Liability of Board Members in Joint Stock Companies under Turkish Commercial Code

The Turkish Commercial Code (TCC), specifically Law No. 6102, regulates the duties and responsibilities of board members in joint stock companies (Anonim Şirket). Board members hold a position of significant responsibility and are accountable for their actions and decisions, as well as for any negligence that may harm the company or its shareholders. Understanding these liabilities is vital for foreign and local investors and board members alike, as failure to comply can lead to severe financial and legal consequences.

• Board members are entrusted with the company’s governance and must act in the best interest of the company and its shareholders. The TCC mandates that board members must carry out their duties with due care and in good faith.
• Article 369 of the TCC requires board members to avoid conflicts of interest and to refrain from using their position for personal gain. They must always prioritize the company’s interests over personal benefits.

• The duty of care requires board members to perform their roles with the care that a diligent and prudent person would exercise in a similar position. This includes making informed decisions based on thorough analysis and reasonable grounds.
• The duty of loyalty requires board members to act honestly and not engage in activities that could conflict with the company’s goals. Violations of these duties can lead to personal liability.

• According to Article 553 of the TCC, board members can be held personally liable for any damages caused to the company, its shareholders, or third parties due to their negligent actions or breach of duties. This liability applies even if the board member’s actions were unintentional, provided that negligence can be proven.
• Board members can also be liable for damages resulting from failure to comply with laws or regulations, including financial mismanagement or failure to adhere to corporate governance standards.

• The TCC holds all board members jointly and severally liable for any damages caused by decisions made collectively by the board. This means that each member of the board can be held fully responsible for the entire amount of damages, regardless of individual involvement in the decision-making process.
• Board members may seek recourse against each other if they believe one member acted negligently or fraudulently.

• In cases where board members violate the provisions of the TCC, criminal sanctions may also be imposed. These violations include, but are not limited to, embezzlement, fraudulent transactions, or misrepresentation of the company’s financial status.
• Article 562 of the TCC outlines the penalties for violations, which can range from fines to imprisonment, depending on the severity of the misconduct.

• Shareholders and creditors have the right to file legal claims against board members if they believe their actions have caused damage to the company. Legal proceedings can be initiated in both civil and criminal courts, and in some cases, bankruptcy administrators may also hold board members accountable.

• Board members may delegate certain tasks to third parties (such as executive directors or managers) under Article 367 of the TCC. However, this delegation does not absolve the board members of responsibility; they must still ensure that the delegated parties perform their duties properly.
• The defense of delegation is only effective if the board members have taken reasonable steps to monitor the delegated tasks and ensure compliance.

• Board members may also be relieved of liability if the General Assembly of shareholders approves their actions or omissions. This approval must be explicit, and the shareholders must be fully informed of the decisions being approved.

• Joint stock companies in Turkey are permitted to take out liability insurance for their board members, covering potential financial losses arising from their duties. This insurance provides protection but does not cover actions taken with intent to cause harm.

• In recent years, Turkish courts have shown increased scrutiny of board members’ actions, particularly in cases involving financial mismanagement or failure to disclose material information. There is growing emphasis on ensuring board members act transparently and with integrity.

• The TCC has introduced several corporate governance reforms aimed at enhancing the accountability of board members, including stricter reporting requirements and mandatory disclosure of potential conflicts of interest. These reforms align Turkish corporate governance with international best practices, making it more attractive for foreign investors.

• Under the Turkish Commercial Code, board members in joint stock companies carry significant responsibilities and are held accountable for their actions. From personal and joint liability for damages to potential criminal sanctions, the risks for board members are substantial if they fail to perform their duties with due care and loyalty. Understanding these liabilities and taking proactive measures, such as ensuring compliance with legal provisions and obtaining liability insurance, can help mitigate risks.