This content is from: Local Insights

The multi-corporate enterprise and securities provided by subsidiaries

The new Turkish Commercial Code (TCC) was ratified by Parliament in January 2011 and enters into force on July 1 2012. It introduces the multi-corporate enterprise concept and controlling company in this context, and includes certain principles applicable to assistance that subsidiary companies provide to their controlling companies for the purposes of facilitating transactions undertaken by such controlling companies.

The current TCC does not include any specific provisions on subsidiary assistance; the new TCC aims to preserve subsidiaries from any kind of loss due to the actions of the controlling company. Under the new Code, the relations between the subsidiary and controlling company are devised for the sake of transparency, accountability, and balance of interests for the first time.

Controlled subsidiaries

Article 202 of the new TCC indirectly restricts subsidiaries from providing subsidiary assistance to controlling companies. The new Code sets out a non-exhaustive list of prohibited acts by controlling companies, including using their voting power to force their subsidiaries to carry out transactions, undertake liabilities as surety, guarantor or otherwise, make payments to third parties, or adopt certain resolutions for the purposes of transactions undertaken by their controlling companies and causing the subsidiaries to incur a loss by decreasing the subsidiaries' productivity and by negatively affecting their activities.

That being said, Article 202 also provides a relaxation procedure as an exception to its prohibition on providing subsidiary assistance by which the controlling company will not be deemed liable if it compensates for the loss of the subsidiary or provides equivalent claim rights within the same financial calendar year. Any of the subsidiary's shareholders have the right to request compensation for damages if the controlling company does not cover the loss of the subsidiary, or does not provide an equivalent form of compensation within the same financial calendar year.

In that instance, the controlling company's board of directors will be liable together with the controlling company. Furthermore, creditors of the subsidiary also have the right to request compensation for the subsidiary's damages. Creditors may also bring legal action to claim damages from the controlling company and its shareholders if the controlling company fails to cover subsidiary assistance-related losses of the subsidiary or to determine the method of covering such losses within the same financial year. Under the new TCC, compensation will not be awarded where any board members acting in good faith and with a high level of duty of care under the same conditions could have engaged in such conduct.

Wholly-owned subsidiaries

The new TCC sets forth a different regime for wholly-owned subsidiaries. According to Article 203, the board of directors of the controlling company – as long as its specified and factual policies require – is entitled to issue instructions regarding the management and direction of its subsidiary provided that it holds, directly or indirectly, 100% of the shares and voting rights of its subsidiary. In this case, even if such instructions might result in loss for the subsidiary, the management and other bodies of the subsidiary must comply with such instructions. However, as an exception, Article 204 provides that instructions that are of a nature which clearly exceed the subsidiary's solvency, jeopardises its existence, or results in the loss of significant assets of the subsidiary, may not be given.

Article 205 of the new TCC provides that the subsidiary's board members, managers and other related persons may not be held liable toward the subsidiary or the controlling company for complying with the instructions in Articles 203 and 204. Furthermore, since the controlling company's management may instruct its wholly owned subsidiary to provide subsidiary assistance, it is possible to say that the new TCC enables wholly-owned subsidiaries to provide subsidiary assistance to their controlling companies.

Nevertheless, the controlling company and its managers will still be responsible for damages incurred by the subsidiary's creditors. According to Article 206, if the controlling company fails to cover the subsidiary's loss incurred as a result of the instructions given by the controlling company or its management, or to determine the method of covering such losses within one financial year, the creditors of the subsidiary will be able to bring legal action to claim their damages from the controlling company or its managers who are responsible for the loss.

Effect on security

In general, providing security on behalf of the controlling company is a commonly used method of subsidiary assistance. The applicable regime under the new TCC differs depending on whether the controlling company partially or wholly owns the subsidiary.

When the controlling company enjoys subsidiary assistance provided by its partially-owned subsidiary, the material point to be cautious about is the loss that may be incurred by the subsidiary. The controlling company will not be held liable, provided that it compensates for the loss of the subsidiary or provides equivalent claim rights within one financial calendar year. To that extent, if, through effective financial planning, the controlling company ensures that benefit to the subsidiary is not jeopardised, the subsidiary may provide security on behalf of the controlling company. Under the new TCC, unless the controlling company wholly owns the subsidiary, it will need to assume more than its parental obligations and, now, must also be a brother's keeper if it requests subsidiary assistance.

If, however, the controlling company wholly owns the subsidiary, such controlling company will be able to instruct its subsidiary to provide securities on its behalf, even if providing such securities may result in loss for the subsidiary. The controlling company, in this case, is still not entitled to give instructions to its wholly-owned subsidiary to provide security that may jeopardise its existence or cause significant loss of its assets. Nevertheless, the wholly controlling company and its managers will still be held liable for the damages of its subsidiary's creditors.

Sara Bar¦n, Kagan Is¦kal and Ipek Baykara

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