The process for revision of the Swiss corporate law was initiated in 2007, and the process continued for some time1. During this process, the reform on accounting law and excessive compensation of managers, separately, entered into force, and the corporate law reform was delayed. On 28 November 2014, the Federal Council published a new draft bill on the Swiss corporate law reform, and the Draft Bill on Corporate Law Reform2 ("Draft") was submitted for consultation on 15 March 2015.
The draft makes provisions in different areas. In general, the Draft covers revision on capital structure, shareholders' rights, excessive compensation of managers, and other provisions that are not directly relating to corporate law. This newsletter addresses the substantial revisions proposed by the Draft, and comparison of these revisions with the Turkish Commercial Code ("TCC").
Provisions on Capital Structure
Art. 621 of the Draft allows for share capital to be in foreign currency. Accordingly, actions concerned with the share capital, such as the formation of legal reserves, distribution of dividends, and determination of over-indebtedness, may be determined in foreign currency. The purpose of these provisions is to eliminate the inconsistencies between corporate law and accounting rules that already allow for accounting in foreign currency. In accordance with Art. 332/1 of the TCC, the minimum amount of share capital is stipulated in Turkish Liras. Additionally, Art. 70/1 of the TCC provides that financial statements shall be prepared in Turkish, and using Turkish Lira. The Tax Procedural Law ("TPL") provides an exemption regarding bookkeeping in foreign currency for certain companies (Art. 251/1 and 2 of TPL). Except for those as stated, there are no provisions in Turkish Law that allow accounting and capital denomination in foreign currency.
Another provision proposing an amendment of capital structures is Art. 632 of the Draft that sets forth an obligation to pay the total share price at the time of the capital increase and the foundation. The relevant provision aims to prevent the issuance of bearer share certificates before payment of the total amount of the share price, and to comply with the practice to pay the total share price prior to registration. Pursuant to Art. 344/1 of the TCC, 25% of the price of the shares subscribed in cash shall be paid prior to registration, and the remaining amount shall be paid within 24 months. Considering the provisions on protection of the capital provided by the TCC (for example Art.(s) 349, 358, 480/3, 482, 483, 484 etc. of TCC) and the special provisions regarding certain types of companies (provided by the Capital Markets Law ("CML"), the Banking Law, etc.), adoption of such amendment may deter shareholders from establishing joint stock companies due to the high amounts that must be paid prior to the registration.
Furthermore, the Draft abolishes the minimum nominal value of one centime (100 centime=1 Franc), and provides that the shares may have any value greater than zero centime (Art. 622/4 of Draft). The relevant provisions aim to liquidate the shares by splitting them when necessary. However, the Draft does not abolish the system of the nominal value; therefore, all shares shall have a nominal value. The TCC also adopts the system of a nominal value, but it provides that a minimum nominal value of the shares shall be 1 kuruş (100 kuruş=1 TRY) and its multiples (Art. 476/1 of TCC). Moreover, it is not permitted to issue shares under this minimum nominal value even if that the company's economic conditions require such issuance (Art. 476/3). Exceptionally, public companies may issue shares at the price determined on the stock exchange 30 days prior to the public disclosure of the resolution on a capital increase if such amount is below the nominal value (Art. 18/1 of the Communiqué on Shares VII-128.1).
In addition, the Draft abolishes the provisions on the acquisition of assets. It is stated that such provisions were incompatible with the principle of legal certainty, and similar consequences may be attained through the provisions on protection of capital, and responsibilities of the managers. Art. 356/1 of the TCC provides a detailed provision on the acquisition of assets. The fact that the provision of the TCC is restrictive and definite, as well as similar to the provision set forth by the European Union ("EU") Directives, renders this provision compatible with the principle of legal certainty. However, it should be noted that the scope of Art. 356/1 may be amended in such a way to limit the transaction with shareholders and related persons instead of all transactions in order to promote legal certainty.
