Groups of Companies in Turkey: When a Parent Controls a Subsidiary, the Ban on Causing Loss, Compensation Claims, Group Reports and Minority Rights (TCC 195-209)

A foreign group that owns a Turkish subsidiary may move cash, staff, contracts and guarantees between its companies. A Turkish joint venture partner who holds forty per cent of a company controlled by an international group will want to know what happens when the group decides that the Turkish company should lend money to a sister company, give a guarantee for the parent's bank loan or stop investing. The Turkish Commercial CodeTTKTurkish Commercial Code No. 6102The statute that governs merchants, companies, commercial paper, insurance and carriage — the framework a foreign business actually operates inside.Glossary → (TCC, Law No. 6102) answers these questions in a dedicated chapter on groups of companies (şirketler topluluğu), Articles 195 to 209. This guide explains when one company counts as the controlling company (hâkim şirket) and the other as the controlled company (bağlı şirket), why the rules also reach a foreign parent, the reporting and notification duties, the central rule that control may not be used to cause the subsidiary a loss unless the loss is offset within the same financial year, the compensation and share-purchase claims of minority shareholders and creditors, the special regime for wholly owned subsidiaries, and the special audit. It is written for foreign parent companies, their Turkish managers, minority partners and creditors of Turkish group companies.

1. When Is a Company "Controlling"? The Tests in TCC 195

The group chapter begins with a definition. Under TCC 195(1), one commercial company is the controlling company and the other the controlled company if the first, directly or indirectly:

1. holds the majority of the voting rights in the other; or
2. has the right, under the articles of association, to secure the election of the number of members of the management body needed to form a decision-making majority; or
3. together with its own votes, forms the majority of the voting rights alone or together with other shareholders or partners on the basis of an agreement; or
4. can keep the other company under its control by contract or in another way.

If at least one of these companies has its head office in Turkey, the provisions on groups of companies in the Code apply (TCC 195(1), last sentence). A Turkish subsidiary of a foreign group is therefore inside the system, even if every other group company is abroad.

The Code adds a presumption. Outside the cases listed above, the fact that a commercial company holds the majority of another commercial company's shares, or enough shares to take the decisions that manage it, is a presumption that it controls that company (TCC 195(2)). Control exercised through one or more subsidiaries is indirect control (TCC 195(3)), and all companies connected directly or indirectly to the controlling company form, together with it, a group of companies; the controlling companies are in the position of parent and the controlled companies of subsidiary (TCC 195(4)).

Two further rules widen the net. Under TCC 195(5), Articles 195 to 209 and the other group provisions of the Code also apply where the party at the top of the group is an enterprise (teşebbüs) whose head office or residence is in Turkey or abroad; the controlling enterprise is deemed a merchant, and the provisions on consolidated statements are reserved. A foreign holding company, a fund vehicle or even an individual investor who runs a business can therefore be the controlling party. And under TCC 195(6), when these rules speak of the "board of directors", they mean the managers in a limited company, the managers in partnerships limited by shares and in partnerships, the management body in other legal entities, and the individual himself or herself where the controlling party is a natural person.

How the percentages are counted is set out in TCC 196: participation is measured by the nominal value of the shares against the capital, voting percentage by usable votes against all usable votes, the company's own shares (including those held by third parties for its account) are deducted, and, when counting the shares a commercial company holds in a capital company, shares held by its subsidiaries or acquired for its account and held by third parties are also counted.

2. Cross-Shareholdings, Notifications and the Control Agreement

Cross-shareholding. Capital companies that each hold at least one quarter of the other's shares are in a cross-shareholding (TCC 197). If one of them controls the other, the second is also a controlled company; if each controls the other, both are controlling and controlled. A capital company that knowingly enters into a cross-shareholding may use only one quarter of the votes and other shareholder rights attached to those shares; apart from the right to receive bonus shares, its other shareholder rights are frozen, and the shares are not counted for meeting and decision quorums (TCC 201(1)). This limitation does not apply where a subsidiary acquires shares in its parent or where the two companies control each other (TCC 201(2)).

Notification of thresholds. An enterprise that comes to hold shares representing 5, 10, 20, 25, 33, 50, 67 or 100 per cent of a capital company's capital, directly or indirectly, or whose holding falls below one of these levels, must notify the capital company and the authorities named by law within ten days of completing the transactions (TCC 198(1)). The acquisitions and disposals are disclosed under a separate heading in the annual activity and audit reports and announced on the company's website. Board members and managers of both the enterprise and the capital company must also notify their own holdings and those of their spouses, of children under their custody and of commercial companies in which these persons hold at least twenty per cent. Notifications are made in writing, registered and announced.

