I. Introduction

A "Group of Companies" can be defined as affiliated companies which have a relationship of control between them. Pursuant to the Turkish Commercial Code No. 6102 ("TCC"), a group of companies shall be formed by minimum three companies with at least one company having control over the other two. Such control relationship can occur pursuant to an actual control, such as holding the controlling shares in the company, or it can occur pursuant to an agreement concluded between companies. While a group of companies does not collectively constitute a separate legal entity, correctly determining their existence is crucial for ascertaining additional liabilities and obligations of the group of companies and the individual companies within the control relationship.

II. Dominant Companies

Under Article 195 of the TCC, dominant companies are those which, either directly or indirectly, (i) hold the majority of voting rights, (ii) have the right to appoint members to the managing body which can make up the quorum of decision, or (iii) make up the majority of the voting rights, solely or together with other shareholders or partners pursuant to an agreement alongside their own voting rights, of another company, or (iv) control another company pursuant to an agreement, or by other means.

Moreover, as per Article 196/2 of the TCC, the presumption of a control relationship shall be established where a company holds the majority of the shares of another company or has sufficient shares to adopt resolutions pertaining to management. In such case, the first company shall be the dominant company (i.e. the parent company) and the second company shall be the subsidiary. The TCC's provisions on group of companies shall be applicable if one of the companies' headquarters is located in Turkey in such control relationship, regardless of where the dominant enterprise resides.

III. Domination Agreements

Turkish law recognizes domination agreements and stipulates that they give rise to control relationships. Domination agreements are defined under Article 106/1 of the Trade Registry Regulation No. 2012/4093 ("Regulation") as "agreements concerning the unconditional authority of one of the parties to instruct the managing body of the other corporate entity, where the parties have no direct or indirect subsidiary relationship; or where parties remain independent and isolated despite any subsidiary relationship which may exist." Pursuant to the foregoing provision, such domination agreements confer management powers. Accordingly, under a domination agreement, the dominant company gives instructions to the affiliated company regarding fundamental matters in respect of its management, including the appointment of executive level managers and setting business goals. Instructions are not required to be made in a certain form. However, only stock corporations, (which are, according to the TCC, the joint stock company, limited company or limited partnerships (commandit) with capital divided into shares) are allowed to execute domination agreements.

The Regulation states that those agreements which require the borrower to obtain consent from the lender institution prior to transactions that may jeopardize the re-payment of their loans do not constitute domination agreements, per se. That said, provided that the conditions under Article 195 of the TCC are met, the existence of such an agreement does not eliminate the control relationship between the companies. In addition to loan agreements, Article 106/5 of the Regulation stipulates that "agreements concerning the management of the company by all or part of the shareholders and their relevant rights and obligations on the same, which are signed between the shareholders but where the company itself is not a party," shall not constitute a domination agreement. Similarly, the existence of such shareholders` agreements does not remove the control relationship, if the conditions under Article 195 of the TCC are met.

The word "instruction" as contained in the relevant legislation is construed widely, to encapsulate all kinds of directives and decisions which are perceived to be binding. On the other hand, mere recommendations and advice will not be construed as "instructions," as long as they are not intended to be binding.

IV. Procedural Formalities of Domination Agreements

As per Article 106/2 of the Regulation, domination agreements must be (i) approved by the general assembly of the subsidiary, (ii) registered with the trade registry office which the subsidiary is registered with, (even in the cases where the residence or headquarters of the party having the authority to give instructions is located abroad, the agreement is executed outside Turkey, or is governed by foreign laws) and (iii) announced in the Turkish Trade Registry Gazette.

Regarding the formalities of the domination agreements, there is no express requirement for the domination agreements to be in writing. However, given that the registration can only be completed if the agreement is in written form (and also translated and notarised if they are drafted in a language other than Turkish), the domination agreements will most certainly need to be in writing.

On the other hand, under Article 198/3 of the TCC the parties to a domination agreement cannot evade their liabilities and obligations arising from the domination agreement by not having the agreement registered with the trade registry. However, failure to register willinvalidate the rights and authorities of the controller of the group of companies arising from the domination agreement. In other words, not registering a domination agreement will deem the domination agreement invalid for the controller of the group of companies, whereas, in order to protect the creditors and shareholders, the dominant companies will remain liable against the said parties.

V. Conclusion

One way of controlling/establishing dominance over a company is executing a domination agreement. Under Turkish law, the domination agreements' validity depends on the satisfaction of procedural formality requirements. On the other hand, in the case of non-registration, liabilities and obligations arising from domination agreements shall be upheld and parties to the agreement shall be barred from arguing invalidity of the agreement due to non-registration.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2021. A link to the full Legal Insight Quarterly may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.