JOINT STOCK COMPANY (A.S)

I. INTRODUCTORY REMARKS – TERMINOLOGY
This type of jOİNT STOCK” company is called “Anonim Şirket” in Turkish law. It corresponds to the Aktiengesellschaft in German and Swiss laws. It is quite similar to the Société Anonyme of French law and the type of company usually referred to as Corporation or sometimes as Joint Stock Company in England and the United States.

Corporations may be divided into different categories based on a variety of criteria. However, to be brief and for the purpose of this report, we should first refer to the regular and common type defined and regulated in the Commerce Act (ComA.) and secondly to the one which we may refer to as the public corporation regulated by Capital Market Act. Here we shall analyse only the regular type of corporation but due to the importance of the subject, occasional references will be made to the public corporations also.

II. DEFINITION
Following art. 269 of the ComA., the corporation can be defined as a company having a corporate title and a predetermined (fix) capital which is divided into shares and with a liability limited to the corporate assets. The liability of the shareholders towards the creditors of a corporation is limited to the amount equal to their commitment to the capital. A shareholder, who has fulfilled his commitment of capital towards the company, shall be under no liability towards the creditors of the corporation.

Predetermined (fix) capital means that the founders must determine the amount of the capital of the proposed company prior to the formation and show it in the articles of association. This capital must be divided into – again predetermined- number of shares.

III. INCORPORATION
1. In General
A corporation can be formed either simultaneously (immediately) or successively (gradually, in stages). Since successive incorporation is only very rarely used We think it is more appropriate to go into the details only of simultaneous incorporation.

To from a corporation, there are two most elementary pre-conditions: (i) There must be at least one founder (ComA. art. 277) who may equally be real persons or legal persons and (ii) The capital of the corporation must be at least 50.000.-TL. (ComA. art. 272). Commercial code of condact was changed by parliament several years ago, so new law was published. After then five founders was changed to as one founder.

The procedure to be followed by the founders will be summarised hereinbelow.

2. Articles of Association
A corporation can be formed by a written contract. This must be drawn in writing and the signatures of the founders have to be authenticated by a notary public (ComA. art. 279/I). The contract of incorporation in corporations is specifically called “The Articles of Association” (or Articles of Incorporation).

Articles of association must contain (ComA. art. 279) the following subjects: (i) The seat and the corporate title of the company; (ii) The purpose (objective) and power; (iii) Main capital, nominal value of each share and the conditions for payment; (iv) In case of capital commitment in kind rather than is cash, the value appraised for these goods; (v) Special privileges (or preferences), if any, allowed for founders, directors or other persons; (vi) Provisions concerning the election of the board members and auditors, their rights and duties and the persons authorised to represent the company; (vii) Rules relating to the calling of the general assemblies and the meetings; (viii) The time limit if the company was formed for a fixed period of time; (ix) How the announcements relating to the company shall be made; (x) Portion of the capital each shareholder has subscribed for.

The above recounted points are the compulsory minimum of the content of articles of association. The shareholders (i.e. the founders) are free to insert any other provision they may think appropriate or useful for the operation of the company in the future, as long as such provisions are not against the mandatory rules.

In the practical flow of this process throughout the years, the articles of association became quite a standardised document and now it takes some time and effort for the founders of new corporations to explain to the relevant authorities some uncommon or rather unusual provisions –which contain by all means lawful issues- that they want to write into their articles of association to provide solution for their special purposes. Therefore, in most cases founders use standard texts for their articles of association and take care of their special problems by making private agreements. It is allowed and perfectly lawful under Turkish law –as it is the case in most other legal systems- for the founding parties to draw private contracts between themselves and solve all the relevant issues that they thing should be clarified before they set their company. Such particular arrangements are usually construed as joint ventures and as such treated as an ordinary partnership. They are binding on the parties but cannot be enforceable against third parties, including the shareholders who did not sing this contract.

3. The Procedure
After the notarisation of the signatures of the founders, they must apply to the Chamber of Commerce in their province- to obtain approval for the incorporation of the company.

