Doing Business in Turkey: Corporate environment
Turkey | Publication | January 2023
Legal entities that are permitted under the Commercial Code include: joint stock companies (anonim şirket), limited companies (limited şirket), collective companies (kolektif şirket), commandite companies (komandit şirket) and cooperative companies (kooperatif şirket). Non-incorporated enterprises (adi ortaklık) do not have legal personality and are regulated under the Code of Obligations.
Domestic and foreign investors commonly choose to form joint stock companies or limited companies as these entities have a number of features that are useful for doing business in Turkey. Joint stock companies are the most sophisticated type of entity and are mandatory in certain regulated sectors such as banking, factoring, insurance, asset management and independent auditing.
The table below presents a comparison between the main features of joint stock companies and limited companies:
|Joint Stock Company||Limited Company|
|Number of shareholders||
Minimum one shareholder
No restriction on the maximum number of shareholders
Minimum one shareholder
Maximum number of shareholders limited to 50
|Minimum capital||Minimum required share capital is 50,000 Turkish Lira (or 100,000 Turkish Lira for companies under the “authorized capital” regime)||Minimum required share capital is 10,000 Turkish Lira|
|Nominal share value||Nominal value of each share must be 0.01 Turkish Lira or a multiple of that amount||Nominal value of each share must be 25 Turkish Lira or a multiple of that amount|
|Authorized non-issued capital||May have authorized non-issued capital||May not have authorized non-issued capital|
|Public trading||May be publicly traded||May not be publicly traded|
|Regulated industries||Certain regulated industries require joint stock companies||Certain regulated industries require joint stock companies|
|Debt instruments||May issue debt instruments||May not issue debt instruments|
|Financial assistance||There are certain prohibitions on financial assistance to fund the acquisition of a joint stock company’s own shares||There are no prohibitions on financial assistance to fund the acquisition of a limited company’s own shares|
|Shareholder liability||Shareholders may not be held responsible for public debt of the company||Shareholders may be held responsible for public debt of the company|
|Share transfers||Share transfers are not, as a general rule, subject to any restrictions. Share transfers may be restricted, to a certain extent, by shareholders in the Articles of Association.||Share transfers are subject to the approval of the General Assembly. Approval may be withheld for any reason without providing justification. Share transfer agreements must be notarized and registered with the Trade Registry.|
Foreign companies may establish branches or liaison offices while Turkish companies may establish branches. Branches are registered with the trade registry, do not have separate legal personality and are not completely independent from the head office. Branch office activities must be in line with the head office’s activities.
Liaison offices differ from the structures described above in that they may not engage in any commercial activity and therefore may not generate any income or incur any losses. As the restriction on “not engaging in commercial activities” is narrowly interpreted by the supervisory authorities, the activities of liaison offices are generally limited to gathering market information. Foreign investors often use liaison offices to familiarize themselves with the Turkish market prior to starting operations. Liaison offices are subject to permits which are issued for initial periods of up to three years and may be extended thereafter. The Ministry of Industry regulates liaison offices and the representative offices of foreign banks are subject to oversight by the BDDK.
Each company is registered with the trade registry in the city where its headquarters are located. In addition, each branch of each company is also registered with the trade registry in the city where the branch is located. If all of the required documentation is available and in compliance with the formal requirements, establishment of a company or branch office should not take more than a few business days. The documents requested by trade registries are standard and documents in a foreign language must be certified and translated according to specific procedures.
Joint stock companies
A joint stock company is a corporation with a minimum capital of 50,000 Turkish Lira represented by shares and has legal personality. Sole-shareholder joint stock companies are possible.
As a general rule, no governmental consent or approval is required to set up a joint stock company. Registration with the relevant trade registry and notification to the Ministry of Industry for foreign investors are sufficient. However, establishment of a company that will operate in a regulated sector requires, among other regulatory approvals, the prior consent of the Ministry of Trade.
The articles of association (ana sözleşme or esas sözleşme) is the main constitutive document for this type of legal structure. The articles of association specifies the name, headquarters, purpose, share capital amount, type of company shares (registered or bearer), number of directors and other information concerning the company. It is filed with the relevant trade registry and announced publicly in the Trade Registry Gazette. The articles of association is binding on every shareholder of a joint stock company.
Certain matters, including increases or decreases of share capital, are exclusively reserved for decisions by the general assembly of shareholders. The articles of association must be amended to reflect any changes to the share capital.
The Commercial Code permits an “authorized capital” system for joint stock companies. Under such a system, the general assembly specifies a ceiling amount of authorized capital in the articles of association. The board of directors may then issue capital up to such ceiling during a period of five years without further general assembly approval for each issuance. Currently, the statutory minimum share capital amount under the authorized capital system is 100,000 Turkish Lira.
