Establishing a Corporation under Turkish Law

The conditions for establishment of a corporation in Turkey are governed by Turkish Commercial Code. On January 13, 2011 the Turkish Parliament adopted the Turkish Commercial Code[1] (“TCC”) within the framework of alignment with the EU Acquis (“Acquis Communautaire”), which governs the commercial transactions as well as the formation and governance of companies. The TCC entered into effect on 1^st of July, 2012. It is important to note that the foreign investors have the same status as local investors pursuant to the non-discrimination principles provided in the Turkish foreign investment legislation.

1. Possible legal forms of corporations under Turkish Law

The most common forms of corporations in Turkish practice are joint stock company (in Turkish “anonim şirket”, Turkish abbreviation “A.S.”) and limited liability partnership (in Turkish “limited şirket”, Turkish abbreviation “Ltd”), both of which are limited liability companies, whereby the liability of the shareholders are limited to their share capital commitments in the respective companies. The procedure of incorporation with respect to both types of corporations is the same.

The organs and some of the main features of joint stock companies (“JSC”) and limited liability partnerships (“LLP”) and the differences between the two are set out below.

1.1 – Shareholders
A single shareholder is sufficient to establish a JSC and a LLP. A LLP may not have more than fifty shareholders. No such limitation for number of shareholders is applicable for JSC. Under both company types, single shareholder or shareholders may be real persons or legal entities.

Except for companies that will engage in certain specified businesses, a JSC or LLP may be fully owned by foreign shareholders that do not have to be resident in Turkey. There are no limitations as to foreign ownership with respect to the Company pursuant to the applicable legislations to the Company.

1.2 – Share Capital
The minimum capital requirement for the establishment of LLP is 10,000TL (approximately USD1,700) and the minimum capital requirement for the establishment of JSC is 50.000TL (approximately USD8,400) under TCC. For non-public JSCs which have adopted the registered capital system the minimum capital requirement is 100.000TL. The minimum registered capital requirements in regulated sectors may, however, be higher.

The TCC stipulates that one-forth of the share capital will be paid before the incorporation and the balance may be paid within 24 months.

1.3 – Share Transfers
The transfer of the shares of LLP is restricted and a relatively long course of procedure has to be fulfilled (i.e. signature of the share transfer agreement before the Notary Public, approval of the Board of Shareholders (unless otherwise provided in the AoA of the company), registration in the domain of the Trade Registry and announcement in the Trade Registry Gazette). In contrast, the shares of JSC can be transferred by either physical delivery or endorsement without being subject to such procedure.

The capital gain obtained by real person shareholders of JSC from sale of share certificates or temporary share certificates is exempt from income tax provided that the shares are owned more than 2 years. There are no such tax exemptions in case of sale of LLP shares.

1.4 – General Assembly of Shareholders
General assembly of shareholders (“GA”) is the highest decision making organ of a JSC and LLP. Each shareholder is entitled to participate in the GA meetings and cast vote either personally or through proxy. Its powers include amending the AoA, electing, releasing and dismissing BoD/managers, approving, rejecting the annual balance sheets, etc.

Previously, the government representative had to be present in all of the GA meetings of all of the JSCs. According to the current TCC, it is stipulated that the types of companies that are required to have government representatives in the meetings shall be determined by a regulation to be issued by the Ministry of Customs and Commerce (“Ministry”). The Regulation on the Procedure for General Assembly Meetings of Joint Stock Companies and the Ministry of Customs and Commerce Representative was published in the Turkish Official Gazette dated 28 November 2012 Numbered 28481. According to the aforesaid regulation, the government representative shall be present in all of the General Assembly meetings of companies which need to obtain clearance from the Ministry for their establishment and amending of AoA procedure. For other companies, government representative shall have to be present only in meetings where a decision for a capital increase or reduction, having or abandoning registered capital system, increasing registered capital ceiling, amending the company’s main subject of activities, merger, de-merge or company type amendments will be adopted. In all other general assembly meetings, the government representative may participate in the meeting only upon demand of the corporation.

With regard to the LLPs, under the former TCC, the LLPs do not have to hold annual shareholders meetings unless they have more than 20 shareholders. The current TCC requires all of the LLPs to hold annual meetings, but in the event that all of the shareholders so agree the resolutions may be adopted by way of circulating the resolution to all of the shareholders for their approval. The presence of the government representative is not required for GA meetings of LLPs.

