TURKEY | Draft Turkish Commercial Code The principal legislation concerning corporate governance in Turkey is essentially included in the Commercial Code, which has been amended several times since its enactment in 1956. A Draft new commercial code has been recently prepared and is currently pending before the Turkish Grand National Assembly. The Justice Commission accepted the 1535-article draft in April 2007 and the Code of Obligations, comprising 649 articles. The Draft aims to regulate commercial relations in line with the recent changes in the local and global business environment as well as technological and legal developments including EU legislation. Historically, the Turkish Commercial Code and Civil Code are based on the German and Swiss systems. The new code is expected to improve Turkey‟s business environment, and allow the country to rank higher in the next World Bank‟s “Doing Business” report. If implemented, the code could increase the audit marketplace from about 1,000 companies well into the 10,000s – with about 40 to 50 firms that have the capability and capacity to serve companies bound by the new commercial code requirements. Although a threshold for the new rules has not been set, industry sources have suggested the code could apply to companies with assets exceeding TRY6m ($3.9m), a turnover of TRY12m or a payroll of 50 employees or more. Today, only about 1,000 Turkish companies are subject to mandatory audit requirement.

The Draft is with the Turkish Parliament and may be passed in March 2011.

Draft consists of six main Chapters:

o Company Law o Enterprise Law o Securities Law o Transportation Law o Maritime Commercial Law o Insurance Law

The Company Law will have a significant impact on Turkish commercial life.

What are the changes introduced by the New Code?

The main changes under the Company Law can be summarized as follows:

The corporate governance approach of the Draft is based on four pillars: (1) Full transparency (2) Impartiality (3) Accountability (4) Responsibility.

The Draft introduces a simple, plain, practical and unique system for public incorporation.

The Draft enables the incorporation of a joint-stock company (“AŞ”) and a limited liability company (“Ltd”) with a single shareholder and a single partner, respectively. This change will abolish the requirement of incorporation by minimum five shareholders for AŞ and minimum two shareholders for Ltd. In parallel with this amendment, under the Draft, a Board of Directors may consist of one person and the necessity that the Board Members have to be shareholders has been removed which allows independent board members. In addition, legal person entities are allowed to become board members.

The Draft, for the first time in Turkish law, regulates group companies, i.e. the relations between the parent company and its subsidiaries which are subject to the same principles and policies.

The Draft ensures transparency by means of the company's internet site. Accordingly, each capital company‟s internet site reserves a certain part of the website specifically for stakeholder information. All reports, particularly all announcements, financial statements and auditor reports should be included on the site. In addition, the internet site shall provide the means for electronic general assembly and board meetings and also for electronic voting.

Financial statements have to be prepared in conformity with the Turkish Accounting Standards to be published by the Turkish Accounting Standards Board and which are in compliance with the International Financial Reporting Standards (IFRS).

The Draft states an entirely new system for the audit of companies. Accordingly, the audit performed by an auditor who does not have to be specialized regarding the subject matter and which is actually considered as one of the company's obligatory positions, has been replaced by an independent audit to be exercised through an independent audit firm or sworn financial advisers (YMM) and independent accounting financial advisers (SMMM) by the new regulation. The Turkish Auditing Standards are to be issued by an autonomous board. Turkish Auditing Standards will be in full conformity with International Standards on Auditing.

The general assembly cannot adopt any resolution based on the financial statements over which a qualified, adverse or disclaimer of opinion has been issued.

The board of directors shall prepare and submit to the general assembly the annual report together with the financial statements and its annexes. The annual report of the board of directors has to reflect the company's flow of activities as well as its financial status in every aspect in a correct, complete, true and honest manner.

There will be a stipulation for the members of the Board of Directors as to the proportion of them which will have a graduate degree.

Professionalism and specialization in bodies have been emphasized which require establishing a mechanism with respect to: internal controls, internal audit, risk identification and assessment and financial planning.

The Draft has arranged the structural changes regarding companies, namely spin-off, merger and conversion, in 60 articles. Most of these provisions relate to securing the benefits of the partners, the partnership creditors, protecting the workers and protecting their rights and receivables. After the new Code, incorporations, limited partnerships with a shared capital, unlimited companies, limited partnerships and cooperatives may merge; while mergers of same type companies were possible previously. Existence of a minus balance sheet or a balance sheet that is deeply involved in debt does not preclude a merger.