Following this approval the founders must apply to the Register of Commerce, having jurisdiction where the founders have decided to establish the seat of the company. After completion of the registration, the company acquires legal personality. The information required by the relevant provisions of the ComA. is published in the RegCGz. The foundation of the company is effective regarding the third parties only after this publication.

IV. ORGANISATION
Pursuant to the provisions of the ComA. a corporation must, mandatorily have three organs.

1. Shareholders General Assembly
a. Meetings of the Shareholders
Shareholders general assembly is composed of all the shareholders. It is the highest decision making organ of a corporation. Every shareholder is entitled to participate in the meetings and cast his vote, either personally or through his representative.

Meetings are held either in the ordinary or extraordinary manner. Ordinary meetings are held at least once a year and within three months following the end of the company’s fiscal year (ComA. art. 364/I); which generally corresponds to the calendar year. Therefore shareholders ordinary general meetings are usually held in March. Extraordinary meetings are held whenever it becomes necessary due to existing circumstances.

Primarily it is the duty of the board of directors to call the ordinary general assembly to a meeting. If the board of directors neglects their duty, the auditors are also empowered to call the meeting. The shareholders extraordinary assembly is also called by the board of directors. In cases of emergency, auditors are also entitled to call the extraordinary assembly. If one or more shareholders who own at least one-tenth of the capital requests for a meeting of the shareholders, the board of directors must arrange for the meeting (ComA. art. 366). If the board does not fulfil this request such shareholder (s) is entitled to apply first to the auditors and in case the auditors also do not take the application into regard then he (they) may ask an order from the court to be allowed to call the meeting (ComA. art. 367).

But on the other hand, a general assembly may lawfully convene at any time, without going through all of these formalities and procedures, with the attendance of all the shareholders or their proxies (ComA. art. 370).

The representative of the Ministry of Industry and Commerce, an official from the local directorate of the Ministry, must also attend the meetings and sign the minutes and the resolutions. Otherwise, the resolutions adopted are regarded null and void. (ComA. art. 378 and 297).

The quorums for the meetings are calculated based on the capital. As a general rule, the necessary quorum for the annual shareholders meeting is the presence of the 25 % of the capital. If the 25 % the capital is represented in the first meeting, the assembly may be declared open. If this quorum is not attained, the meeting is deferred and another call is made for the second meeting and the assembly then convenes regardless of any quorum (ComA. art. 372). There are certainissues that are subject to special quorum, where the presence of the two thirds or even the whole of the capital is necessary. For example, to change the nationality of a corporation, all the shares must be represented in the meeting (ComA. art. 388/I).

b. Item for Discussion – Agenda for the Meeting
Each shareholders meeting must have its agenda drawn up and made known to the shareholders, either by private invitation or published in a newspaper and RegCGz. and during the meetings only the issues on the agenda can be discussed and resolved. It is not allowed to discuss any subject which was not in the agenda (ComA. art. 369/II).

The following items must take place in the agenda for ordinary annual shareholders meetings: (i) Reading of the annual report prepared by the board of directors and the report of the auditors; (ii) Approval or rejection or amendment of the propositions by the board of directors related to the balance sheet and the profit and loss account and the allocation of the profit; (iii) Re-election or replacement of the directors and the auditors whose term of Office is terminated; (iv) Determining the remuneration or other pecuniary interests of the directors and the auditors, if these were not determined by the articles of association (ComA., art. 369/I).

Besides the above items, any other relevant issue that the assembly should debate and resolve may be included in the agenda. However, such subjects that require a special quorum for discussion may not be debated if the necessary quorum were not present, even though they may be in the agenda.

