The Law on Multi-corporate Enterprises under the draft Commercial Code
Contributed by Ozgun Law
February 21 2011
The Law on Multi-corporate Enterprises aims to protect subsidiary companies and their shareholders and claimants in the event of a conflict of interest between the subsidiary company and the group of companies of which it is part. For this purpose, a subsidiary company's control over the management and resolution process has been restricted and certain rights have been granted to its shareholders and claimants in the event that control over the subsidiary company is used illegitimately. In such a case, the parent company may be obliged to pay the shareholders compensation or buy out their shares. On the other hand, if the parent company is wholly in control of the subsidiary company, it can direct the subsidiary company's activities and acquire the shares of any minority shareholder that creates a conflict of interest. However, while groups of companies are subject to regulation by various branches of Turkish law, they are not subject to regulation under the Commercial Code.
This update focuses on the regulation of multi-corporate enterprises under Articles 195 and 209 of the draft Commercial Code, which will enter into force on July 1 2012.
Aim of new law
The basic purpose of the law under the draft code is to finalise the legal relationship between principal partnerships and minority partnerships on a balance of transparency, accountability and benefit, and regulate them within a basic legal framework.
Even though every commercial company is an independent legal entity, the company management that takes place within a multi-corporate enterprise is different from that of an independent company. The purpose, benefit and structure of all the companies in the group are taken into consideration and the company is managed through instructions from the parent company.
The draft code has been developed to recognise multi-corporate enterprises as an economic phenomenon and to regulate their company management.
The draft code addresses the following key issues in relation to multi-corporate enterprises:
- the concept of control and similar parallel concepts (Articles 195 and 196);
- the definition of 'mutual participation' and its results (Articles 197 and 201);
- the disclosure requirement, which is crucial for the determination of control (Article 198);
- regulations on reporting which aim to inform shareholders (Articles 199 and 200);
- the illegal use of control and liability arising from such use (Article 202);
- total control of capital (Articles 203 and 206);
- the right to dismiss minority shareholders and gain total control (Article 208);
- the regulation of special audits (Articles 207 and 406); and
- regulation in regard to liability arising from the trust (Article 209).
In accordance with Article 195 of the draft code, a multi-corporate enterprise is comprised of subsidiary companies that are subject to the parent company's direct or indirect control. Consequently, in the event that the parent company has another company under its control, the controlled company and the subsidiary company constitute a multi-corporate enterprise under Article 195 of the draft code. Since control is established through the parent company's direct or indirect intervention, all companies under direct or indirect control are included in the multi-corporate enterprise. There is no upper limit regarding the size of a multi-corporate enterprise; however, at least two commercial companies must be involved in order to qualify as a multi-corporate enterprise.
Determination of control
The most important aspects of the system under the draft code are the determination of illegal use of control and how to regulate in the event that a controlled company has another subsidiary company under its control.
Illegal use of control
Once the existence of a controlling relationship between two or more companies has been determined, the next step is to examine whether this control is being used legally or illegally. The crucial point of regulation regarding multi-corporate enterprises is the results that arise from illegal use of control (Article 202). If illegal use of control is determined, shareholders now have the right to receive compensation and leave the company by selling their shares.