Another significant reform provided by the Draft is the adoption of the system of capital band (fluctuation du capital). Accordingly, the general assembly may authorize the board of directors to increase or decrease the share capital for a maximum period of 5 years (Art. 653(s) of Draft). The purpose of this reform is to render the capital changes more flexible and overcome the procedures provided in order to protect the creditors. As the system of capital band is similar to the system of registered capital, the provisions regarding registered capital are abolished. Pursuant to Turkish law, the decrease of capital falls under the authority of the general assembly, and shall not be conferred to any other body (Art. 408/1/a of TCC). The provision setting forth that the provisions regarding the decrease of share capital shall apply to the decrease of registered capital (Art. 473/6 of TCC), triggered different opinions from amongst scholars. However, the prevailing opinion accepts that an explicit provision is required in order for the board of directors to be authorized to decrease the registered capital. Therefore, the relevant provision does not authorize the board of directors to decrease the capital3. As a result, including the registered capital system, the general assembly resolution is required in Turkish Law in order to decrease the capital.
Except for those stated, the Draft includes certain provisions on facilitating the distribution of legal reserves (Art. 671 of Draft) and allowing the distribution of interim dividends (Art. 675 of Draft).
Provisions on Shareholding
The draft includes provisions on the controversial issue of dispo shares (actions dispo) that signify the problem regarding the holders of the nominative shares which are not registered in the company's share register. The owners of the shares shall not be registered automatically to the company's share register unless they request to be registered, and shareholders who are not registered in the share register shall not exercise their right to vote. By reason of dispo shares, the quora may not be attained in the general assembly, a lower majority may control the company, or other similar problems may appear. In order to overcome such problems, certain solutions are already adopted, such as a presumption that the depositor is deemed to be the shareholder in terms of exercising the rights that arise from the shares; however, the solutions resulted in new discussions. The Draft also provides for the general assembly to resolve that shareholders who exercise their right to vote be entitled to benefit from up to 20% higher dividends (Art. 661 of Draft). In addition, the Draft obliges the listed companies to provide an electronic means for shareholders to request registration in the share register (Art. 686b of Draft). Pursuant to Turkish Law, the shareholders shall be registered in the company's share register upon their request, and only the holders of the nominative shares registered in the share register may exercise their right to vote in the general assembly (Art. 417/2 of TCC). However, the transfer of the shares registered to the Central Registry Agency ("CRA") shall be registered in the company's share register in accordance with the records of the CRA without any request (Art. 13/6 of CML). The interpretation of this provision is controversial among scholars, and various of them state that the relevant provision does not allow for automatic registration by the company in the share register.
Furthermore, the Draft provides a right to demand written information from the board of directors for the shareholders of the unlisted companies. The board of directors shall respond such requests at least twice a year. In addition, the information provided by the board of directors shall be disclosed at the first general assembly meeting and immediately at the electronic media (Art. 697/2 and 3 of Draft). Pursuant to Turkish Law, shareholders do not have any right to demand information apart from the one which can be exercised during the general assembly meeting. Additionally, contrary to the provisions of Swiss Law, Turkish Law does not require the exercise of the right to demand information to be necessary to exercise other rights arising from shareholding.
The Draft aims to eliminate difficulties caused by the procedures to exercise the shareholding rights and reduce the thresholds in order for the shareholders to exercise their rights without any hindrance. In this respect, the Draft reduces the thresholds regarding the right to request special audits, convene the general assembly, add items to the agenda, and propose motions on the items on the agenda. However, the TCC sets forth higher thresholds to exercise the above-stated rights of the minority shareholders. The most significant reform regarding the procedure is that shareholders may request from the court to rule for payment of expenses that arise from claims regarding the liability of, or restitution by, the company. Pursuant to the TCC, the court shall decide for the distribution of the litigation expenses and attorney's fee between the company and the shareholders in the event that the factual and legal causes, as well as equity principles, justify such distribution (Art. 555/2 of TCC). However, Turkish Law does not provide for any procedure whereby the company may be held liable for expenses incurred prior to the initiation of the relevant lawsuits.
Except for as stated above, Art. 701c of the Draft allows for electronic general assembly meetings, which is also provided by Art. 1527 of the TCC.
Excessive Compensation of Managers
As above-mentioned, the process regarding corporate law reform was initiated in 2007; however, the reform concerning the excessive compensation of managers took priority. After the referendum, in January, 2014, the Ordonnance contre les rémunérations abusives dans les sociétés anonymes cotées en bourse4 (Ordinance Regarding the Excessive Compensation of the Managers in Listed Companies) ("ORAb") entered into force. The Draft legislates regulations introduced by the ORAb, and also adopts certain new provisions.