Agenda for extraordinary assemblies may only consist of the issue –or issues as the case may be-, which necessetated the meeting.
c. Powers of the Shareholders General Assembly
The powers of the shareholders general assembly may be determined by the articles of association. In this connection we must point out first that the general assembly, based on the mandatory provisions of the ComA., has certain exclusive powers –which we shall recite hereinbelow- that may not be given to any other organ and may not be taken away from the general assembly. There are, on the other hand, certain exclusive powers assigned by the ComA. to board of directors and the auditors, which may not be taken away from them through clauses of an articles of association. Therefore, the optional or discretionary powers that the founders may think of bestowing on the general assembly can only be determined in the areas not covered by the exclusive powers of the board of directors and the auditors.

The shareholders general assembly, being the superior organ of a corporation, has exclusive and non-transferable, in other words inalienable right and power to discuss and adopt resolutions on the following subjects: (i) To amend the articles of association; (ii) To elect, to release and discharge or dismiss the board of directors and auditors; (iii) To approve or reject the balance sheet and the profit and loss account; (iv) To approve or reject or amend the proposal for allocation of the profit.

d. Adopting Resolutions in the Assemblies
As a general rule, the resolutions are adopted by the simple majority of the votes present (ComA. art. 378/I). There are two exceptional cases, where unanimity is required: (i) To change the nationality of the company and (ii) To increase the commitments of the shareholders. In these two cases a binding resolution may only be adopted if the shareholders unanimously vote in favour (ComA. art. 388/I).

Each share in the capital gives one vote. Therefore, the voting power of each shareholders depends on the amount of shares, in other words, the percentage of the capital, owned by that shareholder. This is an imperative rule and consequently, shareholders (or any one shareholder) may not be excluded from the right to vote in the shareholders general assemblies, unless of course there exists a lawful ground based on which a particular shareholder may be barred from voting. ComA. foresees two cases in this regard: (i) No shareholder may participate in a voting involving a relation between the corporation and himself or his/her spouse or his/her ascendants or descendants and (ii) Any shareholder who was involved with the management of the corporation’s business, may not vote for the release and discharge of the members of the board of directors (art. 374).

However, one share – one vote rule has some exceptions. First, it is possible to allow more than one vote to certain shares. These are called preference shares. If any such shares exist in a corporation, during all the votings, the number of the votes cast by the holders of these shares must be counted separately.

Secondly, Capital Markets Act, in art. 14/A provides for a share without a right to vote. But, this category of shares must be granted preference on dividends.

The resolutions of the shareholders general assembly are effective and binding on all of the shareholders including those who were not presen tor who voted against.

2. Board of Directors
a. Formation of the Board of Directors
Board of directors is the organ responsible to administer and represent the company. Board members must be real persons and shareholders of the company. Any person appointed to the board who is not member, may only resume office after becoming a shareholder. Legal person shareholders may not become a member of the board, but the real person who represents the legal person can be elected to the board (ComA. art. 312/II).

Members of the board of directors are elected by the shareholders general assembly. In case any vacancy occours during the term of Office, the remaining members elect a member to fill the vacancy and submit this election to the approval of the next general assembly (ComA. art. 315/I). The term of office of the members cannot exceed there years; but, articles of association can set a shorter period. Members of the board may be re-elected after termination of their term of office and actually it is quite customary to have a provision in the articles of association allowing for such re-election.

The board, at the beginning of each year, elects a chairman and a vice-chairman from among its members (ComA. art. 318/I).

The members of the board may be dismissed anytime by the shareholders general assembly and the dismissed member cannot file a suit to ask for damages (ComA. art. 316/I).

b. Duties and Powers of the Board of Directors
The primary duty of the board of directors is the administration and representation of the company (ComA. art. 317). This is an exclusive power of the board of directors and cannot be taken away by articles of association or any other resolution by the shareholders general assembly and cannot also be transferred to another organ. While the fundamental duties and responsibilities are defined by the ComA., additional duties and power can be conferred upon the board of directors by the articles of association.

The power to represent is confined to acts compatible with the purpose and powers of the company; because any undertaking and commitment falling outside the scope of the purpose and powers as defined by the articles of association is ultra vires of the company and therefore invalid.

