1.      Introduction

A legal entity is defined as "groups of persons organized as entity on
its own and independent property groups constructed for special object"
under Article 47 of the Turkish Civil Code No. 4721 ("TCC"). Under Turkish
laws, legal entity owns its assets; such assets are dedicated to the purposes
of the legal entity and legal entity is liable only with such assets. Legal
entity is entitled to be part to the legal transactions as an independent
person, separately from its founders and is liable for such transactions
against third parties.

Likely, shareholders of joint-stock
companies ("Company") are not responsible for any transaction of the Company
but the Company itself is responsible for such transactions. Liability of the
shareholders of the Company is limited and no additional liability can be set
forth against the shareholders. This constitutes "the principle of separation"
between the shareholders and the Company and "a veil" between the shareholders
and third parties. In some cases, the shareholders of the Companies may benefit
from this separation, damage the Company and third parties by hiding behind the
independent structure of the Company. The theory of piercing the corporate veil
which has been first introduced and developed by the American Laws has been then
accepted and applied by Turkish courts in order to prevent misuse of the
principle of separation.

This theory aims to
prevent inequitable result derived by the persons hiding behind the Company by
lifting the corporate veil.

1.     Non-liability
of the Shareholders of the Companies

In principle, the only liability
of the shareholders of the non-public Companies is to pay capital subscription as
per Article 480 of the Turkish Commercial Code No. 6102 ("TCC") which is
referred to as the "principle of single debt" in the doctrine. As this article
is amongst the mandatory provisions of the TCC, any provision of the articles
of association of the Company or the general assembly resolution contrary to
such principle shall be invalid. Said that, there are exceptions to such
principle under the TCC as follows: (i) the shareholders would be obliged to
pay agio (premium) in addition to the share price if it is set forth to issue
shares having a price higher than their nominal value under the articles of
association of the Company or general assembly resolution; (ii) the articles of
association of the Company may impose on shareholders to fulfill certain
obligations of recurring and non-monetary character in addition to the
obligations arising from capital subscription in the Company which the share
transfer is subject to Company's approval; (iii) obligation of loyalty of the
shareholders; and (iv) several notification requirements under the TCC (e.g.
Article 198 of the TCC).

Accordingly, any debt of the
Company could only be demanded from the Company but not from the shareholders
or affiliated companies of the Company. Although this is an essential principle
of corporate law and debt enforcement and bankruptcy law, Turkish courts may
rule that the real person or/and legal entity shareholders misuse this
principle and are liable for the debts and legal transactions of the Company.
Like so, third parties may apply the shareholders due to the debt of the
Company.

2.      Piercing the veil of incorporation

As mentioned above, "piercing
the veil of incorporation" is not the general rule but an exception that only
the courts may resolve on and under certain circumstances. In case the
shareholders commit fraud or breach a liability arising from an agreement or
damage third parties unlawfully by hiding behind the Company, this would constitute
breach of Article 2 of the TCC, among other regulations e.g. Article 50/3 of
the TCC, which states that in exercising rights and in
performing duties, every person must act in accordance with good faith and that
the law does not protect explicit abuse of a right. This article brings the
prohibition of the abuse of rights as a general limitation as the lawmaker is
aware of the impossibility of the regulation of each and every kind of relation
between persons.

As there is no specific
legislation regulating the issue of "piercing the corporate veil" under Turkish
laws, the circumstances which require piercing the corporate veil have been set
forth and developed by the jurisprudence of the Turkish courts based on the
foregoing Article 2 of the TCC, the principle that
the law does not protect explicit abuse of a right. The circumstances
where piercing the corporate veil applies can be listed as follows:

3.1.Assets or Areas of
Shareholders and the Company Blending into Each Other

The "principle of single debt" is
based on the separation of the assets of shareholders and the Company. In some
cases, such separation would not be possible due to the accounting fraud or
other reasons as it may not be clear whether some individual assets belong to
the Company or shareholders. Allocation of the corporate vehicle to the use of
a shareholder or transfer of an asset of an affiliate company to another by the
mother company can be given as examples to such case. In that case, real person
or legal entity shareholder would not be able to allege the separation of the
assets and would be responsible for the debts of the Company with its own
assets.

3.2.Deficiency of Equity
Capital

Deficiency of equity capital occurs
when shareholders do not fulfill their liabilities about payment of the capital
subscription or when the Company does not have a share capital adequate to
cover its activities. In case the Company carries out its activities with an
insufficient equity, the shareholders would not benefit from the principle of single
debt. That said, insufficient equity would not be enough for piercing the
corporate veil on its own and the courts would seek existence of other
conditions reflecting the misuse of the Company before piercing the corporate
veil.

3.3.Dominance of a
Particular Group on the Company

In case of abuse of the Company
by its shareholders for their other commercial benefits, dominance of a
particular group on the Company would be questioned. If dominance causes loss
of third parties, the principles of separation of assets and independence would
not be applicable and the areas of responsibilities and assets of the Company and
its dominant shareholders would be considered as a whole.

Accordingly, 19th
Civil Chamber of Court of Appeals (2005/8774 E., 2006/5232 K., 15.05.2006)
considers that "...although different legal
entities...seem to exist, their shareholders...are the same at the time of the
agreement...The concept of different legal entities cannot be taken into account...The
conflict between the parties has to be assessed within the framework of good
faith and equity...These companies should be jointly liable for the debt...".

A recent decision of the 9th
Civil Chamber of Court of Appeals (2015/2147 E., 2016/11690 K., 10.05.2016)
reveals that "the organic link between
the such companies are determined by the addresses of the companies, scope of
their activities, their shareholders and representative being the same and the
legal relation between them. The claim is that the company uses other companies
as shell companies and the representatives, addresses and scope of activities
of these companies are the same and therefore there is an organic link between the
defendant companies...".

3.     Conclusion

Under
Turkish laws, the Company and its shareholders have separate assets and are
deemed as separate persons and in principle none of them is liable for the
other's liability. Although this is the rule, in case the corporate veil is
used for a fraud or a breach of the contract or in order to damage third
parties by hiding behind the corporate veil, Turkish courts would assume this
as the misuse of the principle of separation of the Company and shareholders
and in order to secure the justice they would hold the shareholders behind the
corporate veil liable. In any case, the implementation of Article 2 of the TCC
should be in an exceptional and limited manner as the principle of separation
is essential.

Authors:Gönenç
Gürkaynak Esq., Nazlı Nil Yukaruç and Gülşen Pazarbaşı of
ELIG Gürkaynak Attorneys-at-Law

(First published by Mondaq on September 7, 2018)