In this respect, the general assembly shall determine direct or indirect compensation paid to the board of directors' members and other managers. The general assembly shall adopt a resolution on compensation (indimnité) every year, and such resolutions shall be binding upon the company. In addition, the Draft determines certain types of compensation that are prohibited, per se, or under certain circumstances (Art. 735c of Draft). Sign-on bonuses and non-compete covenants are accepted by the Draft, provided that they fulfill certain conditions provided by the Draft. Furthermore, the Draft and the ORAb provide that compensation of managers in listed companies shall be presented in the compensation report.
Pursuant to the TCC, financial benefits of the boards of directors' members, such as attendance fees, remuneration, and premiums shall be determined by the articles of association or General Assembly (Art. 394/1 of TCC), and the authority to determine such financial benefits shall not be transferred (Art. 408/2/b of TCC). However, if such decision endangers the financial situation of the company, the minority shareholders have only a small chance to prevent such decision from being adopted. In addition, pursuant to the corporate governance principles, compensation policies of the company shall be presented on the website of the company (4.6.2 of Annex-1 of the Communiqué on Corporate Governance). It is also provided that the remuneration and all other financial benefits granted to the board of directors' members and executive managers shall be publicly disclosed via annual activity report (4.6.5 of Annex-1 of the Communiqué on Corporate Governance). However, beyond those stated, there are no other provisions in Turkish Law stipulating any obligation to disclose the compensation of managers, or to control excessive compensation. It should be noted that financial benefits granted to managers that may affect the financial stability of the company shall be controlled more strictly.
Other Provisions
The Draft also includes certain reforms on arrangement with creditors and over-indebtedness. Accordingly, liquidity shortage of the company, the fact that company's assets do not cover two-thirds of the aggregate of capital and legal reserves, the fact that losses of the previous activity year exceed one-half of the capital pursuant to the balance sheet of the relevant activity year, the company's loss in three consecutive years, and serious concerns with respect to over-indebtedness of the company, are considered to be signals of over-indebtedness (Art. 725a and 725b of Draft). Art. 376 of the TCC is an adaptation of the relevant provision of the Swiss Code of Obligations; however, because of the changes at the phase of adoption of the relevant provision, Art. 376 causes certain issues amongst scholars.
In addition, the Draft includes provisions regarding limitations of the companies that are subject to the obligation of consolidated accounting, gender quota of 30% in management, and the obligation of disclosure by companies exploiting natural resources.
Conclusion
The reform on Swiss corporate law was reconsidered on 29 November 2014 with the Draft. The Draft includes various reforms in different fields. The reform on the capital structure of companies aims to harmonize the provisions on capital structure with other rules, and to harmonize such provisions with current necessities. Additionally, the reform on shareholding facilitates the exercise of the rights of shareholders. The Draft also includes several provisions on excessive compensation of managers, which offers a legislative base to the ORAb. The Draft reinforces financial stability of companies by proposing a more effective system of notice of over-indebtedness. Furthermore, provisions on gender quotas, as well as companies that exploit natural resources are also included in the Draft. Due to the scope of the Draft, it is not expected for these amendments to enter into force prior to 2017.
Footnotes
1. For detailed information, please see: Rapport explicatif relatif à la modification du code des obligations (droit de la société anonyme).
Please see: https://www.bj.admin.ch/dam/data/bj/wirtschaft/gesetzgebung/aktienrechtsrevision14/vn-ber-f.pdf
2. Please see: https://www.bj.admin.ch/dam/data/bj/wirtschaft/gesetzgebung/aktienrechtsrevision14/vorentw-f.pdf
3. Please see: Tekinalp Ü., Sermaye Ortaklıklarının Yeni Hukuku, İstanbul 201, p.119; Tanrıverdi A., Sermaye Azaltılmasına İlişkin Güncel Sorunlar, TBB Dergisi, Ocak-Şubat 2015, Year: 27, No: 116, p. 312; Manavgat Ç. (Kırca/Şehirali Çelik): Anonim Şirketler Hukuku, Cilt I, Ankara 2013, p. 337-338.
4. For the text in German, please see: https://www.admin.ch/opc/de/classified-compilation/20132519/index.html
For the text in French, please see https://www.admin.ch/opc/fr/classified-compilation/20132519/index.html
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