OBLIGATION OF LOYALTY FOR SHAREHOLDERS IN LIMITED LIABILITY COMPANY 19 April 2024
A limited liability company is a capital company established by shareholders uniting towards a specific purpose. Therefore, it is imperative to always prioritize the common goal and protect the company's interests over the personal interests of the shareholders.
According to Article 613 of the Turkish Commercial Code ("the Code" or "TCC"), a duty of loyalty is imposed on the shareholders of a limited liability company. Under Article 613/2 of the TCC, shareholders must not engage in behaviors that could harm the interests of the partnership. The duty of loyalty encompasses obligations such as acting honestly towards the partnership, avoiding causing harm to the partnership, considering the interests of other shareholders regarding the partnership, and supporting the objectives of the partnership. Within this scope, the obligations of confidentiality and non-competition are among the most significant obligations regulated by law. Per the mandatory nature of Article 613 of the TCC, these include the duty of confidentiality and the prohibition of competition.
- Obligation of Confidentiality
According to the first paragraph of Article 613 of the Code, shareholders of a limited liability company are obliged to protect the company's secrets. Although not defined in the law, in doctrine, facts related to the company's economic area, known to certain individuals, not easily learned by others, having a protectable interest for the company, and desired by the company to be kept confidential, are defined as secrets. Shareholders, due to their close relationship with the company, must not disclose company secrets they acquire and must not exploit them to the detriment of the company. Since limited liability companies are capital companies with a personal element predominating, the confidentiality obligation expressing the shareholders' loyalty to the company is mandatorily regulated. Unlike other obligations, the confidentiality obligation cannot be waived by the company contract or general assembly resolution. Evaluating the confidentiality obligation requires considering the relationship between the shareholder and the company. For example, the duties of a shareholder living far from the company's headquarters and having a weak personal relationship with the company differ from those of a shareholder with a strong personal relationship with the company.
2. Prohibition of Competition
According to the second paragraph of Article 613 of the Code, shareholders cannot engage in behaviors that could damage the interests of the company. The prohibition of competition means the ban on economic activities that compete with the partnership. The act of harming the company's interests encompasses any behavior that could deteriorate the company's condition, negatively affect investments, or obstruct the activities related to achieving the company's objectives. The relevant provision expressly prohibits shareholders from engaging in transactions that provide them with a personal benefit and harm the company's objectives. As it is known, shareholders of a limited liability company are limitedly liable for the company's debts, and their partnership rights are linked to capital. Therefore, since it cannot be said that they are directly subject to the prohibition of competition, it must be explicitly included in the company contract. This prohibition can be included in the articles of association prepared during the formation phase or through an amendment to the articles of association at a later time.
The obligation of loyalty encompasses all shareholders, including managers. However, according to the fourth paragraph of Article 613 of the Code, activities contrary to the obligation of loyalty and the prohibition of competition can be undertaken if all other shareholders give their consent. This approval may also foresee the general assembly's approval decision in lieu of direct consent.
