New principles: The updated commercial code will boost transparency and auditing standards

The present Commercial Code – the basic law governing companies – has been in force since 1957 almost without modification. Its replacement has now been enacted and comes into force in stages. The first main stage is expected to be implemented on July 1, 2012.

THE CODE: The new law’s requirements include: • Every company must maintain a website. The website must publish the company’s financial statements (starting from the 2013 statements). Until now there has been no public access to financial statements, which were usually given only to the shareholders, the tax office and any lending banks.

• Information on the remuneration of senior management must be disclosed on the website.

• Explanations of the company’s corporate governance principles and risk management policies must also be disclosed. Until now, there had been no requirement for companies to have such policies in place, let alone disclose them. Moreover, internal audit must be established.

• The concept of groups of companies, under a holding company, is introduced for the first time. Group reporting is also established. Under the old arrangements, consolidation was never considered.

• The published financial statements must be independently audited. Only 5000-6000 companies in Turkey are independently audited, so this provision represents a vast expansion of the audit requirement.

• The financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS).

• The new governance principles must include clear delineation of duties, including at the board level, with board committees such as an audit committee and risk management committee. Reporting lines must be defined.

• The old requirements for at least two shareholders in a limited company (Ltd. Şti.) and at least five in a corporation (A. Ş.) will no longer apply; a company may have a single, 100% shareholder.

• Directors no longer have to hold shares, and a director need not be a real person, it can be corporate.

But at least one-quarter of the directors must have further education and directors must not be indebted to the company.

• The articles of association of each company will have to be redrafted to comply with new requirements.

• Interim dividends will now be possible, as will share options to employees.

• There are new prohibitions on loans to and from shareholders, an area of considerable abuse under the old law.

• Improvements are introduced in shareholders’ rights to company information.

• Minority rights are strengthened.

• New possibilities are granted for electronic communication; for example, board meetings may be held by video link instead of by physical attendance.

• There are extensive changes to shares and the processes for capital increases, public offers, mergers and de-mergers.

IMPACT: There are currently more than 700,000 companies in Turkey. We expect that this number will be slimmed down as shareholders close down or merge inactive companies to avoid these new requirements.

At least 300,000 companies are likely to be affected, and, therefore, the transformation will take substantial time and effort. Doubts have been expressed about whether the new law will be implemented thoroughly, and on time. The author of new codes, Ünal Tekinalp, has said it is an “encouragement law, not a penalty law” but still there are penalties for failing to comply: up to three months in prison for failure to create and maintain a website, for example.

For foreign investors, the law is good news. By making information about each company more available, the law should also allow a much better understanding of the actual position of each sector within the Turkish economy. This should be helpful in ensuring investment reaches the most promising industries.