I. Introduction

Although competition undeniably fuels commercial progress, the misuse and abuse of the right to compete is nevertheless possible. Therefore, there are numerous regulations in our legislation that are introduced in order to draw the limits of the freedom of competition. This study analyses Article 396 of the Turkish Commercial Code No. 6102 ("TCC"), which prohibits board members from engaging in activities that compete with their companies.

II. Purpose of the provision and its nature in terms of being mandatory

In Turkish corporate law, there are special regulations regarding the behaviour of the members of the board of directors of joint stock companies in order to ensure fair practices and transparency and to prevent conflicts of interest. Perhaps the most important of these special regulations is the prohibition of competition stipulated under Article 396 of the TCC, the text of which is presented separately below, which is a special view of the obligation of loyalty and diligence imposed on the members of the board of directors by Article 369 of the TCC.

"VII - Prohibition of competition

ARTICLE 396- (1) Without obtaining the authorisation of the general assembly, a member of the board of directors may not engage in a commercial business that falls within the company's field of activity on his own account or on behalf of another person, nor may he enter into a company engaged in the same type of commercial business as a partner with unlimited liability.[1] The company is free to demand compensation from the members of the board of directors who act in violation of this provision or, instead of compensation, to deem the transaction as made on behalf of the company and to claim that the benefits arising from the contracts made on behalf of third parties belong to the company.

(2) The selection of one of these rights belongs to the members other than the member who has acted contrary to the provision of the first paragraph.

(3) These rights shall expire after three months from the date on which the other members of the board of directors have learnt that the commercial transactions in question have been carried out or that the member of the board of directors has entered into another company as a partner, and in any case after one year from the date of their realisation.

(4) Provisions regarding the responsibilities of the members of the Board of Directors are reserved."

The purpose of the prohibition of competition stipulated under Article 396 of the Turkish Commercial Code is to prevent the members of the board of directors from benefiting from the information and trade secrets on important issues such as the management and operation of the company, its customer environment and business potential, in favour of themselves or third parties, and thereby causing damage to the company or depriving the company of any benefit it may obtain. The purpose of the provision is not to limit the freedom of competition of the members of the board of directors, but to protect the interests of the company and the commercial order in general.2

As can be understood from the wording of the article, it is possible to perform an act falling within the scope of the prohibition of competition with the authorisation of the general assembly, and therefore, it is accepted in the doctrine that Article 396. For this reason, it is accepted in the doctrine that Article 396 is not a "mandatory provision" and is of a substitute nature, and therefore, the scope of the prohibition may be narrowed, expanded, and even the prohibition may be completely abolished.34

III. Scope of the Prohibition of Competition

According to Article 167 of the Constitution, the Turkish economy is based on the principle of free competition, while Article 48 of the Constitution guarantees the freedom of everyone to work, contract and establish private enterprises in the fields of their choice. Therefore, the right to compete or freedom to compete is a constitutional right, and the provisions regarding the prohibition of competition constitute an exception to these principles. For this reason, it is accepted in the doctrine that exceptional non-competition clauses should be interpreted narrowly.5 In this respect, the prohibition of competition stipulated under Article 396 of the TCC also should be interpreted according to the following limitations in terms of subject, term, location and individuals6:

  1. Subject: Article 396 of the TCC prohibits the members of the board of directors from (i) engaging in certain commercial transactions falling within the company's field of activity on their own behalf or on behalf of others, and (ii) entering into a company engaged in the same type of commercial transactions as a partner with unlimited liability. The doctrine adopts the view that the term "commercial transactions falling within the scope of the company's field of activity" covers the business that the company is actually engaged in, rather than the business specified in the articles of association of the company. Therefore, the transactions that are listed in the articles of association as the subject matter of the company's business but are not actually carried out by the company are considered outside the scope of the prohibition, whereas the transactions that the company is actually engaged in, even though they are not listed in the articles of association, are considered within the scope of the prohibition.7
  2. Term: The prohibition of competition stipulated under TCC 396 is not valid indefinitely; it starts with the acquisition of the board membership and ends with the loss of this title. However, it is possible for the prohibition to continue permanently or for a certain period of time after the loss of the membership, within the scope of "contractual non-competition", by concluding an agreement on non-competition between the relevant member and the company, or by adding a provision to this effect to the agreement signed with the member of the board of directors for the performance of his/her duties. In this case, a member who fails to comply with the prohibition may be held liable according to the agreement, not pursuant to Article 396 of the Turkish Commercial Code.
  3. Location: It is also possible to limit the prohibition of competition stipulated under TCC 396 in terms of location, and in this regard, it is argued that the prohibition is valid only in terms of the location and customer circle where the company conducts its business. In other words, it is considered outside the scope of the prohibition for the members of the board of directors to carry out a business, which is originally considered within the scope of the prohibition, outside the location and customer circle of the company.
  4. Individuals: The prohibition of competition stipulated under Article 396 of the TCC is a special form of the duty of loyalty and diligence, and as a rule, binds only the members of the board of directors. As a matter of fact, the doctrine unequivocally accepts that the prohibition of competition cannot be stipulated for shareholders in joint stock companies under the TCC.8 However, it may be useful to examine the following issues regarding the scope of the prohibition in terms of individuals;
  • In terms of executive directors (murahhas üye) and managing directors (murahhas müdür): Pursuant to Paragraph 1 of Article 367 of the TCC, boards of directors of joint stock companies may delegate the management partially or wholly to one or more members of the board of directors (executive director/murahhas üye) or to a third party (managing director/murahhas müdür), provided that the articles of association contain a provision to this effect. When the prohibition of competition stipulated under Article 396 of the TCC is evaluated in terms of the delegation of the management powers of the board of directors, although it is undisputed that the managing directors are subject to the prohibition due to their status as a member of the board of directors, it is controversial whether the third parties, namely the managing directors, to whom the management and representation powers are delegated, are within the scope of the prohibition. In this context, a doctrinal opinion argues that managing directors should also be considered within the scope of Art. 396 TCC. However, according to another opinion in the doctrine, these individuals are subject to the prohibition of competition stipulated under Article 553 of the Turkish Code of Obligations No. 6098 ("TCO") for commercial representatives, commercial agents and other merchant assistants, rather than Article 396 of the TCC.9 Since Article 369 of the TCC subjects third parties in charge of management to the duty of loyalty, just like the members of the board of directors, and since there is no difference between the executive directors and the managing directors in terms of the manner of exercise of authority and access to important information and documents regarding the operation of the company, we are of the opinion that the executive directors are also subject to the prohibition stipulated under Article 369 of the TCC. However, even if it is accepted that the managing directors are not subject to the prohibition stipulated under Article 369 of the TCC, the prohibition of competition introduced for the assistant merchants under Article 553 of the TCO shall apply to these individuals, albeit in a narrower scope. Since "being a partner" is not included within the scope of the prohibition under Article 553 of the TCO, even if it is possible for such individuals to become a partner in a company engaged in the same business as the company of which they are managing directors, it will not be possible for them to carry out a transaction falling within the scope of the prohibition of competition as a partner authorised to represent the company or as a member of the board of directors or as a director of the company.10
  • In terms of legal entity board members and their real person representatives: Pursuant to Article 359, Paragraph 2 of the TCC, legal entities may also be elected as members of the board of directors. Therefore, both the legal entity elected as a member of the board of directors and the real person representative acting on behalf of the legal entity are subject to the prohibition of competition stipulated under Article 369 of the TCC.11
  • In terms of temporary board members: Pursuant to Article 363 of the TCC, in the event of a vacancy in the board of directors due to resignation, death, etc., a temporary member is elected by the board of directors and submitted to the approval of the general assembly. According to the opinion accepted in the doctrine, the temporarily elected members of the board of directors are also subject to the prohibition of competition stipulated under Article 369 of the TCC, even if their membership is not approved by the general assembly, during their temporary term of office.12