Conversion of the company types is made simpler. Provisions are introduced for Prevention of Unfair Competition and Consumer

Protection. False or misleading declarations such as „high quality, low price‟ or unending campaigns of „end of season sales‟, aggressive door-to-door marketing and dishonest behaviour in instalment selling and consumer credits will be deemed as an unfair competition.

The draft legislation will introduce malpractice insurance for doctors and other professionals.

Any form of company included in the Turkish Commercial Code is acceptable for foreign investment.

Here are some relevant points from the Draft for JOINT-STOCK COMPANIES Establishment The ultra vires principle (i.e. that company cannot operate outside its area of activity) which exists in the current law will not be valid when the draft law comes into force. Gradual formation of the companies which exists in the current law but is not common in practice will not be valid in the new law. The public establishment principle of offering the stock publicly at the outset was accepted instead of gradual formation. According to the current law, joint stock companies are established with at least five shareholders. However, the draft provides one shareholder establishment opportunity. Also, the company has a right to be operated in case the number of shareholders decreases to one shareholder. Therefore, decreasing number of shareholders does not cause the dissolution or liquidation of the company. However, the Trade Registry must be informed about the situation within seven days. Capital Whether public or non-public, there are two types of capital; principal and registered capital. According to the draft for non-public joint stock companies minimum principal capital is 50.000-TL and minimum registered capital is 100.000-TL, for public joint stock companies minimum principal capital is 50.000-TL. It is quite obvious that the draft gives an opportunity to have registered capital to the non-public joint stock companies and this makes public joint stock companies and non-public joint stock companies closer. According to the draft all property ownership, including intellectual property rights and virtual environments which do not have limited real rights, legal attachments, and which can be utilized as cash and transferable can be used as capital. However, unpaid debts cannot be invested as capital. Board of Directors According to the current law the board must contain a minimum three members, but according to the draft the board can contain only one member. According to the law in force the board members must be shareholder but the draft does not have such an obligation. According to the law in force legal entities cannot be board members but the draft allows legal entities to be board members. There is a significant amendment in the draft which is an obligation to have board members with university degree. In one-membered boards, the only member has to have university degree. According to the law in force the quorum is more than half of the total members, but according to the draft the majority is enough. Information and Internet Site Stock corporations are required to have an internet site and allocate it information according to the draft. The internet site should contain the required announcements of the company, general board meeting documents and announcements, audit reports, financial tables, valuation reports, dissolution announcements, shareholders and shareholding structures, information about voting, question and answer information and annual reports. Audit Joint stock companies will be audited by independent auditing firms or independent accountant and financial advisors and sworn financial advisors. Auditor will be determined according to the scale of the company. Accordingly, large scale companies will be audited by independent accountant firms, small and medium scale companies will be audited by financial advisors or sworn financial advisors.

LIMITED COMPANIES General The draft makes some amendments on limited companies. Limited companies become more similar to joint stock companies. Limited companies which cannot present dividend share according to the law in force, can present dividend share according to the draft. According to the draft, dividend share rules of joint stock companies will be applied to limited companies. Audit is one of the rules which make limited companies similar to joint stock companies. According to the draft auditor and process auditor rules of joint stock companies will be applied to limited companies. Establishment According to the law in force limited companies can be established with minimum two shareholders but now limited companies can be established with only one shareholder according to the draft. Also the draft makes the establishment process easier. Capital and Shares Minimum capital for limited companies is 5.000-TL according to the law in force but the draft makes minimum capital 25.000-TL. According to the draft all property ownership, including intellectual property rights and virtual environments which do not have limited real rights, legal attachments, and which can be utilized as cash and transferable can be used as capital. Credit and debts cannot be invested as capital. Also cash capital must be paid at once. Liability Bankruptcy of limited company‟s shareholder does not cause bankruptcy of the company according to the draft. Also according to the draft, dissolution of the company by reason of a shareholder‟s personal debt does not exist. Accordingly, the creditor of the shareholder can make a claim on the shareholder‟s shares without dissolution of the company. Exiting the Shareholding The current law regulates the situations for leaving the shareholding and the exclusion of shareholding. Accordingly, the shareholder has a right to demand exclusion for justifiable reasons or demand exclusion from the court with approval of the shareholders who have more than half of the principle capital of the company. The draft has more protection than the law in force about leaving and exclusion. The leaving reserve is not enacted in the current law but is enacted in detail and the maturity date specified, so the exiting shareholder is protected. ends