As a rule, members of the board act and discharge their duties collectively. But, as we shall examine hereinbelow, it is possible to distribute the powers of the board between the directors and even confer these powers to people who are not board members.

Without going into much detail, we find it appropriate to mention the following as the most fundamental, as well as the inalienable duties and powers of the board of directors: (i) To call amd make the necessary arrangements for the meetings of the shareholders general assemblies; (ii) To implement the resolutions, adopted by the shareholders general assemblies; (iii) Keep the books and accounts of the company, prepare the balance sheet and the profit and loss account, prepare annual reports relating to the commercial and financial situation of the company and submit them to the shareholders general assemblies, (iv)To arrange for and follow the procedures relating to the increase or decrease of the capital; (v) To arrange for and handle the liquidation operations as the liquidator, if no separate liquidation officer has been appoinled.

c. Distribution of the Powers Between the Members of Board
With respect to powers related to administration; it is possible, through the articles of association, to allow for distribution of the duties of the board between the members and delegate different functions to different members (ComA., art. 319/I). For instance, one member may be in charge of financial affairs, another may look after sales and marketing and yet another one may be responsible for exports and imports. In this case, individual members to whom specific powers were delegated shall be liable for the acts falling within their areas of authority and the other members of the board will be relieved of liability for the subjects so delegated.

Furthermore, it is also possible, provided it was foreseen by the articles of association, to appoint one or more members of the board as rnanaging directors and delegate them the whole or part of the powers of the board. The articles of association may also provide for the appointment of persons who are neither members of the board nor even shareholders, as managing directors (ComA., art. 319/II). This way, a general manager, who is neither a shareholder nor a board member, may be given total power and authority to run and manage the company. Actually this is a practice that is recently becoming quite widespread in some of the big companies.

Managing directors, on whom such powers are devolved, in a sense, replace the board of directors and consequently members of the board no longer carry any liability.

With regard the power of representation, the foregoing rules, except for some variations, also apply. The power of representation is, as a rule, indivisible, except for two occasions: (i) The power to represent the company may be limited to the acts of the head office or a branch and (ii) The power to represent the company may be given only to some of the directors or even to a single director.

Pursuant to ComA., it is not possible to distribute the power of representation between the directors, allocating each one certain areas or functions, like marketing, production, human resources, finance, etc., as in distributing the powers of administration. Such an arrangement shall not be binding on the third persons. Therefore, any such division of functions will be only an inter-company business and will be valid only as a directive to the board members. In case they do not comply, then they would be liable only for acting against the company regulations.

When looked at the rules summarised hereinabove, it is apparent that, by inserting proper clauses in articles of association, it is possible to arrange for different options for the administrative and representative functions of a corporation. The bottom line in this respect is to devolve both the powers of administration and representation to one person, elect him as the managing director as well as the chairman of the board and also appoint him as the general manager (the president) and ultimately call him Chief Executive Officer (CEO).

In cases of both the distribution or devolution of powers, each member, or the single managing director, as the case may be, will be responsible for the area left to his authority and the joint liability rule will not be applicable for matters falling within this area (ComA., art. 336/II). The other directors cannot be held liable for the consequences of the acts by any director for matters left to his authority.

But, it is important to note that, the joint liability for the members of the board for the acts indicated in (i) through (iv) under (d) hereinbelow, nevertheless remains applicable despite any distribution or devolution of powers between or on the directors.

The quorum for the meetings of the board is absolute majority and the board adopts resolutions with the absolute majority of those present. The members must use their votes personally, casting votes by proxy is not allowed (ComA., art. 330/1). However, qualified majority can be imposed by articles of association, either as a general rule or for specific subjects, such as for instance, buying and selling immovable property or making investment in excess of certain monetary limits.

d. Liability of the Members of the Board of Directors
Members of the board are liable towards the company, the shareholders and the creditors of the company, in case they do not properly discharge the duties and the obligations imposed upon them by the relevant laws and the articles of association (ComA, art. 336). This liability is based on fault and if the director in question proves that he had no fault then he would be relieved of liability. Since the board of directors is an organ designed by the ComA, members are in a position to discharge their duties collectively and as a single body, they are under joint liability.