Public companies may also operate under the authorized capital system after seeking the approval of the Capital Markets Board.
Capital may be cash or non-cash. Any non-cash capital must be transferrable and not encumbered. Non-cash capital must be valued by an expert appointed by the relevant Commercial Court. Personal services, receivables not yet due or commercial reputation may not be contributed as capital.
Mandatory corporate bodies of joint stock companies
Board of Directors
A joint stock company is managed and represented by its board of directors. The board may be composed of one or more directors who may be individuals or legal entities. Directors are elected by the general assembly for a maximum term of three years and may be re-elected. Directors need not be shareholders of the company. Legal entity directors must appoint an individual representative to take the necessary corporate actions on their behalf. There are no citizenship or residency requirements for serving as a director. Certain share classes or minority shareholders (please see the "Minority Rights" sub-section of this chapter for for further information on minority shareholders) may be given the privilege to appoint a specific number of members to the board. The board may hold physical or electronic meetings and pass resolutions by written consent in lieu of a meeting. While the Commercial Code sets forth the minimum number of directors needed for a meeting quorum and for taking a board decision, a higher number may be specified in the articles of association. Although the board may delegate certain of its powers to one or more directors or officers, at least one board member must maintain the power to represent and bind the company.
General Assembly of Shareholders
Certain matters are exclusively reserved for decision by the general assembly of shareholders. Such matters include amendments to the articles of association, changes to share capital and the election or removal of directors. The general assembly must convene annually on an ordinary basis and may convene as needed on an extraordinary basis. While the Commercial Code sets forth the minimum percentage of shareholding needed for a meeting quorum and passing shareholder resolutions, the articles of association may specify a higher number. Each shareholder has the right during the general assembly to ask questions to the directors and auditors and to request a special audit on a specific matter.
Shares of joint stock companies
A joint stock company requires a minimum capital of 50,000 Turkish Lira with each share having a nominal value of 0.01 Turkish Lira (one kuruş) or a multiple of that amount. 25 percent of the share capital of a joint stock company must be paid in before registration and the remaining 75 percent must be paid in within the two years following registration.
Shares may not be issued for a value lower than nominal value. However, shares may be issued with a premium in excess of nominal value. Any such excess over nominal value is transferred to the company’s reserves.
Preferred or preference shares are defined in the Commercial Code as privileged shares (imtiyazlı pay). Privileged shares may be issued if permitted in the articles of association. As explained above, with the exception of the privilege to appoint members to the board of directors, privileges such as dividend or voting privileges are attached to the share and not to the person holding the share.
Shares may be in either registered form (nama yazılı) or bearer form (hamiline yazılı). While it is not mandatory to issue certificates to represent registered shares doing so may be convenient for certain share transactions such as transfers or pledges. Minority shareholders have a right to request the issuance and delivery of certificates representing registered shares. Such share certificates must then be delivered to all shareholders.
Uncertificated registered shares may be transferred with a written transfer agreement. If certificated, shares are transferred by delivering the share certificate. In addition, for registered share certificates, it is required that the transferor duly endorses the back of the certificate. Transfer of bearer shares requires notification and registration with the Central Registry Agency (Merkezi Kayıt Kuruluşu).
Shareholders have statutory pre-emptive rights to participate in capital increases in proportion to their shareholding. This right may only be restricted or revoked for justified reasons by a general assembly resolution approved by shareholders holding at least 60 percent of the share capital.
As a general rule, registered shares that are fully paid-up may, subject to any specific restrictions in the articles of association, be freely transferred. Restrictions requiring the company’s approval for transfer must be based on justifiable grounds relating to the composition of shareholders, the business of the company, the economic independence of the company or sector specific regulations. For example, share transfers in companies operating in regulated sectors (e.g., power, banking, insurance, financial services, etc.) may be subject to the relevant regulatory body’s approval if the transfer exceeds certain thresholds.
Registered shares that are not totally paid-up may only be transferred with the company’s approval unless the transfer is due to inheritance, a marital property regime or enforcement of an obligation. The company may refrain from giving its approval only if the transferee does not have the ability to pay for the shares.
Please see “Security and Collateral” under “Banking and Finance” for details on share pledges.
Joint stock companies may purchase their own shares up to a value equal to 10 percent of the share capital subject to conditions stipulated by the Commercial Code.
