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Introductory Business Guide: Turkey’s Legal Overview

Kurt & Partners

Interlegal Permanent Officer

First published in 2019 - Updated from time to time.

Introduction

In 2019, Interlegal published its first joint book called Legal and Tax Issues Around the World - Starting and Growing a Business. It is the result of collective work with the accountants' firms network EuraAudit. This article aims to introduce the legal environment of Turkey for entrepreneurs who are interested in forming and financing their business in this country. Note that it is not equivalent to a complete professional analysis. Through this introductory guide, the network intends to help entrepreneurs to craft the questions they need to ask themselves in order to start, operate, and see their business thrive on the global stage. Therefore, Interlegal encourages entrepreneurs to obtain legal advice with Kurt & Partners' firm on the issues arising from starting and running a business in Turkey.

Legal Overview

Executive Summary

Turkish legislation on establishing a company, is based on the principle that both international and local investors enjoy the same treatment and have the same rights and liabilities.

Turkey has introduced many reforms, making it easier to do business, and eliminating unnecessary formalities, to minimise cost and procedures.

After the articles of association of the companies are entered into MERSIS (Central Registry System), the incorporation of a company is carried out at Trade Registry Offices located in the Chamber of Commerce.

Registered Companies and Partnerships

The four most common ways, for a non-Turkish company to operate in Turkey as a foreign investor are as follows:

  • Ordinary Partnerships: An Ordinary Partnership does not have a legal personality. Any partnership formed in order to carry out a specific project, is accepted as an Ordinary Partnership, which is regulated under the Turkish Code of Obligations No. 6098.
  • There are no significant differences between Ordinary Partnerships, joint ventures, consortiums or business partnerships, none of which are registered. Although Ordinary Partnerships are subject to less complicated requirements than registered companies, the partners are first and foremost responsible for the debts of the company.
  • Liaison Office: a non-Turkish company may open a Liaison Office to conduct market research and advertise and promote their business in Turkey. Liaison Offices are prohibited from
  • engaging in commercial activities. They do not have independent legal personality, or representation authority against third parties, they cannot issue invoices, enter into purchasing/selling agreements on behalf of the parent company, execute contracts, provide price quotations, or accept orders from customers. Liaison Offices must submit an annual notification of their activities to the Ministry for Economy.
  • Branch Office: a non-Turkish company may open a branch which is independent from the parent company, and can independently perform commercial transactions. The parent company remains liable for all obligations of the branch, irrespective of the capital allocated to the branch. In the event of the transfer of the parent company, the branch shall also be subject to the transfer unless otherwise stipulated in the transfer agreement. Branches must maintain separate accounting records and separate management personnel. Turkish law applies to branches established in Turkey.
  • Turkish Subsidiary: non-Turkish companies may also incorporate in Turkey. The common types of incorporation in Turkey are joint stock company (JSC) and limited liability company (LLC). These are explained in more detail below.
Classification of Registered Companies

Pursuant to Turkish Commercial Code No. 6102 (“TCC”), companies are organized in two main groups: non-capital companies and capital companies:

  • Non-capital/partnership companies: Collective and commandite companies. There is unlimited liability of shareholders for the company’s debts and undertakings. Therefore these are rare in Turkey.
  • Capital companies: JSC, LLC and commandite partnerships with a share capital divided into shares. The shareholders have limited liability in these types of companies.

JSCs and LLCs are the most common types of capital companies. LLCs can be established with a minimum capital of TRY 10,000 and JSCs with a minimum capital of TRY 50,000. JSCs are better suited for bigger operations and the legal framework for corporate governance is more developed. Only JSCs can make a public offering. On the other hand, such as strict share transfer restrictions, the LLCs may suit better to reflect the shareholder’s commercial understanding.

Memorandum and Articles of Association

The main constitutional document for a JSC and LLC is its articles of association (“AoA”). All registered companies must register their AoA that set out the rules which govern the company, including procedures for the appointment and removal of directors/managers of the company and shareholders’ meetings. It is possible to use a different shareholders’ agreement however this agreement is only binding on the shareholders/parties and is not binding on third parties.

Share Capital

Share capital is the primary source of finance for the companies. The amount of share capital is recorded in the AoA and must be paid within 24 months starting from the date of incorporation. Changes in share capital are made through general meeting decisions.

Unlike partnerships, service deeds, personal effort, commercial reputation and undue credits may not be brought as capital in JSCs and LLCs. Assets including virtual platforms and intellectual property rights, on which there is not any limited property rights, confiscation or measures and which can be valued as cash and can be transferred, may be brought as capital.

In capital companies, shareholders’ liability is limited by their capital contribution to the company. However, shareholders of an LLC can be held liable for public debts that cannot be collected from the company.

Public Offer of Shares

Public offering procedures are regulated by the Capital Markets Board (CMB). Only JSCs can offer its shares to the public. The company should apply to CMB to receive approval of its proposals and at the same time apply to Borsa Istanbul to be listed on the relevant market.

Two prerequisites for companies to go public are: the capital of the company must be fully paid-in and the shares should be freely transferable. After fulfilling these conditions, companies follow a detailed procedure determined by CMB. The whole procedure starting from application to Borsa Istanbul and CMB, to trading on the exchange may last approximately 6 weeks.

General Meetings

The rules applicable to quorum requirements of shareholder meetings vary depending on whether the company in question is a JSC or LLC.

For JSC, unless a higher quorum is required by law or by the AoA, a general assembly convenes with shareholders representing ¼ of the share capital. This quorum must be preserved throughout the meeting.

If this quorum is not met at a first meeting, the shareholders are called to a second meeting. At the second meeting, present shareholders can vote on resolutions on any matter, irrespective of the share capital they represent. Resolutions are passed by a simple majority of votes.