Pursuant to art. 336 of the ComA. the grounds for liability are the following: (i) If the payments made by the shareholders as their contributions for the shares are not accurate and not fully paid; (ii) If the dividends allocated and paid to the shareholders are not based on correct accounts; (iii) If the mandatory books are not kept in accordance with the relevant rules or not kept at all; (iv) If the resolutions of the shareholders general assembly were not implemented without any justifiable cause and (v) If the duties and obligations imposed by the relevant rules of law or by the articles of association were not fulfilled either through negligence or wilful misconduct.

Members of the board shall be relieved of their liability after the shareholders general assembly resolves to release and discharge them. This resolution contains two statements: (i) That the shareholders have found the conduct and performance of the directors lawful, correct and beneficial to the interests of the company and therefore have approved them and (ii) That the members of the board shall not in the future be held liable for their conduct during their term of Office. On the other hand, approval of the balance sheet by the shareholders is also tantamount to a resolution of release and discharge.

Consequently, the corporation cannot file a suit based on liability against the directors who were released and discharged by the shareholders.

On the other hand, the members of the board are personally responsible for the taxes as well as other public debts of the company and if these were not paid in accordance with the relevant provisions of the tax acts and other rules, they would be held personally liable. This liability falls on the members who are in office on the date such public obligations had to be paid.

3. Auditors
a. Auditing in Corporations
Corporations play an important role in the economy of the nations and for the last couple of decades they became the major -or indeed the singular-tool in all the commercial and industrial activities as well as investment operations. Corporations, particularly in the form of public companies, are also widely instrumental in providing variety of alternatives for the small investors to deposit their savings. Because of all these and many other features of the corporations, these organisations are subject to proper and strict auditing.

Auditing of the corporations is carried out both internally and externally. The internal auditing is performed by the company auditors, in a manner, which will be described hereinbelow.
The external auditing is exercised primarily by the Ministry of Industry and Trade. Said Ministry has vast powers in auditing and supervising corporations in many ways; e.g. granting approval at the formation stage, having an official of the Ministry (hükümet komiseri) attend every shareholders general meetings, etc.

Another means of external auditing is performed by the Capital Market Council. This category of auditing involves, understandably, the activities of the public corporations.

b. Appointment of the Auditors
Auditors are (or the auditor is) appointed by the shareholders general assembly. They may be shareholders or not. Their term of office cannot exceed three years, but they can be re-elected, provided there is no provision to the contrary in the articles of association. However, the initial auditors appointed when a corporation is formed must be determined by the founders and indicated in the articles of association. Their term of office is limited to one year only.

The number of auditors may be determined by the articles of association, but they cannot be more than five. Alternatively a maximum and minimum number for the auditors may be given in the articles of association and at each term of election the shareholders general assembly may determine the number of the auditors to be appointed for the current term. If there are more than one auditor, they perform their duties collectively as a body.

The auditors may not be elected as member of the board of directors nor may they be engaged as the employees of the corporation. The members of the board whose term of office is terminated may not be elected as auditors before they are released by the shareholders general assembly (ComA., art. 347).

c. Duties and Powers of the Auditors
The paramount function-indeed their raison d’etre- of the auditors is to protect the interests of the shareholders. They are elected by the shareholders and appointed to be the guardian and protector of their rights and interests.

Dulies and powers of the auditors, in their general sense, are enumerated in art. 353 of the ComA. Only the important ones will be named here for convenience: (i) To determine the method the balance sheet shall be prepared in co-ordination with the board of directors; (ii) To examine the company books and accounts; (iii) To regularly inspect the treasury (coffers) of the company; (iv) To audit the budget and the balance; (v) To call the ordinary or extraordinary shareholders general meeting in case of board of director’s negligence: (vi) To maintain supervision on the board members to make sure that they comply with the provisions of the acts and the articles of association.