The sanction is practical: as long as the notification, registration and announcement have not been made, the voting rights and the other rights attached to the shares concerned are frozen (TCC 198(2)). A foreign buyer that crosses one of these thresholds in a Turkish capital company should therefore treat the ten-day notice as part of closing.

Control agreement. Where control rests on a contract, the control agreement (hâkimiyet sözleşmesi) is valid only if it is registered in the trade registry and announced (TCC 198(3)). The invalidity of such an agreement does not prevent the application of the group obligations and liabilities in the Code and in other laws: a parent cannot escape the group rules by leaving the contract unregistered.

3. Reports and Information Rights Inside the Group

The subsidiary's dependency report. Within the first three months of each financial year, the board of the controlled company prepares a report on the company's relations with the controlling company and with companies connected to it (TCC 199(1)). The report describes every legal transaction made in the previous year with the parent, with a company connected to the parent, or at the parent's direction for the benefit of the parent or such a company, and every other measure taken or avoided for their benefit. For transactions it states the performance and the counter-performance; for measures, the reason and the advantages and disadvantages for the company. If a loss was offset, it states how this happened during the year or which claim the company was given.

The report must follow the principles of true and fair accounting (TCC 199(2)). At its end the board states whether, on the facts known to it when each transaction or measure was carried out, the company received an appropriate counter-performance and whether any measure taken or avoided caused it a loss; if there was a loss, it also states whether the loss was offset. This concluding statement appears only in the annual activity report (TCC 199(3)).

Information for the parent's board. Each board member of the controlling company may ask the chair to have a report prepared and submitted to the board on the financial and asset position of the subsidiaries and their quarterly results, on the relations of the parent with its subsidiaries, of the subsidiaries with each other and with the shareholders of the parent and the subsidiaries and their relatives, and on their transactions and their results and effects, and to have its conclusion attached to the annual report and the audit report. Subsidiaries must hand over the necessary information and documents to the experts appointed for this work unless they prove a just cause for refusal that leaves no room for interpretation; a board member who makes the request for the benefit of a third party is liable for the consequences (TCC 199(4)).

Information for the parent's shareholders. Every shareholder of the controlling company may ask in the general assembly for satisfactory information, prepared on the principles of careful and truthful accounting, about the subsidiaries' financial and asset position and results, and about the relations and transactions within the group, including those with shareholders, managers and their relatives (TCC 200(1)). The general information right of shareholders in a joint stock company expressly extends to subsidiaries within the frame of Article 200 (TCC 437(2)).

4. The Central Rule: Control May Not Be Used to Cause a Loss Unless It Is Offset

TCC 202(1)(a) is the heart of the chapter. The controlling company may not use its control in a way that causes the controlled company a loss. In particular it may not lead the subsidiary to:

• enter into legal transactions such as transfers of business, assets, funds, personnel, receivables or debts;
• reduce or transfer its profit;
• restrict its assets with rights in rem or personal rights;
• assume liabilities such as giving a surety, a guarantee or an aval;
• make payments;
• take decisions or measures that adversely affect its productivity or activity, such as not renewing its facilities or restricting or stopping its investments without a just cause, or refrain from measures that would allow it to develop.

The prohibition has a built-in exception. The transaction is permitted if the loss is actually offset within that financial year, or if, by the end of that financial year at the latest, the subsidiary is given a claim of equivalent value, with a statement of how and when the loss will be offset (TCC 202(1)(a)). The Turkish system therefore does not forbid intra-group transactions as such; it forbids using control to cause the subsidiary a loss that is not offset in time. For a group treasurer this translates into a simple discipline: any cash pooling, intra-group loan, upstream guarantee or transfer of a business line that causes the Turkish company a loss needs a documented offset or an equivalent claim in its favour within the same financial year.

The Code also gives the defendants a defence measured against an independent company. No compensation can be awarded if it is proven that the board of an independent company, acting in good faith in the company's interests and with the care of a prudent manager, could also have carried out or avoided the loss-causing transaction under the same or similar conditions (TCC 202(1)(d)). A transaction that a stand-alone company would have made on the same terms is therefore defensible.

5. Who Can Sue: Shareholders, Creditors and the Court's Options

Shareholders of the subsidiary. If the loss is not actually offset within the financial year or an equivalent claim is not granted in time, every shareholder of the controlled company may claim from the controlling company and from those of its board members who caused the loss that they compensate the company's loss (TCC 202(1)(b)). The claim is brought by the shareholder, but the compensation is for the company's damage. On request or of its own motion, if it would be fair in the case at hand, the court may instead order the controlling company to buy the plaintiff shareholders' shares on the basis described in TCC 202(2), or adopt another appropriate and acceptable solution.

Creditors of the subsidiary. Creditors may also claim, under the same rule, that the company's loss be paid to the company, even if the company has not gone bankrupt (TCC 202(1)(c)). For a supplier or lender facing a Turkish subsidiary that has been stripped of cash by its group, this is a route that does not wait for insolvency.

