Affiliation and dependency reports required by companies in Turkey

July 2013 | EXPERT BRIEFING | CORPORATE LAW

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The new Turkish Commercial Code No. 6102 (NTCC) came into effect on 1 July 2012. NTCC introduced a new set of provisions regarding group and affiliate company operations. These provisions aim to establish a certain level of transparency regarding the relationship between parent companies, their group, subsidiary and affiliates.

These new provisions impose certain obligations on controlling and controlled companies and their affiliates. One of the most significant obligations imposed under the NTCC is the obligation to draft a report on the company’s relations with controlling and dependent companies (‘Affiliation Report’, also commonly referred to as ‘Dependency Report’).

According to Article 195 of the NTCC, if the headquarters (domicile office) of at least one of the companies considered to be part of a company group is located in Turkey, the provisions of NTCC relating to group companies shall apply. Thus, such companies are under an obligation to issue an annual Affiliation Report as noted in Article 199 of the NTCC within the first three months of the following fiscal year (that is, the end of March for standard fiscal year applications in Turkey).

Therefore, it is important to first understand which group of companies are regarded as a ‘company group’ as defined in NTCC. Such determination shall be made in accordance with the provisions set forth in Article 195. Accordingly, if a company, whether directly or indirectly, holds the majority of the voting rights or has the right to ensure the election of members forming a resolution quorum in

the management body of another company in accordance with the articles of association; or has the majority of the voting right of another commercial company alone or with other shareholders or partners based on a contract in addition to its own votes; or if a company is able to hold another company under its control in accordance with a contract or through other means; or if a company is able to keep another company under its control pursuant to an agreement or contract or otherwise; the first company will be deemed as the controlling company and the latter company will be deemed as the dependent (affiliate) company. In addition, if a company holds the majority shares of another company or sufficient number of shares to make the decisions enabling it to manage the company, this first company shall be deemed as the controlling company of the latter, until proven otherwise.

Article 199 of NTCC stipulates that all affiliated or subsidiary companies shall draft an annual Affiliation Report. It is important to mention at this point that, even if the controlling company holds 100 percent of the shares of the affiliate company (in other words, total control), the affiliate company is still obliged to draft an Affiliate Report. Therefore, once it is determined that a controlling company exists, the subsidiary of that controlling company with a domicile in Turkey is obliged to issue this Affiliation Report.

Article 199 explains the content of an Affiliation Report. Accordingly, this report shall contain the following issues: all legal transactions conducted or refrained from, or in favour of the controlling company or an affiliate of the controlling company; remarks on the suitability, necessity and benefit of the measures taken, and remarks on the consideration and counter considerations relating to any of such legal transactions including discontinuance of present arrangements; transactions that contain considerable risks and remarks relating to necessary precautions and measures taken; and any incurred losses arising from such transactions and remarks relating to covering such losses.

Although NTCC provides an elaborate set of provisions, since the Affiliation Report is a new concept, there is some confusion regarding the application of such provisions and the format of the actual report (there is no published format). One of the important uncertainties currently being experienced is whether or not the affiliate (dependent) company should also report transactions conducted with its own subsidiaries (in addition to transactions with the affiliates or subsidiaries of the controlling company). In practice it is currently believed that such transactions are not required to be reported within the Affiliation Reports.

The Affiliation Reports shall be drafted by the managing body of the affiliate (dependent) company – that is, the board of directors for joint stock companies and the board of managers for limited liability companies; and shall be submitted at the general assembly of the shareholders at their annual year-end closing meetings that must be held within the first three months of the following fiscal year.

It is important to note that there is, as yet, no regulation detaining registration and announcement requirements for Affiliation Reports. Therefore, in practice, submission at the general assembly meetings of shareholders is considered sufficient. It should also be noted that there are no immediate penalties or fines set forth for late submission of these reports (following the first three months of the fiscal year closing); however, in general, failure to comply with NTCC and failure to issue an Affiliation Report is subject to judicial fines imposed on members of the management body between 4000 and 73,000 Turkish Lira.

According to Article 199/3 of NTCC, the Affiliation Reports are connected with the annual activity reports of company managements and are another obligation imposed on capital companies by NTCC. According to such provision, the concluding section of the Affiliation Report shall refer to and cite the Activity Report on the information, stating whether or not the company incurred any losses arising from transactions executed or refrained from and whether or not appropriate countermeasures were taken or not. Therefore, the measures taken against the losses suffered due to transactions with the controlling company or its affiliates shall be mentioned at the annual activity report of the company management in line with the information presented on such transactions in the Affiliation Report.

In conclusion, dependent (affiliate) companies as defined in Article 195 of NTCC, whether in the form of a joint stock or limited liable company with their domicile in Turkey, must issue an annual Affiliation Report in accordance with Article 199 of NTCC. This report must be submitted to the general assembly meetings of shareholders, held within the first three months following the closing of a fiscal year.

Ali Yurtsever is a lawyer and Orhan Yavuz Mavioğlu is a managing partner at ADMD Law Office. Mr Mavioğlu can be contacted on +90 (212) 269 56 61 or by email: yavuz.mavioglu@admdlaw.com.

Ali Yurtsever and Orhan Yavuz Mavioğlu

ADMD Law Office