On Institutionalization in Family Corporations Under Turkish Law

As is known, vast majority of corporations in Turkey are family corporations. As stated by Güler Sabancı, the Chairman of the Board of Directors of Sabancı Holding, in newspaper Hürriyet dated 04.10.2017, “95 percent of businesses in Turkey comprise of family corporations. Average lifetime of family corporations in Turkey is 25 years. Only 30 percent of these family corporations can survive to the second generation and only 12 percent can survive to the third generation. The rate of corporations passing to the fourth generation is limited to 3 percent. Number of currently active businesses which have been founded before the pre-Republican period is only 69”.

The reason behind this has been determined as the lack of institutionalization in family corporations. Indeed, in the Family Corporation Priorities Survey conducted by Corporate Governance Association of Turkey in 2017, it has been found that 60% of family corporations participating in the survey did not have a family constitution and 53% of them did not have a Family Committee. In these terms, even the most minor dispute in the management may cause greater losses. Therefore, when the current economic and psychological conditions in Turkey are considered, “Family corporations” subject gets more significant day by day.

In this context, a closer look to institutionalization and professionalization in family corporations must be taken.

First of all, it should be stated that rules and principles on operation of the company are not sufficient for institutionalization of family corporations; internal relations of the family should also be institutionalized and the relationships between family members and the corporation must be shaped within this framework. In this context, family constitutions are established including sanctions and penal clauses for reasons such as:

*management of the family & wealth,

*regulations of family membership and company partnership relations,

*operations on shares (e.g. rules on share transfers and sales, shareholding conditions)

*elections of future head of family and corporate directors,

*resolution of disputes, whether these are business-related or not,

*employment of family members and wage policies,

*rules on launching new businesses and investments for the family,

*sanctions on acts against the family constitution

Family constitutions are not only legal documents, but also consensus among the relevant family members. Therefore, contribution and agreement of each and every family member (especially the ones who joined the family though marriage or birth) must be compulsory.

The Place of Family Constitution in Turkish Law

Family constitutions are not among the typical contracts regulated in Turkish law. Therefore, these are considered as atypical legal contracts to be assessed under freedom of contract principle of Law of Obligations. No form requirement is sought under the freedom of contract principles. Nevertheless, family constitution is established in writing and signed by family members for general practice and proof purposes. In this context, the contract concerns all family members regardless of their shareholder status in the family corporation since it is an applicable and binding codes for signatories of the Constitution.

The Place of Family Constitution in Company Law

Family constitution does not have a direct legal effect on the partnership which is not a party to the contract. Since family constitution is a debt contract in legal terms, it shall only affect family members and mentioned rights shall only be claimed by these persons, due to relativity of contracts.

Since the corporation does not hold the party title in the family constitution, there shall not be a performable, executory and actionable legal dispute in terms of the corporation in the event of violation of this constitution. However, family members who are signatories of the family constitution may make legal claims against family members who act in contrary to the agreement (and who are also company partners). As a matter of fact, penal clauses may be claimed if adjudicate.

So as to the family constitution be binding for the corporation and its provisions to be executable in terms of company law, it must be supported by relevant parallel provisions of the corporation’s articles of association and similarly must be completed by a shareholders contract to be signed by family members who are and will be shareholders.

In terms of Joint Stock Companies 

Articles of association in joint stock companies contain two types of provision groups which are adjective and material provisions.

Adjective provisions are related to establishment of organs and have absolute and compulsory qualities. Material provisions regulate the relationships between founders and shareholders of the corporation.

Pursuant to article 340 of Turkish Commercial Code, articles of association can only be established if explicitly allowed in the joint stock company provisions of the law. Article 340 is included under Mandatory Provisions title of the law:

TCC no. 6102  2.Mandatory provisions

ARTICLE 340- (1) The articles of association can depart from the provisions in the Law relevant to joint stock companies only if allowed in the Law. The supplementary provisions of articles of association allowed to be stipulated by other laws shall be effective specifically for that law.

Despite the aforementioned provision involve a restricting expression, it is observed that the opportunity to make special arrangements in relation to many articles is already provided by the lawmakers when other provisions of the law are examined. In addition to this, even in cases where the opportunity to depart from the wording of the law and relevant article cannot be explicitly understood, it shall be accepted in the justifications of Article 340 that complementary arrangements can be made with interpretations which are in accordance with the purpose, based on satisfactory grounds and have fair consequences.

Another matter to be assessed in addition to this is regulated in Article 480 of TCC:

TCC no. 6102 Obligation of Share Price and Consequences of Non-Performance

ARTICLE 480- (1) Apart from the exceptions foreseen by the law, articles of association shall not burden the shareholder with debts other than the execution of the credit exceeding the share price or nominal value of the share. (2) In joint stock companies accepting registered capital system, articles of association may give board of directors the right to issue premium shares. (3) Shareholders shall not request refund of the capital they have provided to the company; their rights related to liquidation share are reserved. (4) In cases where share transfers are subject to the corporation’s approval, obligation to fulfill the actions which repeat in certain times and which are not monetary can be imposed on shareholders by articles of association in addition to the debt arising from capital subscription. Nature and scope of these secondary obligations can be written on the back of share registers or certificates.

