| Emre DURGUN Partner, Lawyer, Litigation and Dispute Resolution | Muzaffer Emre BİNGÖL Trainee Lawyer |
ABSTRACT This study examines the obligations and liabilities of the board of directors of joint stock companies and the managers of limited liability companies within the framework of the Turkish Commercial Code. Persons tasked with the management of companies must safeguard not only the company’s interests but also the rights of shareholders and creditors. In this context, the responsibilities imposed on managers are of significance in terms of ensuring that company activities are conducted in compliance with the law. Within the scope of this study, the areas of responsibility of both joint stock and limited liability company managers have been examined and explained within the framework of legal regulations.
Keywords: Joint Stock Company, Limited Liability Company, Board of Directors, Manager, Duty of Care, Duty of Loyalty, Duty of Confidentiality, Non-Competition Prohibition.
INTRODUCTION Within the framework of the Turkish Commercial Code, the responsibilities of board members of joint stock companies and managers of limited liability companies are not limited solely to the company’s interests but also encompass the rights of shareholders and company creditors. These managers are obliged to perform their duties in accordance with the standards of a “prudent manager” and the rules of honesty within the framework of their obligations of care, loyalty, confidentiality, and non-competition. Situations such as misuse of powers held by virtue of the manager title, preparation of documents and statements contrary to law, or engagement in activities violating the non-competition prohibition may give rise to manager liability.
1. RESPONSIBILITIES OF BOARD MEMBERS OF JOINT STOCK COMPANIES
The transactions and torts of the board of directors, which is the management body of the joint stock company, give rise to the company’s liability. However, interpreting this situation as disregarding the personal liability of board members will lead to serious consequences. The protection of the company and shareholders necessitates recourse to members’ personal liability; therefore, the personal liabilities of board members have also been addressed within the scope of the TCC. Articles 549 to 561 of the TCC regulate the provisions on legal liability, and Article 553 in particular stipulates that board members may be held liable to the company, shareholders, and creditors for damages arising from their faulty conduct. For the liability of board members to arise, obligations arising from the law or the articles of association must have been violated. “Founders, board members, managers, and liquidators are liable for damages they cause to the company, shareholders, and company creditors if they culpably violate their obligations arising from the law and the articles of association.” Although there is no consensus in legal doctrine regarding the nature of board members’ liability, the predominant view argues that this liability arises from contract. The liability herein is an unlimited liability with the members’ assets.¹
1.1. Liability of Board Members for Company Debts
As is known, pursuant to the Turkish Commercial Code No. 6102 (“TCC”), a joint stock company is a company whose capital is determined and divided into shares, and which is liable for its debts only with its assets. In this company type, shareholders are liable to the company only with the capital shares they have undertaken. The shareholder’s liability is limited to the amount of capital they have undertaken and is towards the company. In this limited liability type, also referred to in legal doctrine as the single debt principle, liability ceases once the undertaking is fulfilled. The concrete outcome of this situation is that the shareholder is not liable for the company’s debts to third parties. Similarly, the shareholder has no liability whatsoever for the company’s public debts. In contrast, pursuant to the provision of Article 35 bis of the Law No. 6183 on the Procedure for the Collection of Public Receivables (“LPCPR”), which states that “Public receivables that cannot be collected wholly or partially from the assets of legal persons, minors and restricted persons, foundations and associations without legal personality, or which are understood to be uncollectible, shall be collected from the personal assets of legal representatives and those managing associations without legal personality in accordance with the provisions of this Law,” board members who are the legal representatives of the joint stock company have secondary liability in the event that the public receivable cannot be collected from the company’s assets. The liability of the joint stock company for public debts is linked to the representative capacity of the board of directors, and the expression “legal representative” has been adopted for persons who manage company activities and represent the company in external relations. In this sense, board members who have the authority to administer and represent the company, authorized managers, and liquidators during liquidation are the legal representatives of the joint stock company.²
1.2. Duty of Care and Loyalty of Board Members
Pursuant to Article 369, Paragraph 1 of the TCC, which states that “Board members and third parties tasked with management are under the obligation to perform their duties with the care of a prudent manager and to safeguard the company’s interests in accordance with the rules of honesty,” the duty of care of company board members has been regulated based on the “prudent manager” standard criterion and tied to the criteria of company interest and the rule of honesty. Evaluated as an objective fault criterion, the prudent manager standard expected from the board member is taken into consideration in assessing whether the board member is at fault. As also expressed in the rationale of the article, the duty of care has been regulated to cover board members and company managers. The additional specification of managers is also significant in cases where management is partially or wholly delegated to a board member or a third party pursuant to a provision included in the articles of association under Article 367 of the TCC. Therefore, in the event that proof activities are undertaken for the compensation of damages caused to the company by board members and persons tasked with management, the matter to be evaluated for fault to be attributed to these persons will be the violation of the duty of care expressed as “a prudent manager.”