IV. Authorisation Granted to the Members of the Board of Directors to Compete

In doctrine and practice, it is accepted that the members of the board of directors may be authorised to compete with the company (i) within the articles of association or (ii) by a resolution of the general assembly. The authorisation to be granted within this scope may cover all members of the board of directors, or may be granted in relation to an individual member. In addition, it is also possible that the permission to be granted may be customised in terms of a concrete work/action, in other words, the scope of the prohibition may be narrowed, although it is not completely abolished. However, in terms of the authorisations to be granted by the general assembly, attention should also be paid to the non-voting shares provision under Article 436/1 of the TCC. In other words, if the relevant board member himself/herself or his/her relatives listed in Article 436/1 of the TCC hold shares in the company, these individuals should not vote in the authorisation discussion of the relevant member.13 However, it should be noted that, as recognised in the decisions of the Court of Cassation, the deprivation of voting rights is only applicable to the members of the board of directors who have been granted a competition authorisation for themselves or their relatives specified in the law.14 In this respect, the provision differs from Article 436/2 of the TCC, which provides that all members of the board of directors are deprived of voting rights in release resolutions.

V. Sanctions for Breach of Non-Competition

  1. Scope of Sanctions

The sanctions for breaches of the prohibition of competition are stipulated in Article 369, Paragraph 1 of the TCC and the following optional rights are granted to the company in case of breach of the prohibition:

  1. To demand compensation for the damage,
  2. If the transaction is made by the member on his/her own account, to request the transaction to be deemed to have been made on behalf of the company,
  3. If the transaction is made on behalf of a third party, to request the transfer of the benefits arising therefrom to the company,
  4. If the violation is entering into another partnership dealing with the same subject matter as an unlimited liability partner, to request the relevant member of the board of directors to exit from this partnership or to transfer the benefits obtained from this partnership to the company.15

In addition to the above, it should be noted that a member of the board of directors who acts in violation of Article 369 of the TCC may be dismissed by the general assembly for just cause.16

Pursuant to Article 369, Paragraph 2 of the TCC, the other members who do not violate the prohibition shall decide which of the above-mentioned alternative rights shall be exercised. However, if the board of directors is unable to take a decision due to the excessive number of members violating the prohibition, the general assembly shall be authorised to choose which of the alternative rights shall be exercised.17 The way of exercising the rights must be through litigation in order to interrupt the statute of limitations.18

Finally, as mentioned above, Paragraph 4 of Article 369 of the TCC reads as "Provisions regarding the liability of the members of the board of directors are reserved." With the relevant paragraph, it is emphasised that the shareholders and company creditors may file a liability lawsuit against the relevant member within the scope of Article 553 of the TCC in respect of the damages arising from the unlawful acts of the members of the board of directors who act in violation of the prohibition of competition, thus ending the debates during the former Turkish Commercial Code No. 6762.19

ii. Statute of limitations

Pursuant to paragraph 3 of Article 369 of the TCC, the aforementioned alternative rights of the company in cases such as breach of non-competition are time-barred within 3 months after the other members of the board of directors become aware of the breach, or after 1 year has elapsed since the breach occurred.

VI. Conclusion

Although competition is one of the main driving forces of commercial progress, various legal regulations have been introduced to prevent the abuse of the right to compete. Article 396 of the Turkish Commercial Code explicitly prohibits board members from engaging in competitive activities against their companies. The scope of the prohibition of competition includes certain limitations in terms of subject, duration, location and individuals. In particular, the prohibition is limited only to the businesses in which the company is actually active, and a prohibition of competition is not imposed on the entire business, and the competitive activities of the members of the board of directors outside the location and customer circle in which the company operates are considered outside the scope of the prohibition. Article 369 of the TCC also stipulates various sanctions in case of violation of the prohibition. In this regard, in the event of a breach of the prohibition, the breached company has optional rights such as compensation for damages, deeming the transactions to have been made on behalf of the company, transferring the benefits arising from the transactions to the company, and the authority to exercise these rights belongs to the members of the board of directors who did not commit the breach. However, it is important to note that these optional rights are time-barred within 3 months from the date of realisation of the breach by the other members of the board of directors, and in any case, after 1 year from the date of the breach.