Apart from the exceptions anticipated in the law pursuant to the provision of the relevant article, it is prohibited with the articles of association to burden the shareholder with debts other than the execution of the credit exceeding the share price or nominal value of the share. This is the reflection of “single debt” principle on the law. As is known, single debt principle is an arrangement made as an extension of the limited liability with the capital in joint stock companies.

Purpose of this principle is to make the article of associations organization dominant and so as to prevent the side organization that may be established by other obligations law contacts from impeding this. It is because, single debt principle determines the limit of the debt of the stakeholder to the partnership. In this context, even if the family constitution provisions that may be contrary to the single debt principle will not be applicable in terms of partnership law, performance of these actions undertaken between the parties may be requested. The reason for this is the grounds of TCC article 480. Since, the article was written in order to prioritize the corporation’s interest as is seen, and Articles of Associations of the corporation was written with an aim to protect the corporation’s legal personality and therefore its assets. Likewise, Family Constitution serves to the same purpose in terms of its nature and organization. The purpose of the constitution’s provisions in terms of company law is not to increase the power of the dominant partner or to privilege a group, but to prevent family synergy within the family corporation and therefore to establish a set of rules to make family unity of family permanent.

In terms of Limited Liability Companies

There are no restrictions for limited liability companies to make special arrangements for founders or shareholders provided that these are not against mandatory rules in articles of association.

Moreover, similar to joint stock companies, family constitution or shareholders contract arrangements which are not anticipated by the Corporation’s articles of association shall not be binding in terms of company law and in terms of the corporation for limited liability companies. Moreover, this constitution will only lead to provisions of obligations law contract.

Unlike joint stock companies, limited liability companies do not have “single debt” principle. Despite limited liability companies are also capital companies in nature, personality of partners constituting capital union is prevalent compared to joint stock companies. In this case, it has been accepted that it may implicitly cause side obligations for persons. Relevant arrangement can be found in TCC article 587.

TCC no. 6102 Registration and Announcement

ARTICLE 587- (1) Articles of associations shall be registered at the trade registry of the place where company headquarters are located at and announced on Turkish Trade Registry Gazette within thirty days following the date of signing by the founders before authorized personnel at trade registry directorate. Provision of first clause of article 36 shall not be applicable for the registered and announced articles of association other than the ones listed below: (1)(2) a) Date of articles of association. b) Commercial title and headquarters of the company. c) Area of activity of the company with reference points identified and defined; duration of the company if there is a relevant provision in articles of association. d) Nominal value of the registered capital. e) Name and surname, residential address of natural person partner; titles, headquarters and registered capital shares of each legal person partner. f) Subject of capital in kind and registered capital shares to be granted against this kind of capital; subject, other party and contrary deed undertaken by the company in the event of taking over a non-monetary asset; content and value of special interests. g) If foreseen, number of dividend shares and the content of rights granted to these. h) Names, surnames or titles and residential addresses of directors and other persons authorized to represent the company. i) Form of use of representative power. j) Residential address, headquarters, and (if any) branch registered to trade registry (…)(3). k) Privileges, additional obligations or side deed obligations foreseen in the articles of associations, reference, contact, preliminary purchase, return and purchase rights in relation to registered capital shares. l) Form and type of announcements to be made by the company and form of notification by directors to partners if there is a relevant provision in the articles of association.

Because the aforementioned article provides the opportunity to make arrangements for reference or contact in the event of transfer of privileges, additional obligations, side deed obligations and transfer of shares in limited liability companies, in other words broadens the limits, reflection of arrangements made by family constitution or shareholders contract on the articles of association is rather easier and convenient compared to joint stock companies.

In the light of these considerations, it is evident that the place of family constitution in the practice should be reinforced. Consequently, apart from the type of the company, the provisions established by the family constitution shall be incorporated within the Articles of Association of the Corporation and the Shareholders’ contract as much as it is allowed by the law and also each and every family member shall sign the family constitution. Through this, stability can be ensured and long-running family corporations can be established.

NOTE: Aforementioned company types, Joint Stock and Limited Liability Company, are the company organizations in Turkish laws. It should not be forgotten that these structures may be different at international levels.

Bibliography:

“‘Türkiye’deki Işletmelerin Yüzde 95’i Aile Şirketi.’” Hürriyet Ekonomi, Hürriyet, 4 Oct. 2017, www.hurriyet.com.tr/ekonomi/turkiyedeki-isletmelerin-yuzde-95i-aile-sirketi-40599291.

Özel, Sibel, and Hatice Selin Pürselim. Atipik Sözleşmelere Uygulanacak Hukuk . On İki Levha Yayınları, 2020.