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)