tax, financial and operational due diligence reports, the parties initiate the negotiation process in case they reach an agreement on proceeding with the...
A popular business model for expanding market reach and brand recognition worldwide is franchising. Despite being less common than distribution agreements in the form of mono-brand store agreements, franchising is another significant method for extending luxury brands' distribution networks. Luxury brands use...
In the decision dated 14.06.2022 and numbered 2019/149 E. 2022/894 K., the Court of Cassation General Assembly (“CCGA”) evaluated the theory of piercing the corporate veil in the context of the relationship between the guarantor and the borrowing company in a dispute arising from a loan agreement...
The European Union continues to be an important investment center for foreign investors. According to data from the European Commission's "Second Annual Report on the monitoring of foreign direct investment in the European Union", the European Union received €117 billion worth of foreign direct investment in...
Transfer of shares is arguably the first legal transaction that comes to mind among the legal transactions regarding the shares of a capital company, and the most common transaction in practice. However, the shares of a capital company may also be subject to various transactions, other than share purchase...
Law No. 6563 on the Regulation of Electronic Commerce (E-commerce Law or Law) has recently undergone a radical change in order to regulate the behavior of the players in the rapidly growing and developing e-commerce sector. The new regulations that came into force as of January 1, 2023 envisage important...
On 11 June 2021, the German Federal Parliament approved the German Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz) (“Act”) which affects not only German entities but also their suppliers in foreign countries (including Turkish entities). The main focus of the Act, which entered into force on...
On 21 December 2007, the Federal Council approved the draft revision of the Swiss Code of Obligations, which also includes amendments to company law. On 28 November 2014, the Federal Council referred the draft revision for consultation. Following extensive discussions and a long enactment process, the...
The Turkish Commercial Code No. 6102 ("TCC") regulates maritime trade contracts under the fourth part of the fifth book of the Code. Among the types of contracts regulated in this section, the most frequently used contract in international maritime transport practice is the freight contract regulated under...
Prohibition on hidden income shifting is one of the most important issues that is broadly regulated under Capital Markets Law No. 6362 (“CML”). In conjunction with CML Article 21, which has a broader context than Article 15 of the abrogated Capital Markets Law No. 2499, another significant step has been taken...
As a result of developing commercial activities and large-scale investments, especially concluded in the fields of construction, energy and mining, companies are seeking to participate in these investments by uniting their powers and expertise to take advantage of financial opportunities together. This tendency...
The Turkish Commercial Code (“TCC” or “Law”) has enabled companies to apply different structural models and to implement new legal formations by including spin-off provisions to its Article 159 et seq. In accordance with the provisions of the law, companies may transfer a certain element, or elements, of their...
The International Federation of Consulting Engineers is a professional association established in 1913, known as the FIDIC (Fédération Internationale Des Ingénieurs-Counseils). Its members are duly elected from consultant-engineer associations of various countries, and membership to the association is...
Incoterms are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of Incoterms rules is to facilitate and expedite international trade in a safe and secure manner...
The regulation applicable to all Turkish ports prepared by the Ministry of Transport, Maritime Affairs and Communications that entered into force after being published in the official gazette on October 31, 2012 (˝the Regulation˝), consolidates all the bylaws, regulations and instructions in a single Regulation...
As a rule, rights and obligations arising from an agreement have legal consequences only between the creditor and the debtor which are parties to the agreement. This principle is referred to as "privity of contract." In general, contracts for the benefit of third parties, where the fulfillment of an...
The rules of e-commerce, which grow and develop with the digitalizing world, are changing. E-commerce has become the driving force of the digital economy. However, considering the growth rate of e-commerce and the transformation it has undergone in a short time, it is obvious that some...
The dissolution of a company is a specific type of dissolution, which results in the cancellation of the legal personality which was gained by registration at incorporation. The specific proceeding which leads to the dissolution, and thus, the termination of a company upon the constitutive decision...
Companies in which shares or authority to manage is held by members of a family are considered to be “family businesses”. Family members can hold shares that control the company, as well as retain management authority. Having a family business means opportunity, security and income for...
Turkey ratified the Convention on the Contract for International Carriage of Goods by Road (“CMR”) in accordance with Act No. 3939 dated 7 December 1993, and the CMR entered into force in Turkey on 31 October 1995. In accordance with Article 1 / 1 of the CMR, the carriage of goods by road...
Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”). An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal...
The concept of disguised profit transfer in joint stock companies, in its broadest meaning, covers the transfer of company assets to related parties and may occur in different ways. This concept is regulated in detail under capital markets legislation...
Share subscription agreements, which are commonly encountered in start-up investments, set out the terms and conditions of an investor’s participation in a company as a shareholder by subscribing the new shares issued in a capital increase...
The electronic signature, which has the same legal consequences as wet signatures if it meets certain conditions, has taken its place in many legal systems and has enhanced commercial life. Although there are various types and applications in different legal systems...
INCOTERMS are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of the Incoterms rules is to contribute to and facilitate the safe and swift conduct of international trade...