Liability Lawsuits under Laws of Turkey

Understanding Liability Lawsuits under Turkish Law - Part A

Introduction

The term "Liability" has been used extensively in the context of the law. In simple terms, it indicates the legal responsibility a person owns for his/her actions. Liability is mostly governed by the contract and customs of tort when the situation involves a tortious liability. Failure to comply with the responsibility shall result in liability lawsuits for any resulting damages from being claimed. The Turkish Commercial Code (TCC) has been thorough and relatively extensive in addressing the prospects of legal recourse by means of liability lawsuits as a form of 'legal action'.

Director/Management Liability

Director liability is governed primarily by Article 553(1) of the TCC, under which the provision implicates individuals, such as but not limited to directors, liquidation officers and corporate officers, as liable for arising losses if they are found to have negligently breached their obligations that evolve from the applicable laws and articles of association. 

Understanding Breach of Duty 

The concept of 'Breach of Duty' under the TCC is wholly dependent on certain conditional factors. Firstly, it must be established that there has been a violation of a statutory obligation by way of a negligent act. Secondly, the said obligation would only form the basis of a potential violation if it has been expressly conveyed to the individual under the periphery of the TCC. 

Direct Loss and its Entailing Repercussions 

The activation of a claim to a direct loss is dependent on the said loss being such that it has either resulted in a decrease in value or prevention of a potential value increase of the company's and shareholders assets. Additionally, a direct loss can also be claimable by creditors if it deems to have recognized a statutory violation that has led to a decrease in value or prevention of a potential value increase of the company's assets. 

Likewise, the Turkish courts have also gone above and beyond to further widen the aforementioned precedent, to include intentional fraud committed by management in the form of striping corporate assets by means of fictitious transactions. 

Further, if the company carries reasonable grounds to believe that a said loss has been incurred due to mismanagement, it must then conduct a shareholders meeting, which must affirmatively vote in favour of initiating proceedings citing 'direct loss' concerns. Thereafter, the company must decide on appointing directors for proceeding with the claim on behalf of the company's positive interests. 

However, if the court recognizes the board in its entirety to be culpable of the said violation, it will assume the responsibility of appointing a third-party representative for the purpose of initiating and proceeding with a claim under 'direct loss'. Moreover, in such an event, the court will replace the current board with a new board if it recognizes culpability on the part of the former. 

In the event of the court recognizing culpability, the courts under Article 367 (2) would deem the director(s) to be jointly and severally liable for their negligent acts resulting in them becoming liable.

Indirect Loss and its Entailing Repercussions

The activation of a claim to an indirect loss is dependent on the said loss being exclusively inflicted on the company's assets. Therefore, an action may only be brought about by the company to assert its claim to a direct loss. 

Although, it is noteworthy that a shareholder could raise a separate cause of action under the ambit of Article 555 (1) of the TCC. However, under either of the aforementioned eventualities, the compensation will only be received by the company and not the shareholder. Contrastingly, an action under indirect loss by a shareholder does not require affirmative approval by way of a shareholders meeting. Similarly, such claims to indirect losses are subject to a limitation period of six months under Article 558 (2).

Likewise, as under Article 556 (1), creditors also gain a right to claim indirect losses, provided the company under concern has filed for bankruptcy, and the company has not filed for a liability lawsuit. In this event, the creditor gains the added advantage of being entitled to litigation proceeds on a priority basis that is higher in the ranking than that of the shareholders and bankruptcy estate. On the contrary, if the creditor is not steadfast in raising its claim, then its standing would drop in priority, as per Article 556 (2).

Litigation Costs

It is also noteworthy that in claims seeking indirect losses, courts carry the discretion to equitably redistribute litigation costs based on the value of compensation paid to the company and the specific facts of the case at hand. 

Understanding Causation

In order to better understand liability arising from a breach of duty, it is imperative to assess the connection between a negligent act and the arising loss thereafter. Formally, this connection is referred to as 'causation', which the courts rely on to assess individual liability on the part of the shareholders. 

Relief

Shareholders or directors can seek relief from potential liability by means of 'delegation' as a form of liability relief. Article 367 (1) of the TCC clearly indicates the pathway for shareholders to either partially or totally delegate the management to other director(s) or third party. 

More specifically, in order to begin 'delegation', the director(s) must adhere to certain procedural norms. Firstly, the director(s) are required to make and modify the articles of association via majority consensus to initiate delegation procedures. Likewise, the board is also required to formalize an administrative plan by way of an 'internal directive'. Moreover, it is this document that outlines the duties and obligations upon delegation. Further, an 'internal directive' must be followed by a formal board resolution to lay the route map for the newly appointed director(s) by way of a delegation. 

On the contrary, certain duties such as the macro-management of the company and its maintenance are non-delegable directorial duties in nature. Nonetheless, upon successfully delegating one's duties, it deprives and defends itself of any prospective third-party liability claims. 