1.5 – Management
The transfer of the shares of LLP is restricted and a relatively long course of procedure has to be fulfilled (i.e. signature of the share transfer agreement before the Notary Public, approval of the Board of Shareholders (unless otherwise provided in the AoA of the company), registration in the domain of the Trade Registry and announcement in the Trade Registry Gazette). In contrast, the shares of JSC can be transferred by either physical delivery or endorsement without being subject to such procedure.

The capital gain obtained by real person shareholders of JSC from sale of share certificates or temporary share certificates is exempt from income tax provided that the shares are owned more than 2 years. There are no such tax exemptions in case of sale of LLP shares.

1.5.1 – JSC
A JSC is managed by its Board of Directors (“BoD”). Some of the important issues related the BoD are as follows:

● BoD members do not have to own any shares of the company. Non-shareholder real persons or shareholder legal entities may serve as members of the BoDs.

● A legal entity may be a BoD member and may be represented by a real person appointed by that statutory director legal entity for carrying out the activities of the BoD member and such representative must be registered at the Trade Registry as the sole representative of that legal entity. Only that representative may participate in the BoD meetings and vote.

● With respect to the management duties of the BoD, the BoD may partially or wholly delegate its management duties to one or more of its members or to a third party who is not a BoD member by issuing an “internal regulation” provided that such delegation is authorized by the provisions of the AoA. However, at least one member of the BoD must have the authority to represent the company. The internal regulation governs the management of the corporation and shows each duties and chain of reporting structure of the corporation.

● Within the general aim of adapting to technological developments, the TCC, enables the BoD to hold meetings electronically. The BoD resolutions, however, must be in the written form and signed by the members. It is possible to adopt the resolutions by way of circulation. Each member may sign the resolution on a separate paper, all of which may then be affixed to the company’s ledger. It is explicitly provided that the members cannot vote on behalf of one another or through a proxy.

● The meeting quorum is the majority of the members. The decision quorum is majority of the members that are present.

● The BoD members may be foreign real persons or nonresident legal entities. A real person, who does not have to be a Turkish citizen, has to be appointed to represent the legal entity BoD member.

1.5.2 – LLP
A LLP may be managed by one or more managers. Manager or managers may be real persons or legal entities. Same as JSCs, in the event that a legal entity is appointed as manager, the legal entity appoints its sole representative to carry out the duties. If there is more than one manager in a LLP, one of them should be appointed as the chairman of the board of managers. Although, all authorities of the shareholders relating to the management of a LLP may be granted to a general manager or one of the shareholders, at least one of the managers should be a shareholder. The managers may be foreign real persons or nonresident legal entities. A real person, who does not have to be a Turkish citizen, has to be appointed to represent the legal entity manager.

1.6 – Auditors
Under the current TCC, the auditing function shall be carried out by independent audit firms or alternatively, medium and small scale companies may have the services of one or more than one sworn financial advisors or public accountants. Such audit requirement, however, shall be applicable only to some corporations, which are determined and announced by the Cabinet of Ministers. The regulation on independent audit was adopted on 26 December 2012. The companies other than those subject to independent audit shall also have to audited.

1.7 – Liability of shareholders and liability for public debts
The liability of shareholders of both JSC and LLP is limited to the amount of their capital undertaking. However, the shareholders LLPs may be held personally liable, in proportion to their capital undertaking for the public debts which cannot be recovered from the assets of the LLP whereas the shareholders of JSC do not bear such a liability. In JSCs, the BoD members are personally liable for the public debts which cannot be recovered from the assets of the JSC.

2. The process and time required for the incorporation

A company is incorporated by signing of the AoA of the company by the shareholder(s) before the Notary Public or the Trade Registry and registering the AoA at the Trade Registry. The incorporation process, including the tax office registration, takes about three weeks and consists of the following formalities, all of which may be carried out by proxy under the duly legalized power of attorneys issued by the shareholder(s):

• Obtaining and legalizing shareholder identity documentations;
• Opening a temporary capital advance blockage account at a bank;
• Executing an office rental contract in order to obtain company’s registered office address;
• Drafting, execution and legalization of the AoA;
• Registration of the AoA along with other documents before the Chamber of Commerce Trade Registry;
• Execution of the signature circular showing the signature authorities of the Company along with their signature specimen before the Notary Public or Trade Registry,
• Legalizing the company’s statutory books;
• Registration to tax office.

This Article addresses some of the significant aspects of establishment and governance of JSC and LLP and does not intend to give a full review of the applicable provisions on incorporation or the Company or serve as a legal advice. Before taking any action or relying on the information given, addressees of this Article should seek specific advice on the matters which concern them.

[1] Turkish Commercial Code No.6102, published in the Official Gazette dated February 14, 2011 numbered 27846.