Draft Commercial Code Still Pending - But Help Is On The Way.

The Turkish Commercial Code (the "TCC") was enacted in 1956, and governs commercial transactions, as well as the establishment and governance of capital stock companies and sole proprietorships. Therefore, although the legislature has from time to time introduced amendments in response to changed circumstances and urgent needs, it is clear that the TCC is inadequate in meeting the legal and commercial demands of contemporary commercial and corporate life. Accordingly, in order to harmonize Turkish commerce with globalization, the government prepared a draft commercial code (the "Draft") for discussion in 2005. The Draft has been accepted by the Justice Commission and is still pending before the Turkish Grand National Assembly, but may be enacted in 2008.

Under the Draft, the legislature embraced a reformist approach, departing from certain historical practices that have been in effect for more than fifty years. This article intends to review several major changes introduced by the Draft in terms of their effects on contemporary commercial life, especially from an investor's point of view.

Share Capital and Shareholding Structure

The capital contribution made by a shareholder constitutes the ceiling for the financial liability of that shareholder. Formerly a negligible amount, the amount of capital required for limited liability partnerships (limited sirket) ("LLPs") has increased from 5.000 YTL (approximately $4,200 USD) to 25.000 YTL (approximately $21,000 USD) under the Draft. Also, under the Draft, the amount of capital required for joint stock corporations (anonim sirket) ("JSCs") remains at 50.000 YTL (approximately $42,000 USD).

The Draft also introduces major changes with respect to the payment of share capital. Under the TCC, one-quarter of the share capital subscribed by the parties to a JSC or an LLP may be paid within three months from the date of registration with the trade registry, and the remaining amount may be paid in three years from the same date. The Draft, on the other hand, stipulates that the entire capital amount subscribed by the partners of an LLP must be paid prior to its establishment. With regard to JSCs, the Draft maintains the current system by merely decreasing the timeframe for paying the remaining three-quarters' capital due from 36 to 24 months.

With regard to the shareholding structure, contrary to the TCC calling for a minimum of two shareholders for an LLP and five shareholders for JSCs, the Draft provides that both LLPs and JSCs may be established with only one shareholder. This change is most likely to ease and accelerate the incorporation procedures of LLPs and JSCs by diminishing the burden of documentation required, as well as removing the necessity to include non-functioning shareholders simply for technical compliance with the TCC.

Formation and Function of the Board of Directors

Contrary to the TCC's requirement that a Board of Directors (the "BoDs") of a JSC must be comprised of three members, the Draft proposes that a BoD may be comprised of one director only. The Draft does mandate, however, that at least one member of the BoD must be a Turkish citizen residing in Turkey.

Also in contrast with the current TCC, the Draft stipulates that non-shareholder real persons and shareholder legal entities may be appointed as members of the BoDs. A shareholder legal entity may be represented by a real person appointed by that legal entity. The real persons representing the legal entities must have a university degree and must be registered for this purpose with the relevant trade registry as the sole representative of the subject legal entity. This practice will theoretically enhance professional corporate governance.

On-Line Meetings

Subject to certain conditions stipulated under the Draft, the Draft provides that the Articles of Association may include provisions allowing the BoDs, General Assembly and Board of Partners meetings conducted via audio and video conference. Since members of the BoDs are not allowed to vote on behalf of other members, or vote by proxy under the Draft, on-line meetings are likely to constitute a major logistical solution for foreign investors.

Mandatory Web-site and Online Notification

In light of the recent technological developments and widespread use of computers in commercial life, the Draft brings a statutory obligation for each corporation to maintain a web-site. Statutory announcements, official corporate announcements, important notices for shareholders, audit reports and financial statements must all be published on the web-site for the purposes of transparency and public information. Failure to maintain a web-site in conformity with the statutory obligations under the Draft is deemed to be a breach of the law and will constitute a failure of the BoD to perform its statutory duties. Moreover, corporations are obliged to keep notarized print-out records of the announcements on their web-sites.

The commercial necessity for a more expeditious method to exchange legal correspondence is addressed by the Draft by way of granting validity and binding effect to on-line notifications, objections, invoices, approvals, applications for shares and calls for meetings. Electronic communication is conditional upon explicit prior agreement of the parties on the validity of the chosen means of correspondence.

Reformist Regulations on Agencies

Many foreign companies prefer to initially enter the Turkish market by using the local know-how of agents and distributors. Therefore, considering that the TCC lacks the necessary provisions to respond to the current needs of commercial life (i.e. portfolio compensation), the Draft proposes to regulate certain aspects of this issue in conformity with the referenced laws and regulations (i.e. the Swiss Code of Obligations). In this respect, the Draft stipulates that the principal may impose a non-compete obligation on the agent for a maximum term of two years from the expiry of the agreement. The non-compete covenant may only cover the territory and customer portfolio assigned to the agent in the course of the agency relationship. In addition, the agent will not be bound by the non-compete restriction if the agreement is terminated due to the principal's fault.

Although it was not regulated under the TCC, portfolio compensation was introduced through a decision of the Court of Appeals in 1996. The Draft directly regulates the conditions and principles with respect to this matter. More importantly, the Draft introduces the method by which the amount of compensation will be calculated. This sheds some light on the ambiguity caused by recourse to experts for calculation of portfolio compensation, as is commonly required by Turkish courts.

The Draft also intends to preserve the rights of a principal if an unauthorized agent executes an agreement on behalf of the principal. While the TCC requires that the principal be bound by the agreement if it does not communicate its disavowal to the third party within a reasonable period, the Draft reverses the TCC system by holding that if the principal does not communicate its intention to be bound by the agreement executed by a non-authorized agent, the agreement will be valid and enforceable only between the third party and the agent.

In appreciation of the fact that the system embraced by the Draft may prejudice the rights of third parties who intend to execute an agreement with the principal, the Draft also provides that the agents authorized to execute agreements on behalf of the principal must be registered with the trade registry and be announced in the Trade Registry Gazette.

In conclusion, the Draft delivers long overdue solutions to the challenges of modern commercial activities in Turkey. Undoubtedly, the Draft will require some improvements and periodic updating as technology evolves and conflicts arise. Nevertheless, it provides a vast improvement over the status quo and will be much appreciated by Turkish business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Herguner Bilgen Ozeke

Herguner Bilgen Ozeke

Suleyman Seba Caddesi 55-57

Akaretler Siraevler

Besiktas

Istanbul

34330

TURKEY

E-mail: [e-mail]

URL: www.herguner.av.tr

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