Procedure. The Code applies by analogy the liability provisions of TCC 553, 555 to 557, 560 and 561 (TCC 202(1)(e)). Where the head office of the controlling enterprise is abroad, the compensation action is filed in the commercial court of first instanceAsliye ticaret mahkemesiCommercial court of first instanceThe specialised first-instance court that hears commercial cases — and, unless the law says otherwise, it hears them whatever the amount in dispute.Glossary → at the subsidiary's head office (TCC 202(1)(e)), which gives minority partners and creditors a Turkish forum against a foreign parent.

Managers of the subsidiary. The managers of the controlled company may ask the controlling enterprise to assume, by contract, all legal consequences of the liabilities that may arise for them towards shareholders and creditors under this article (TCC 202(5)).

6. Structural Decisions Imposed by the Parent: Compensation or Purchase of Shares

A separate remedy covers major structural decisions. Under TCC 202(2), where control is used to carry out a merger, demerger, change of legal form, dissolution, issue of securities or significant amendment of the articles, or a similar transaction, that has no clearly understandable just cause from the subsidiary's point of view, shareholders who:

• voted against the general assembly resolution and had their vote recorded in the minutes; or
• objected in writing to the board's resolution on such matters,

may ask the court to order the controlling enterprise either to compensate their loss or to buy their shares. The price is at least the stock-exchange value where there is one; where there is none, or the exchange value is not fair, it is the real value or a value set by a generally accepted method, using the data closest to the date of the court's decision. The claim is time-barred two years after the date of the general assembly resolution or of the announcement of the board resolution (TCC 202(2)).

Once the action is filed, the court orders that an amount covering the plaintiffs' likely loss or the purchase price of the shares be deposited as security in a bank chosen by the court in the court's name, and no step may be taken on the general assembly or board resolution until the security has been deposited (TCC 202(3)). If an action under paragraph 1 or 2 of Article 202 is brought in bad faith, the defendant may ask the plaintiffs to compensate its loss jointly and to deposit security with the court (TCC 202(3)). In mergers, demergers and changes of form, the other rights the Code gives shareholders in those procedures remain available (TCC 202(4)).

7. Wholly Owned Subsidiaries, the Special Audit and the Group's Reputation

Instructions in a 100% group. Where a commercial company holds, directly or indirectly, one hundred per cent of the shares and voting rights of a capital company, the parent's board may give the subsidiary instructions on its direction and management even if they may lead to a loss, provided that they are required by the group's defined and concrete policies; the subsidiary's organs must follow them (TCC 203). There is a hard limit: no instruction may be given that clearly exceeds the subsidiary's ability to pay, may endanger its existence or may lead it to lose important assets (TCC 204). Board members, managers and other persons of the subsidiary who follow instructions within Articles 203 and 204 cannot be held liable to the company and its shareholders for doing so (TCC 205).

Creditors keep a claim. If the loss caused by such instructions is not offset within that financial year, or an equivalent claim with its time and manner is not granted, creditors who suffered damage may sue the controlling company and its board members responsible for the loss (TCC 206(1)); the defendants may rely on the independent-company defence of TCC 202(1)(d), and TCC 202(1)(e) applies. For claims arising from loans and similar causes, the defendants escape liability if they prove that the creditor entered into the relationship knowing, or being bound by the nature of the business to know, that no offset had been made or no claim granted (TCC 206(2)).

Special audit. If the auditor, the special auditor or the committee for the early detection and management of risk has given an opinion indicating fraud or deceit in the subsidiary's relations with the parent or another subsidiary, every shareholder of the subsidiary may ask the commercial court at the company's head office to appoint a special auditor to clarify the matter (TCC 207). In a joint stock company, a special auditor may also be appointed at the request of any shareholder where the auditor has given a qualified opinion or refused an opinion on group relations, or the board has stated that the company was caused a loss by the group without an offset (TCC 406(1)).

Squeeze-out and reputation. The chapter also contains the parent's right, once it holds directly or indirectly at least ninety per cent of the shares and voting rights, to buy the minority's shares where the minority obstructs the company's work, acts contrary to good faith, creates noticeable trouble or acts recklessly (TCC 208), and a rule that the controlling company is liable for the trust created by the use of the group's reputation where that reputation has reached a level that inspires confidence in the public or in consumers (TCC 209).

8. The Group Remedies Compared

For foreign groups, three steps follow from the text: keep an annual record of every intra-group transaction with the offset or claim documented in the same financial year; make the ten-day threshold notifications at closing; and register any control agreement. For minority partners and creditors, the starting point is the subsidiary's dependency report and the information rights in the general assembly.

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