But, the vital function of the auditors is to write and submit a report to the annual shareholders meeting, containing their views and recommendations on the balance and loss and profit account and the proposition on the distribution of the profits made by the board of directors. This report also contains the suggestion by the auditors to the shareholders, whether the members of the board of directors should be released or not. This is an imperative procedure and without this report by the auditors, the shareholders general assembly cannot review and discuss and adopt the required resolutions on the balance (ComA., art. 354). Consequently the general assembly cannot vote on the release and discharge of the board of directors. Evidently, this report is vitally important for the members of lhe board also.

Besides, the auditors have the right to attend the meetings of the board, but without participating in the debates and the voting (ComA., art, 357).

V. SHARES AND SHAREHOLDERS
1. Shareholder
Shareholder is the owner of a share (or shares) in a corporation. Shareholders may be real or legal persons.

Speaking more practically, a shareholder is one of the owners of a corporation. The capital of the company, i.e. its original financial source, is -however partially- provided by the shareholder. This ownership is, of course, in proportion of the amount of shares any shareholder owns.

Shareholding may be original or derivative. Original shareholders are the persons who have contributed to the capital of the company during its foundation, and therefore the founders are the original shareholders. Original shareholding also takes place when a person commits to buy shares when a corporation increases its capital, which means issuing new shares to correspond the amount of increase affected in the capital. Equally, buying shares of public corporations in the stock exchange when they increase their shares is a way of acquiring original shareholding.

When anybody buys shares from a shareholder, it is a derivative ownership.

Shareholders are under obligation to pay the amount of the shares they have committed to purchase. Once they pay all their commitments, shareholders are relieved of any further liability. Liability of the shareholders is only towards the legal personality of the corporation.In its practical sense, this means that the creditors of the corporation do not have the right to demand any payment from a shareholder who has not paid in all of his commitment to the company.

2. Share and Share Certificate
In corporations, the capital is divided into shares and the nominal value of the shares must be determined and written in the articles of association. The founders are free to decide the nominal value for the shares when they set up their corporation. These shares are independent of the persons of the shareholders. Each share, in one sense, denotes a portion of the main capital. Share also reflects the status of shareholding, in other words it demonstrates the right of ownership in the company. To be a shareholder in a company, one must own a share in the capital of that company.

The term share is, sometimes, used also to mean the document called share certificate, which reflects the share. But in this connection we must emphasise that the share per se is important, the document merely reflects the right on the share; the origin / source of the right is the share itself; without the actual share the document is worthless. A share, not reflected on a document, i.e. the share certificate, may still be transferred, bought and sold and made a subject of other rights, like pledge. One single function of share certificate is to facilitate the circulation of the shares.

Pursuant to mandatory provision of ComA. (art. 373), each share gives at least one vote to the holder and therefore it is not allowed to issue shares without a right to vote. By inserting a clause in the articles of association of a corporation, more than one vote may be allocated to certain shares. On the other hand, Capital Market Act provides that shares without a right to vote may be issued in public corporations (art. 14/A).

VI. CAPITAL
The capital of a corporation must be a fixed amount and predetermined by the articles of association. Furthermore this capital must be divided into shares. The minimum capital required to establish a corporation is TL. 50.000. 25 % of this amount must be paid in either simultaneously with the formation of the company or within three months following the registration of the company. The remaining amount can be paid in by instalments –conditions of which must be stated in the articles of association- within three years. It is also possible to pay in the whole amount at once. The shareholders general assembly is authorised to increase the capital.

The Capital Market Act allows for “registered capital” (art. 12). Under this system, while the company has been formed a ceiling is set for the company’s capital. But, this entire amount is not paid in initially. During the following years the board of directors would be authorised to increase the capital, by issuing new shares, up to that ceiling and in doing this, the procedure prescribed by the relevant articles of the ComA. relating to the increase of the capital need not be observed.