Secondly, another mode of relief is to exercise 'release'. In essence, the relief of release negates any possibility of liability lawsuit, provided the breach of duty had been fully known to the board. Under such circumstances, having full knowledge of the prevailing circumstances would equate to shareholder consent. Likewise, as per the 'Statue of Limitations', it must be noted that a shareholder shall waive its right to initiate liability action if its previously voted in favour of a release request. 

Onus on Proving Burden of Proof

Despite having discussed the various routes to establishing liability on the part of the director(s), it must be noted that director liability does not constitute a strict liability. It is also imperative to note that the lack of specificity with respect to the burden of proof under Article 553 (1) places the onus on the plaintiff to prove their claims of director negligence. This, upon closer reviewal, places the plaintiff in a detrimental position because of the limitation posed against him or her in gathering internalized corporate documents. This, in turn, under Article 553 (3) acts as a protective cloak protecting directors from their potential liabilities.  

Conclusively, it is evident that although directors within companies are susceptible to liability suits, they are sufficiently protected through the aforementioned relief mechanisms. 

Shareholder Liability

In the event of a breach of stipulated conditions within the shareholders' agreement, an individual shareholder is within his capacity to bring about simultaneous liability lawsuit proceedings against another shareholder. Moreover, such breaches would, in turn, prompt either a claim to remedy or compensation to the non-breaching party shareholder. 

An Eventuality: Absence of a Shareholders Agreement

The notion of loyalty is one that has been greatly contested in the Turkish legal landscape, as there has been no enshrined provision catering to the former. This has been further elucidated by Article 480 of the TCC, which only establishes a relationship between a shareholder and its company on the basis of a renewable capital payment subscription. 

On the contrary, companies have recognized the importance of acting in 'good faith' and in the collective best interests of the company, which naturally trickles down to the shareholder level. Moreover, this sense of 'loyalty' between shareholders tends to be generally textualized within the memoranda of association, prompting shareholders to act in accordance with the two aforementioned principles.  

Perceived Duty of Loyalty between Partners in an Equity Joint Venture

The setting of an equity joint venture is the pathway individuals tend to take prior to incorporating a company under the virtues and regulations of the Turkish Commercial Code. More specifically, in beginning such a venture, the individuals would enter into a partnership agreement that stipulates the conditions and obligations central to that venture. 

Further, Article 626 of the Code of Obligations clarifies the centrality of such a partnership agreement and how partners must solely act in their personal and collective interests vis-à-vis the equity joint venture. 

This area is further supplemented with the provisions under Article 628, which places a 'duty of care' on partners to act in a manner such as he would ordinarily in his personal business. Thus, the duty of loyalty exists beyond perception in the case of an intra-shareholder partnership behind an equity joint venture. 

Understanding Statute of Limitations

In the event where there is an establishable intra-shareholders agreement and a violation contravening with its principles, it would be imperative to assess the nature of the concerning violation. Thereafter, if the violation is identified to be tortious in nature, a two-year limitation period would be imposed, whereas if the violation is contractual in nature, the limitation period would be ten years. Further, if the violation arises without an underlying partnership and there has been, then a possible cause of action would be deemed to be tortious in nature.

Recognizing Alternate Causes of Action

In the event of a loss due to unlawful dominance over not being compensated, a cause of remedy will be activated against each of the constituents of the controlled company. The intended purpose of this alternate action is to recoup the losses borne by the affected shareholder. 

Defining the Element of Control

Control, simply put, can be understood in terms of exertion of a level of control or dominance by the shareholder(s) in their pursuit to further the interests of the company. However, this sense of control and its legitimacy tends to become blurred in certain scenarios. 

In order to assess illegitimate 'control', companies tend to rely on an approach of 'comparative reasonableness', wherein a fictitious company's possible behaviour under specific circumstances would be relied upon to draw an inference vis-à-vis an exertion of abusive control. 

The use of control would be assessed differently depending on specific circumstances. The first nature of control would concern Article 202 (1) (a), wherein abusive actions by a controlling shareholder are cited to indicate damage on a subsidiary. Additionally, the use of unlawful control could also arise in the case of unjustifiable material transactions taking place at the subsidiary level, as elucidated in Article 202 (2). 

Relief against Possible Liability Claim

Establishing a 'duty of care' is a primary requisite towards finding a legitimate claim in liability due to abusive actions. Likewise, as previously noted, the bar for 'duty of care' is sufficiently high, and the element of 'burden of proof' makes it all the more cumbersome to prove. This, in turn, acts as a likely mechanism of relief against possible liability claims. However, it must be noted that this pathway to relief does not exist in cases where unjustifiable material transactions have taken place at the subsidiary level. 

Alternate Causes of Action: Liability

The fraudulent misrepresentation and forgery of documents would give rise to a cause of action under Article 549 of the TCC. Moreover, it is noteworthy that the aforementioned cause of action does not require a 'burden of proof' being a strict liability in nature. However, in order to find liability on the part of those issuing the misrepresented documents, proof of negligence must be established. Likewise, other causes of action include inaccurate declarations, fraudulent valuations, known payment incapacity and an unauthorized public offering. 

Conclusively, it can be understood that both directors and shareholders derive liabilities based on their acts or omissions.