Modernising corporate law: An up-to-date legal code will make for a healthier economy

The Turkish economy has emerged from the world’s most recent financial troubles relatively unscathed. That, coupled with its image as a star performer among emerging markets, has made the country a favourite destination for foreign capital. As a result of both this inflow of foreign capital and the accumulation and livening of domestic capital, the amount of large-scale investments in Turkey has drastically increased over the last few decades. The changing nature of investments has made the old Turkish Commercial Code (TCC), which was enacted in the 1950s, seem increasingly outdated, and, as a result, the parliament has taken the initiative to comprehensively overhaul corporate law and rework it to fit the modern business environment.

To avoid any downturn and to stabilise the economy, one of the government’s priorities has been to replace the “hot money” coming in from abroad with more stable foreign direct investment (FDI). The changes brought about by the new TCC will contribute immensely towards this goal, by assuring foreign investors of a safe and stable legal system to protect their interests. The new TCC, which will go into effect on July 1, 2012, will give global investors protection matching, if not exceeding, what they have come to expect in their home jurisdictions, and remove whatever negative effect Turkey’s outdated commercial jurisprudence may have had on FDI.

THE NEW TCC: The new TCC will bring numerous innovations to commercial law. The overarching theme of the reformulation of the legislation will be the recognition of the distinction between publicly and closely held companies. The law will widen the gulf between the treatment of joint-stock corporations and limited liability partnerships, with the joint-stock corporation being cultivated as the format organised for an eventual public float, whereas the limited liability partnership will retain the properties that make it the form of choice for closely held companies. The law will achieve this result through its differential treatment of the two forms of association with respect to the availability of share buybacks, the enforceability of option rights and the permissibility of share transfer restrictions, and other similar subtle differences.

Another major innovation brought by the new TCC will be its reform of the corporate governance principles applicable to corporate bodies. It will allow for easier delegation of duties to smaller groups within the board or to company management. This change, together with a shift to the liability regime that will allow for a closer matching of responsibility with liability, will enable companies to recruit more knowledgeable directors, and increase the efficiency of Turkish businesses.

A further change on the corporate law front that will dovetail with the new TCC will be the change to the Capital Markets Law. The Capital Markets Board has recently announced a new draft of this law that will integrate discrete strands of the law into a coherent whole.

A new Code of Obligations will also go into effect on July 1, 2012. Most of the changes in this body of law will affect the relationship between employers and employees, and between lessors and lessees.

While the effects of these changes will tend to be more directly felt in relations among Turkish citizens, an updated law of contracts will no doubt result in the economy operating more efficiently.

BENEFITS: With its volatile current accounts balance, the country is in a promising but potentially precarious position in these first years of the second decade of the 2000s. A similar predicament in the early 2000s, which unfortunately culminated in the 2001 financial crisis, yielded an overhaul of the economic system, which ended up securing a more solid footing for the Turkish economy from that point forward. The most recent major changes on the legal scene have come at the urging of less dramatic but no less powerful forces. The modernisation of Turkish law will undoubtedly help the country draw in more stable foreign investment, and result in a healthier economy through the efficiency-oriented changes that it will bring.