Although the Commercial Code expressly permits shareholders in a limited company to include in the articles of association rights of first refusal, call options and put options, in which case these rights are enforceable against third parties, there is no equivalent permission for joint stock companies. In practice, however, such rights and options are often included in shareholders’ agreements and sometimes in articles of association of joint stock companies. Because the elements of shareholders’ agreements are not specifically defined in the law and also because a shareholders’ agreement may not override the articles of association, the enforceability of these provisions is questionable and is a topic of discussion in Turkish law. Moreover, the limited enforceability of specific performance clauses (i.e., requiring a party to perform a contractual obligation as set forth under the contract) under Turkish law further complicates the enforceability of shareholders’ agreements in practice. Therefore, remedies for breach are not enforceable against third parties and remain at the contractual level among the shareholders.
Dividends of joint stock companies
Dividends may only be distributed out of net profits and legal reserves. Before distribution of dividends, the Commercial Code requires an allocation equal to 5 percent of profits (before taxes and previous years’ losses) to statutory legal reserves. This allocation is not required if accumulated reserves exceed 20 percent of the paid-in capital. Additional voluntary contributions to reserves are permitted. A dividend equal to 5 percent of the company’s paid-in capital may be distributed to shareholders from net profits. The dividend distribution percentage may be higher if stipulated in the articles of association.
Advance dividend distributions are permitted if the company has generated profits and the general assembly has resolved to do so in advance. For public companies, specific authorization to make advance dividend distributions must be permitted in the articles of association.
Financial assistance prohibition
The Commercial Code prohibits joint stock companies from granting loans or security or to advance funds for the acquisition of their own shares. A target company may not (i) grant any loan, (ii) advance any funds, or (iii) provide its own assets as collateral for an acquisition financing. However, shares of the target company owned by the shareholders, not the company, may be provided as collateral.
The Commercial Code provides for two exceptions of limited application to this prohibition. The first relates to transactions by banks or other financial institutions and is limited to scenarios where the bank or financial institution is the target company. The second exception is for transactions involving the purchase of a company’s shares by the employees of the company or its subsidiaries.
A limited company must have a minimum capital of 10,000 Turkish Lira with each share having a nominal value 25 Turkish Lira or a multiple of that amount. Shares may be certificated or uncertificated.
Limited companies are not allowed to undertake certain regulated activities, such as banking and insurance, and may not be publicly listed. As with joint stock companies, the articles of association of a limited company must contain certain required information and must be registered for public disclosure with the Trade Registry.
One of the distinct characteristics of limited companies is that although the liability of the shareholders is limited to their share capital, shareholders may be held personally liable for the public debts, such as taxes and social security payments, of the company. It is also possible in the articles of association to stipulate that shareholders may have additional liabilities such as capital contribution requirements.
Mandatory Corporate Bodies of Limited Companies
A limited company must be managed and represented by at least one manager. Managers may be selected from third parties; however, it is required that at least one shareholder have the authority to represent and bind the company. Managers may be individuals or legal entities. Legal entity managers must appoint an individual representative to take the necessary corporate actions on their behalf. There are no citizenship or residence requirements for managers.
General Assembly of Shareholders
As with joint stock companies, the general assembly of shareholders is the other mandatory corporate body in a limited company. The Commercial Code reserves certain matters, such as amendments to the articles of association, appointment or removal of managers and approval of share transfers, exclusively for the general assembly.
Shares of limited companies
Share transfer agreements must be in writing and certified by a Turkish notary public. Unless otherwise stipulated in the articles of association, the general assembly of shareholders must approve share transfers. The articles of association may prohibit share transfers altogether. If the general assembly of shareholders does not approve a share transfer or share transfers are prohibited under the articles of association, a shareholder may withdraw from the company and ask to be paid the fair market value of the shares held by such shareholder, by initiating a lawsuit against the company. Limited company share transfers must be registered with the Trade Registry.
Articles of association may give shareholders or the company itself rights of first refusal or call and put options.
Under the Code of Obligations, individuals or legal entities may form non-incorporated enterprises. Because such enterprises do not have legal personality, they are sometimes preferred for projects undertaken by partners where the corporate formalities of a legal entity are not necessary. For example, a joint venture may be formed for a specific purpose such as bidding in a tender.
At the heart of the non-incorporated enterprise lies a contractual relationship between at least two persons. Each partner must contribute a partnership interest, which may be of an intangible nature, such as efforts, goodwill or know-how. Third parties may also be appointed to represent or manage the non-incorporated enterprise.
Partners are personally responsible for the debts of the partnership. Unless otherwise determined by all partners, each partner has the right to individually represent and bind the partnership and each partner may oppose and prevent an action taken individually by another partner prior to completion of such action.
