DAMAGE TO THE COMPANY CAUSED BY A MEMBER OF THE BOARD OF DIRECTORS IN A JOINT STOCK COMPANY AND ITS CONSEQUENCES 9 October 2023

WHO ARE THE MEMBERS OF THE BOARD OF DIRECTORS AND HOW ARE THEY ELECTED?

According to the abrogated Turkish Commercial Code No. 6762 (''Former TCC''), the members of the board of directors must be shareholders of the company at the same time; however, according to the Turkish Commercial Code No. 6102 (''TCC''), the requirement for the members of the board of directors to be shareholders at the same time has been abolished.

The number of members of the board of directors is determined by the articles of association of the company. Pursuant to the Former TCC, the board of directors must consist of at least 3 persons, whereas pursuant to Article 359 of the TCC, the board of directors may consist of one or more persons. While the first board of directors formed after the incorporation of the company is determined by the articles of association, the subsequent boards of directors are elected by the shareholders holding the majority of the votes in the general assembly.

WHAT ARE THE DUTIES AND AUTHORITIES OF THE BOARD OF DIRECTORS?

According to the TCC, there is a separation of functions between the board of directors and the general assembly. While the general assembly may take decisions in areas authorised by the law and the articles of association of the company pursuant to Article 374 of the TCC, the board of directors is authorised in all areas excluded from the general assembly.

Furthermore, according to Article 365 of the TCC, the board of directors is the management and representation body of the company. In this context, the members of the board of directors are the legal representatives of the company, and the legal relationship between them and the company is based on a contract of mandate. The rights, debts and commitments arising from the transactions and agreements made by the board of directors with third parties by using the mentioned representation authority belong to the legal entity of the company, and the board members are not personally liable to third parties.

HOW CAN THE MEMBERS OF THE BOARD OF DIRECTORS CAUSE DAMAGE TO THE COMPANY?

If the members of the board of directors violate their obligations arising from the law or the articles of association of the company, their liability will be raised. The legal liability of the members of the board of directors against the company is regulated under Art. 549 and the following articles of the TCC.

According to Article 553 of the TCC, certain conditions must be fulfilled at the same time for the legal liability of the members of the board of directors to arise. Pursuant to the aforementioned article, the members of the board of directors must violate their obligations arising from the law or the articles of association of the company, the violation must arise as a result of a negligent behaviour, damage must occur and there must be a causal link between the negligent behaviour of the relevant member violating his/her duty and the damage. Therefore, the members of the board of directors may cause damages to the company as a result of the breach of their legal responsibilities.

First of all, it should be noted that the board member may be held liable for all kinds of actions committed intentionally, grossly negligently or slightly negligently while fulfilling his/her duties.

The damage arising from the breach of this obligation may be direct or indirect damage. Direct damages can be counted as a decrease in the assets of the company, an increase in its debt, or the inability to make a profit. Indirect damage, on the other hand, is the indirect damage to the company's receivables or shareholders as a result of damage to the company (for example, a bankruptcy decision).

If there is no appropriate causal link between the above-mentioned damages and the misconduct of the members of the board of directors, the board of directors may not be requested to compensate the damages.

In terms of fault, the duty of care of the board of directors regulated under Article 369 of the TCC is a criterion taken into consideration when determining whether the members are at fault. A member of the board of directors who fails to exercise the diligence of a prudent manager shall be held liable to the extent that he fails to exercise such diligence. The board members may be held liable for any damage caused to the interests of the company, if such damage arises as a result of any fault and breach of the director's duty of care, and if the above-mentioned conditions are met.

WHAT CAN BE DONE IF THE BOARD OF DIRECTORS CAUSES DAMAGE TO THE COMPANY?

According to Articles 555 and 556 of the TCC, in addition to the legal entity of the company, shareholders and creditors of the company may also bring a liability action against the members of the board of directors due to the damages incurred by the company.

An important issue in such liability actions is which party bears the burden of proof. Pursuant to Article 553/1 of the TCC, the members of the board of directors would be liable "unless they prove that they are not at fault". However, with the amendment made to the said article paragraph, the phrase "unless they prove that they are not at fault" has been removed from the text, and a regulation has been introduced whereby the party claiming that the members of the board of directors are at fault has the burden of proof.

In addition, pursuant to Article 555 of the TCC, the shareholders may only demand the payment of the compensation to the company in the liability lawsuit to be filed against the members of the board of directors of the company. In other words, the shareholders may file this lawsuit on behalf of themselves, but on behalf of the company.

While the competent court for the relevant lawsuit is the Commercial Court of First Instance, the competent court is the court where the company's head office is located.