1.3. Duty of Confidentiality and Non-Competition of Board Members
Although there is no regulation within the scope of the TCC regarding the board member’s duty of confidentiality, it must be accepted that board members are subject to the duty of confidentiality both due to the rule of honesty and the “prudent manager” criterion contained in the wording of Article 369 and due to the rationale of the article. Indeed, it is clear that company secrets will also be within the scope of the obligation when company interests are safeguarded with the care that a prudent manager would demonstrate within the framework of the rule of honesty. The non-competition prohibition for board members is regulated in Article 396 of the TCC under the same title as follows: “No board member may, without obtaining the permission of the general assembly, conduct on their own behalf or on behalf of another a transaction of a commercial nature falling within the company’s line of business, nor may they enter a company engaged in the same type of commercial business as an partner with unlimited liability. The company is free to claim compensation from board members who act contrary to this provision, or to deem the transaction conducted as having been conducted on behalf of the company, and to sue for the benefits arising from contracts made on behalf of third parties to belong to the company.” As can be seen, transactions of a business type falling within the company’s field of activity have been included within the scope of the non-competition prohibition prescribed for board members. In this context, not only the direct conduct of a commercial activity falling within the company’s field of business but also participating as an unlimited liability partner in another company engaged in the same type of commercial business is considered contrary to the non-competition prohibition. The company’s line of business must be interpreted as the activities in which the company is actually engaged, since in practice it is observed that areas in which no activity has yet been conducted are also included in the company’s articles of association. However, it is clear that if the company subsequently engages in such business, this business will also be within the scope of the prohibition. With the ultra vires principle being excluded from the scope of Turkish commercial law, it has been regulated in Paragraph 2 of Article 371 of the TCC that transactions conducted by persons authorized to represent outside the company’s line of business will bind the company. Therefore, a business actually conducted although not written in the articles of association, if it exceeds the concept of incidental business, must be evaluated within the scope of the non-competition prohibition.³ Pursuant to Paragraph 1 of Article 396 of the TCC, in the event of conduct contrary to the non-competition prohibition, two legal remedies available to the company have been indicated. The first of these is to claim compensation from the board member who performed the act in question. The other is the right to file a lawsuit for the determination that the benefit arising from the contract concluded belongs to the company as if the relevant transaction had been performed by the plaintiff company. For the claims enumerated, a statute of limitations period of three months from the date of learning and in any event one year has been prescribed in Paragraph 3 of the article. “These rights shall be subject to the statute of limitations upon the expiry of three months from the date the other members learn that the commercial transactions in question have been conducted or that the board member has entered another company, and in any event one year from their occurrence.”