Other forms of legal entities
Less common forms of corporate entities are collective companies, commandite companies and cooperative companies. These types of companies establish a more informal relationship between the shareholders. In the case of collective companies, all shareholders, and in the case of commandite companies, one class of shareholders may be held personally liable for all of the company’s debts and obligations. Cooperative companies are legal entities established for cooperative supply of various needs related to the founders’ professions, crafts and other businesses. Cooperative companies are based on the principle of mutual help and collaboration.
The Turkish legal system permits two types of non-profit legal entities, namely associations and foundations. Associations are entities formed without any capital requirement and require at least seven members to exist. There is no citizenship requirement for members of associations; however, a member who is not a Turkish citizen must be legally residing in Turkey. Foundations must be not-for-profit, undertake an activity deemed beneficial to the public, have at least one real or legal person member and require the allocation of real estate, a regular income or a lump sum capital to the fulfillment of its stated activity or purpose. There must always be a sufficient amount of funds remaining to fulfill the goal of the foundation and provide continuity. If the funds are consumed the foundation is terminated by the state.
Governmental agencies monitor the operations of non-profit entities principally to check whether resources are correctly used for the charitable purposes indicated in the constitutional documents. Accepting funds and donations and obtaining tax-exempt status for the entity and donor are subject to additional rules after the entity is formed. For example, an association seeking to raise funds from the general public must secure approval from the relevant governorship of the city where the fund raising activities will be undertaken. If these activities span several cities or the whole country, the association must secure the approval of the governorship under whose jurisdiction it resides. Neither type of non-profit entity may distribute funds to its members
Joint stock company directors and limited company managers must perform the fiduciary duties of loyalty and care towards the company’s shareholders. The duty of loyalty stems from the mandate given to directors and managers by the shareholders to manage the company. As an extension of this duty, directors and managers are not allowed to enter into transactions with the company itself or enter into competition with the company, without the approval of the general assembly. In respect of the duty of care, directors and any person with delegated board powers are required to carry out their duties diligently. Failure to act in accordance with objective standards required from such position may result in being held liable for breaching this duty.
While fiduciary duties have traditionally been a concept applicable to directors and managers, the Commercial Code has introduced the principle of expanding fiduciary duties to shareholders who are in control of a “group of companies.” This concept is important since conglomerate structures are a common feature of the Turkish economy. Foreign investors can easily find themselves in control of a “group of companies” and therefore subject to fiduciary duties.
A corporate “group of companies” is deemed to exist if there is a structure of at least one parent company and two subsidiaries controlled by that parent company. This structure is applicable to both joint stock and limited companies. It is sufficient for any one of these companies to be headquartered in Turkey. In corporate groups, the parent company has a fiduciary duty of loyalty to each subsidiary and may not impose a transaction on the subsidiaries that would cause harm to one subsidiary and a benefit to the other. In such case, the parent must compensate the harm within a certain amount of time. Failure to do so may result in a shareholder or creditor of the aggrieved subsidiary filing for damages against the parent (as well as the parent’s shareholders and directors) and requesting compensation.
In addition, if the shareholding percentage of an entity in a joint stock company or limited company exceeds or goes below defined thresholds (5 percent, 10 percent, 20 percent, 25 percent, 33 percent, 50 percent, 67 percent or 100 percent), such shareholder (whether or not it is controlling) is required to make disclosures to the company, the Trade Registry and, if the company is regulated, to any relevant regulatory bodies. Failure to make the disclosure results in the suspension of important shareholder rights including voting and dividend rights.
The board of directors has special responsibilities in cases of capital loss (sermaye kaybı) and significant debt (borca batıklık).
The Commercial Code regulates two scenarios of capital loss. First, if it is understood from the most recent year’s financial statements that half of the company’s share capital and legal reserves have been lost, the board of directors must immediately call a general assembly meeting and propose a corrective action plan to the shareholders. Second, if the most recent year’s financial statements reveals that two-thirds of the company’s share capital and legal reserves have been lost, the board of directors must immediately call a general assembly meeting. Unless the general assembly decides (i) to accept the loss and resume operations with only one-third of the capital by way of capital decrease, or (ii) compensate the loss by injecting capital, the company is automatically dissolved without any legal proceeding or action. All interested parties may ask the courts to issue a declaratory ruling to this effect.
If there are signs that the company is in significant debt, the board of directors is responsible for preparing an interim financial statement. If the interim statement reveals that the company’s assets (excluding those without which the company cannot continue to operate), if sold, would still be unable to pay its debts, the board of directors must notify the competent commercial court. This notification would constitute a bankruptcy filing.
The managers of limited companies have the same responsibilities in the event of capital loss or significant debt of a limited company.
