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TCC Exposes Board Members and Senior Management to Claims from Shareholders, Creditors

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In a significant shift in corporate governance, the Turkish Commercial Code (TCC) has introduced new liability principles that expose board members and senior management to claims not only from shareholders but also from creditors. Under this regime, board members and senior management are now required to demonstrate that they have acted with reasonable diligence in discharging their duties.

Liability Principles

The TCC’s liability principles provide that if a company’s internal bylaws define the board members’ and senior management’s duties and delegate powers with respect to specific fields, exchange of information and reporting systems within the board, liability will attach to the delegated powers. This means that board members and senior management who have delegated certain powers or duties will not be held liable for the actions or decisions of their delegates unless they can prove that they acted with insufficient diligence in delegating, instructing, or supervising such delegates.

Liability for Breach of Duties

Under the TCC, board members and senior management may be held personally liable for breach of duties and responsibilities, including fraudulent acts that are beyond their control. However, they will not be held exempt from liability if they fail to demonstrate reasonable diligence in discharging their duties.

Administrative Monetary Fines

The TCC also provides for administrative monetary fines for breaches of certain provisions, such as non-compliance with bookkeeping requirements or inaccurate statements on capital adequacy. Board members may also be held personally liable for unpaid public debts, such as taxes and social security payments, if the company is unable to pay them.

Criminal Liability

In addition to administrative liability, board members and senior management may also face criminal liability for breach of risk and compliance management obligations. The Turkish Criminal Code governs criminal liability, and individuals may be held criminally liable for acts such as bribery, embezzlement, or forgery.

Capital Markets Code

The Capital Markets Code also provides for specific legislation on insider trading and market manipulation, which can lead to imprisonment or judicial monetary fines.

Corporate Compliance Defense

Under the TCC, if there is a delegation of powers, board members and senior management who have delegated their powers or duties will not be held liable for the actions or decisions of their delegates unless they can prove that they acted with insufficient diligence in delegating, instructing, or supervising such delegates.

Recent Cases

A recent example of corporate risk management failure is the sale of a Turkish regional airline company, which led to criminal proceedings. The deal had a fast-track and cursory negotiation phase, and both parties proceeded with a share transfer agreement that did not have sufficient liability or protection mechanisms to cover their risks. Following the closing, one party alleged that the financial situation of the company was misrepresented, and initiated criminal proceedings for fraud against the other party.

Government Obligations

The Turkish government has introduced legislation on risk and compliance management in the public sector since the 2000s. The Code on the Public Financial Administration and Control from 2003 introduced the concepts of internal control and internal audit to the public sector, and subsequent secondary legislation has detailed the processes and covered general compliance issues.

Public Sector Requirements

Today, all public administrations and state-owned enterprises are required to establish an internal control system that requires internal audit and risk management to be carried out by internal auditors.