1.4. Liability for Documents and Statements Being Contrary to Law
Pursuant to Article 549 of the TCC regarding liability for damages arising from documents and statements being contrary to law, it has been regulated that those who prepare documents or make statements, and those who participate therein if they are at fault, shall be liable for damages arising from such documents, prospectuses, undertakings, statements, and guarantees related to transactions such as the establishment of the company, increase and decrease of its capital, merger, division, change of type, and issuance of securities being incorrect, fraudulent, false, contrary to fact, from the concealment of facts, and from other illegalities. Pursuant to the provision of the article, it has been regulated that those authorized to prepare these documents and statements shall be liable for incorrect, fraudulent, false and/or contrary-to-fact documents and statements, while those who participate in these documents and statements shall be liable in the event of their fault, and it is understood that the non-requirement of fault for those authorized to prepare documents is a conscious preference of the legislator, and that no-fault liability is prescribed for those who prepare the documents in question. The relevant preference has also been stated in the rationale of the article: “The Draft has not defined ‘preparers’ and ‘participants’, but has linked them to different liability systems. No-fault liability has been accepted for preparers, and faulty liability for participants.”
2. LIABILITY OF LIMITED LIABILITY COMPANY MANAGERS
Pursuant to Article 553 regulated in Chapter 11 entitled “Legal Liability” of the TCC, it has been regulated that limited liability company managers, by virtue of their manager capacity, shall be liable for damages they cause to the company, shareholders, and company creditors if they culpably violate their obligations arising from the law and the articles of association. A limited liability company manager, pursuant to Article 623 of the TCC, refers to one or more partners or all partners or third parties to whom the authority to manage and represent the company has been granted by the company’s contract. In cases where a company partner is authorized as a limited liability company manager, it is clear that they will also be subsidiarily subject to the obligations to which partners are subject towards the company. In this section of our article, the obligations to which a limited liability company manager is subsidiarily subject both by virtue of their manager capacity and their company partner capacity will be addressed.
2.1 Duty of Care of Limited Liability Company Managers
With the first paragraph of Article 626 of the TCC regulating managers’ duty of care and loyalty and non-competition prohibition, which regulates managers’ duty of care, managers have been obliged “to safeguard the company’s interests within the framework of the rule of honesty.” Within the scope of the article, the duty of care, which is addressed as “Managers and persons tasked with management are obliged to perform their duties with all care and to safeguard the company’s interests within the framework of the rule of honesty,” lacks certainty regarding the criterion to be taken as basis. In the rationale of the article, it has been evaluated that the concepts of “care” and “safeguarding company interest” are distinct from each other, and that care expresses the attention, seriousness, and scientificity that must be demonstrated in work and transactions. In this context, the appearance of the duty of care has been expressed by way of exemplification with the explanation that “Conducting market research, financial situation assessment, and compliance examination regarding debts and ethics before a decision is taken is a requirement of scientificity and modern management principles, and this examination, research, and assessment are included in the definition of the concept of care.” In contrast, it has been expressed in legal doctrine that “it would be more appropriate for the duty of care of limited liability company managers to be regulated in the form of and equivalent to ‘the care of a prudent manager’ prescribed for joint stock company board members (TCC Art. 369), that the concept of ‘all care’ appearing in Article 626/I is not clear and is susceptible to being understood as the highest care or full care, that there is no justified reason for departing from the regulation in Article 369 of the TCC in this regard, and therefore that it would be appropriate to make a change in the legislation regarding proceeding from the concept of prudent manager in determining the degree of care that limited liability company managers must demonstrate.”⁴
2.2 Duty of Loyalty of Limited Liability Company Managers