The Turkish Commercial Code (‘TCC’) also introduces qualified meeting and resolution quorum requirements for some issues, such as change of scope of activities, change of nationality of the company and change of legal form.

In LLCs, all general assembly decisions, including election decisions, require the vote of simple majority of the shareholders present at the meeting, unless otherwise provided for in the AoA or in the TCC.

The TCC introduces qualified meeting and resolution quorum requirements in LLCs for certain issues such as change of scope of activities, creating privileged shares and so on. Different classes of shares with different voting rights can be issued. It is possible for a company to issue privileged voting shares, although a privilege can only be granted to the share (or a class of shares) and not to the shareholder(s).

Directors

Unless otherwise required by special laws and regulations, there are no restrictions regarding the nationality and residency of the directors or managers. Legal entities can also be appointed as directors or managers of a company. In this case, a person must also be appointed as representative of the legal entity to act on its behalf. Foreign individuals who serve as directors or managers, or act on behalf of a legal entity manager or director, must obtain a Turkish potential tax number, to be registered with the relevant trade registry office. Directors of JSCs who are foreign individuals and also not shareholders and residing outside of Turkey, do not need a work permit. A board of directors can be composed of a single member. Under the TCC, at least one member of the board must have full capacity to exercise the legal rights of the company.

Financing of a Company

The company can be financed by:

  • Capital contribution from shareholders in the form of shares;
  • Loan, debt and bank finance;
  • Equity investment from private equity funds;
  • Capital contributions in kind such as: movable properties, real estates, intellectual rights (on condition that there are no encumbrances on them).
Commencement of Business

There are various requirements that need to be filled before a company can commence business. Before submitting the documentation determined in TCC and by the Trade Registry, the AoA agreed by shareholders must be entered into MERSIS. Once entrance of the AoA is completed in MERSIS, the physical documentation must be submitted for registration with the Trade Registry where the company has been incorporated. Registration takes approximately 5-7 days, provided the Trade Registry does not require additional information. Following registration with the Trade Registry, the company must also register with the relevant tax office, where the headquarters of the company is located.

Mergers and Acquisitions

Mergers and acquisitions are regulated under the TCC. It is possible for companies to merge with other companies and take over another company or partnership.

For partnerships, it is possible for them to merge with other partnerships, however this can only occur where the partnership can only be taken over by a company on merge.

When a merger or acquisition is made, either a new legal entity is created, or one company or partnership continues with the other legal entity’s name.

It is also possible for companies that are bankrupt to enter into a merger, with the condition that they must be the company taken over as part of the merger. The asset distribution of the bankrupt company must not have started for the merger to take place.

Merger or acquisition transactions do not require any governmental authorities’ approval in principle however, the transaction does require merger clearance by the Competition Authority, in case conditions determined in the Law on the Protection of Competition and relevant communique requirements are met.

Since public companies are generally regulated under Turkish Capital Markets Law, merger and acquisition transactions may require the approval of the Capital Markets Board.

Companies operating in regulated sectors (such as banking, insurance and energy) will also be subject to the approval of the relevant authority under specific laws.

Corporate Insolvency

The Turkish Execution and Bankruptcy Law (the “Law”) gives priority to the prevention of a debtor’s prospective bankruptcy however, the Law imposes a condition that the creditor’s best interest must be protected during the process.

Insolvency proceedings must be dealt with in the courts. The proceedings can be initiated by debt collection procedures, or direct filing for bankruptcy. Regardless of the method used for commencement of insolvency proceedings, a company’s assets must be liquidated either by bankruptcy declaration, approval of debt restructuring by forfeiting assets, or approval of reorganization by consent.

The law allows for three company rescue mechanisms:

  • Postponement of bankruptcy;
  • Debt restructuring;
  • Re-organization by consent.

The partners in the individual companies (unlimited liability company, commandite companies and active partners who have to become natural persons in the commandite companies) have unlimited liability for all assets from the same debt.

In joint-stock companies and limited liability Companies, the share capital is the total amount contributed to the company by the partners. It is the company that is primarily responsible for the debtors in capital companies.

The exception, which applies to all types of companies, the public, tax and SSI debt, both the company and its partners/shareholders can be held accountable for the debt.

Winding Up of Companies

A company may dissolve for various reasons determined in the TCC, such as:

  • The company has realized its purpose and the shareholders no longer want to continue the business activities;
  • the company was established for a limited period of time, which was prescribed in its Articles of Association;
  • the company shareholders consider that the company no longer represents their interests;
  • one or more claims have been filed by creditors with a Turkish court and the company is bankrupt.

The liquidation process can be started voluntarily by the company, or is compulsory, after the creditors have filed a petition with the court. The liquidation can be conducted by the Board of Directors, unless other liquidators are nominated within the AoA, or by a General Assembly resolution. The liquidators must be registered with the Trade Registry and announced.

If the liquidation takes place following a court decision, then the liquidator is nominated by the court. One of the liquidators with authority to represent the company must be a Turkish citizen and reside in Turkey.

The liquidator will prepare the balance sheet and the inventory of the company’s assets, which must be approved by the shareholders during an extraordinary meeting.

The creditors then submit their claims and if the claims are not completed in time, the amount necessary to cover them is deposited to an administrative authority, appointed by the liquidator.

After paying the company’s debt, the rest of the assets will be distributed to the shareholders. The amount given to each shareholder is in accordance with their contribution to the capital of the business.

The last step in the liquidation process, is to convene a general meeting, in which the termination of the procedure is announced.

The liquidation process can be completed within 12 months.

For more details, please contact: Özlem Kurt, Kurt & Partners ozlem.kurt@kurtandpartners.com, www.kurtandpartners.com

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