Footnotes

1. The definition of unlimited liability partner should be understood to mean that the members of the board of directors may not enter into ordinary and collective companies as partners, into limited partnership companies as limited partners, and into cooperatives as partners with personal and unlimited liability.

2. Aşık, P. (2017, p. 167). Prohibition of Competition in Joint Stock Companies (Art. 396 TCC). Journal of Ankara Bar Association, 2017(4). https://dergipark.org.tr/tr/download/article-file/542417

3. Aşık, P. (2017, p. 168-169).

4. There are also opposing views in the doctrine that the authorisation of competition cannot be granted in a general and abstract manner, and that the authorisation of competition should be granted to certain members of the board of directors by considering the personal situation of the relevant member. See: Günaydın Gültekin, B. (2022). Anonim Ortaklıkta Yönetim Kurulu Üyesinin Rekabet Yasağı (PhD Thesis, Galatasaray University Institute of Social Sciences, Department of Private Law), pp. 204-206.

5. Aşık, P. (2017, p. 169).

6. Aşık, P. (2017, p. 170).

7. Aşık, P. (2017, pp. 180-181).

8. Aşık, P. (2017, p. 173).

9. Aşık, P. (2017, pp. 176-178).

10. Aşık, P. (2017, pp. 176-178).

11. Aşık, P. (2017, p. 178).

12. Aşık, P. (2017, p. 179).

13. Aşık, P. (2017, pp. 186-190). See the case law of the Court of Cassation dated 11/12/2018 and numbered 2017/294 Merits and 2018/7825 Decision, it was stated that the article on authorising the members of the board of directors to carry out transactions with the company and to borrow money to the company in accordance with Articles 395 and 396 of the TCC and the articles regulating the Prohibition of Competition should be cancelled within the framework of Article 436 of the TCC, which regulates the article on deprivation of voting, since the quorum for the general assembly decision was not met due to the fact that the votes cast by the member were not counted.

14. For example, see the decision of the 11th Civil Chamber of the Court of Cassation dated 27.06.2014 with the Merits No. 2014 / 4613 and Decision No. 2014 / 12296 Decision.

15. Pulaşlı, H. (2014, p. 1170). Corporate Law Commentary, Volume I (2nd Edition). Ankara, Turkey: Adalet Publishing House.

16. Aşık, P. (2017, p. 194). As a matter of fact, the Court of Cassation, stating that the prohibition of competition is a just cause for dismissal, has allowed the dismissal of the member of the board of directors without being subject to the principle of adherence to the agenda. For an example decision, see the decision of the 11th Civil Chamber of the Court of Cassation dated 02.12.2019 with the Merits No. 2019 / 689 and Decision No. 2019 / 7655.

17. Pulaşlı, H. (2014, p. 1170).

18. Aşık, P. (2017, p. 196).

19. See the decision of the Bakırköy 4th Commercial Court of First Instance dated 12.11.2019 and numbered 2019/599 Merits and 2019/1010 Decision. The Bakırköy 4th Commercial Court of First Instance rejected the lawsuit directly filed by the shareholder requesting the exercise of the optional rights under Article 396 of the TCC, since the authority to exercise the relevant rights was given to the members of the board of directors. See also "Article 396 of the TCC grants the right to file a lawsuit against the manager who does not comply with the non-competition clause exclusively to the damaged shareholder. Therefore, the shareholders do not have the right to file a lawsuit based on this article." (11th Civil Chamber of the Court of Cassation, 2017/420 Merits and 2018/6137 Decision).

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.