Pursuant to Paragraph 3 of Article 626 of the TCC, it has been regulated that the company manager is also subject to the duty of loyalty prescribed for partners. The duty of loyalty of a limited liability company partner, on the other hand, has been regulated under the heading “Duty of loyalty and non-competition prohibition” in Article 613 of the TCC. When the relevant article is evaluated, it will be seen that rather than making a detailed explanation within the scope of the article, it has been contented with explaining the forms of appearance of the duty of loyalty. Pursuant to Article 613, partners are obliged to keep the company’s secrets confidential, and this obligation cannot be eliminated either by the company contract or by a general assembly decision. Furthermore, partners’ engaging in conduct contrary to the company’s interest has also been prohibited within the scope of the article. Partners must particularly refrain from transactions that provide them personal gain and harm the company’s purpose. Although there is no explanation in the article regarding which types of information will constitute company secrets, in the form accepted in legal doctrine, company secrets may be defined as “facts known by certain persons regarding the company’s economic sphere, not easily learnable by others, in whose concealment the company has an interest worthy of protection, and which the company desires to keep confidential.”⁵
2.3 Non-Competition Prohibition of Limited Liability Company Managers
Pursuant to Paragraph 3 of Article 613 regulating the limited liability company partner’s duty of loyalty and non-competition prohibition: “The provisions of Article 626 prescribing non-competition prohibition regarding managers are reserved.” In this framework, when the provisions of Article 613 and Article 626 are evaluated together in terms of non-competition prohibition, it emerges that the prohibition in question is of imperative nature for partners who possess management authority; whereas, for partners who do not have management authority, it appears as an exceptional obligation open to contractual regulation. Indeed, pursuant to TCC Art. 626/2, “unless there is a contrary provision in the company contract or the written consent of all partners is obtained,” persons holding the manager title are prohibited from engaging in activities of a competitive nature with the company. According to a view defended in legal doctrine, the scope of the non-competition prohibition is limited to the lines of business determined in the company contract. According to this approach, no obligation or liability arises for managers in respect of fields of activity not expressly regulated in the company contract. However, according to another view prevailing in legal doctrine, the scope of the non-competition prohibition also encompasses the business areas in which the company is actually engaged. This view is based on the assumption that due to the manager’s access opportunity to information and data they possess about the company, competition increases the risk of harm to the company. On the other hand, pursuant to TCC Art. 626/2, managers cannot engage in activities constituting competition with the company. Accordingly, if the transaction conducted by the manager does not fall within the company’s actual or contractual field of activity, this activity is not evaluated within the scope of the non-competition prohibition.⁶ At this point, considering that the ultra vires principle has been abandoned and that in practice company contracts also include fields of activity in which the company is not actually engaged, we are of the opinion that the view accepted in legal doctrine that the non-competition prohibition should be evaluated based on the areas in which the company is actually engaged must be adopted.
CONCLUSION
Board members in joint stock companies and managers in limited liability companies are held liable not only to the company but also to shareholders and creditors if they do not fulfill their obligations arising from the law and the articles of association. This liability must be evaluated within the framework of legal regulations as well as ethical principles and the protection of company interests. In particular, fundamental areas of responsibility such as the obligations of care, loyalty, confidentiality, and non-competition constitute principles that managers must take into consideration in their decision-making processes. Company managers conducting their activities within the framework of honesty rules and like a careful manager will both protect themselves from liability and ensure the healthy functioning of the company.
¹ Yaşar, A. (2024). Legal Liability of Board Members in Joint Stock Companies. Gazi University Faculty of Law Journal. https://dergipark.org.tr/en/download/article-file/3254777
² Mert Silahşör, “The Liability of Directors in Joint Stock Companies for Public Receivables,” II. International Symposium on Commercial Law, 26 November 2016, pp. 67–68, DergiPark, https://dergipark.org.tr/tr/download/article-file/270566
³ Aşık, P. (2017). Non-Competition Prohibition in Joint Stock Companies (TCC Art. 396). Ankara Bar Association Journal, Nov 2017. https://dergipark.org.tr/tr/download/article-file/542417
⁵ Demirayak, E. B. (2018). Partners’ Duty of Loyalty Towards the Company in Limited Liability Companies. Ankara Bar Association Journal, (3), 25–52. Received 17 May 2018; Accepted 24 September 2018. https://dergipark.org.tr/tr/download/article-file/554149
⁶ Budak, N. A., & Önder, M. F. (2023, November). Competition Prohibition for Managers in Limited Liability Companies. Journal of Strategic and Social Research, 7(3), 687–706. https://doi.org/10.30692/sisad.1376034