Accounting and audit
Private joint stock companies and limited companies that meet certain criteria (e.g. net asset, net sales revenue and number of employees) and all public companies regardless of these criteria are subject to independent audit. In addition, all companies operating in regulated sectors (such as banking, capital markets and telecommunications) are also subject to independent audit requirements.
In an effort to align the accounting practices with internationally recognized rules, the Commercial Code requires financial statements to be prepared in accordance with the Turkish Accounting Standards and Turkish Financial Reporting Standards that are in line with IFRS. In 2015, in an effort to establish compliance with IFRS to the greatest extent possible, a conceptual framework for financial reporting including a set of reporting standards and interpretation guidelines was published in the Official Gazette. These standards are continuously updated in accordance with the amendments made by the International Accounting Standards Board.
There are also related disclosure and reporting obligations for companies deemed to be part of a “group” (as defined in Section II. B above). The board of directors of subsidiary entities are required to prepare an annual report setting out all transactions within the corporate group. The report must specify any losses suffered and, if applicable, whether those losses have been compensated for within the group.
Shareholders holding at least 10 percent of the capital in privately held joint stock or limited companies or at least 5 percent of the capital in public companies have certain statutory rights. These rights include affirmative rights to take certain actions and veto rights to block certain actions proposed by other shareholders. The articles of association may provide a lower shareholding threshold than what is required by statute.
Minority shareholders may request:
- Issuance of registered share certificates;
- The board of directors to convene a general assembly, and adding items to the meeting agenda;
- Adjournment of balance sheet discussions for a month;
- Dissolution of the company on just grounds;
- Information from the board of directors or auditors at a general assembly of shareholders meeting. Indeed, any shareholder, regardless of statutory minority threshold, may request information; and
- Appointment of a special auditor on certain issues. Indeed, any shareholder, regardless of statutory minority threshold, may request this.
The resolutions listed below require approval, by law, of a specific supermajority of the shareholders and therefore may be blocked by minority shareholders holding sufficient capital to preclude such a supermajority. The statutory supermajority requirements may be increased in the articles of association (unless, of course, it is 100 percent). Requirements other than the approval of a specified majority of share capital may also apply in order to take the actions listed below.
|Resolution;||Minimum Vote Required|
|Imposing monetary obligations to cover balance sheet losses||100% of the share capital|
|Changing nationality of the company||100% of the share capital|
|Minority squeeze out||90% of the share capital|
|Changing the field of activity||75% of the share capital|
|Issuing privileged shares||75% of the share capital|
|Restricting transfer of registered shares||75% of the share capital|
|Decrease of share capital||75% of the share capital|
|Limiting or removing statutory pre-emptive rights||60% of the share capital|
Shareholders may be squeezed out from a company in two circumstances: (i) merger and (ii) disruptive actions by minority shareholders in a corporate group.
In a merger scenario, shareholders owning 90 percent or more of the dissolving company may squeeze out minority shareholders by offering them the real value of their shares.
In a “group” of companies, the controlling company holding at least 90 percent of the shares of a subsidiary may squeeze out the minority shareholders if these shareholders act in bad faith and disrupt the business operations.
A company may be terminated voluntarily upon the decision of its shareholders or if certain specific circumstances exist, such as bankruptcy, expiration of a definite term, realization of a specified purpose or occurrence of a specific termination cause set out in the articles of association. If the articles of association of a company set a certain date for the termination, the company must be terminated at this date. Termination date provisions in articles of associations are not common in practice. Continuation of a company’s business activities after the expiration of the definite term tacitly deems it a company with indefinite period.
The owners of a company may, in a shareholders’ general assembly meeting where at least 75 percent of the total share capital is represented, approve voluntary termination.
Termination by court order is an extreme measure which is generally granted by Turkish courts only as a last resort. Courts look for one of the following causes before ordering termination:
Failed company management
Shareholders may file a lawsuit for the company’s termination (i) if the general assembly of shareholders cannot convene at least once a year on an ordinary basis or on an extraordinary basis whenever necessary or (ii) in the absence of statutory corporate bodies (notably the board of directors). Depending on the specifics of the case, absence of the board could occur if the term of the board expires and a new board is not elected, if the members of the board resign and no new members are appointed or if the members of the board fail to convene at all or as required. Creditors of a company or the Ministry of Trade may also file a lawsuit to terminate a company for failed management.
Other just cause
Shareholders collectively representing a minimum of 10 percent of the company’s share capital (or lower percentage if provided for in the articles of association) may file a lawsuit for the termination of the company in the event of just causes. “Just causes” are not defined in the Commercial Code and are considered by courts on a case-by-case basis.