Nazlı Kaçar

Trainee Attorney

16.01.2022

THE NON-COMPETITION LIABILITY OF THE MEMBERS OF THE BOARD OF DIRECTORS WITH THE COMPANY IN JOINT-STOCK COMPANIES

Article 396 of the Turkish Code of Commerce (TCoC) regulates the prohibition of competition in joint-stock companies in force for the members of the board of directors. The non-compete regulation aims to hold the company or the business harmless from any damage arising from people acting in the capacity of the company director or partner by using the information they have acquired due to their duties.

There are various regulations regarding the prohibition of competition in our legislation (TCoC Art. 123, 230, 231, 311, 396, 613 (3), 626; TCoO Art. 553, 626, etc.). However, the subject of this article is the provisions of Article 396 of TCoC, which was introduced for the members of the board of directors of joint-stock companies and which prohibits these persons from competing with the company.

In accordance with Article 396 of TCoC; "No board member can conduct any business of commercial nature falling under the scope of activity of the company in his/her account or any other person's account without obtaining permission of the general assembly, and s/he cannot become a partner with unlimited liability in any company carrying out the same activities." Commercial business is a concept directly defined in the Turkish Code of Commerce. In accordance with article 3 of TCoC, commercial business is defined as "Commercial business refers to all transactions and actions concerning a commercial enterprise with the matters regulated in this law." Pursuant to Article 3 of the TCoC, in addition to the transactions under the field of activity of the company, the definition of commercial business includes all the actions related to the business corporation." In the light of Article 396 of the TCoC that regulates the prohibition of competition specific to joint-stock companies, the members of the board of directors shall not be entitled to carry out any transaction that is a commercial business and falls within the scope of the company's business on their own or someone else's behalf without the consent of the general assembly. Since acting as a member of the Board of Directors, commercial agent, director, or manager in another partnership operating in the same field with the company is considered to be a commercial transaction for someone else; it is within the scope of the prohibition of competition pursuant to article 396 of the TCoC. In the definition of "s/he cannot become a partner with unlimited liability in any company carrying out the same activities," the partner phrase refers to the limited partners in limited partnerships, which is among sole proprietorships.

With an argumentum e contrario to the same definition, it shouldn't be interpreted as the members of the Board of Directors do not violate the prohibition of competition if they have partnerships in joint-stock and limited liability companies engaged in the same commercial activities as the company. Because, in the first sentence of the article, it is stated that the members of the Board of Directors can conduct any business of commercial nature falling under the scope of activity of the company in his/her account or any other person's account only by obtaining permission of the general assembly. In addition to the permission of the general assembly, these kinds of transactions may be permitted in the articles of association at the beginning. 

As can be seen, two situations require the application of the prohibition of competition to which the members of the Board of Directors are subject in Joint-Stock Companies:

  1. Conducting any business in the same scope of activity with the company without the consent of the general assembly.
  2. Becoming a partner with unlimited liability in any company carrying out the same activities without the consent of the general assembly.
If the prohibition of competition is violated, the law grants the joint-stock company three optional rights within three months after finding out the action or act in violation of the prohibition, in any case, within a maximum of one year after the action:

  1. Claiming indemnity
  2. Requesting the transaction to be considered as performed on behalf of the company
  3. To file a lawsuit for the benefits arising from contracts made on behalf of third parties to be deemed as the company's benefits.
The fundamental basis of the prohibition of competition is the duty of loyalty. In general, the duty of loyalty is the code of conduct expected from the parties in legal relations. The nature of the legal relationship will essentially determine the strength of this obligation. It can also be said that the provisions on non-competition are based on the concept of "affectio societatis" as complementary to the duty of loyalty of the partners. "Affectio Societatis" means the efforts of the partners to achieve their common goals.  In addition to being an essential concept for sole proprietorships, it is also an essential concept from the perspective of capital companies since it constitutes one of the bases of the prohibition of competition.

In 1991, fundamental changes were made in the provisions of the Swiss Code of Obligations, from which the Turkish Code of Obligations was excerpted, regarding joint-stock partners. The first paragraph of Article 717 of the Swiss Code of Obligations regulates the duty of loyalty of the members of the Board of Directors and other persons with management power. In accordance with the related article, the members of the board of directors and third parties engaged in managing the company's business must perform their duties with all due diligence and safeguard the company's interests in good faith. In Swiss doctrine, the duty of loyalty has been made a legal basis, just like in our legislation. The heading of Article 717 of the Swiss Code of Obligations is "duty of care and loyalty." In our law, it can be interpreted that the members of the Board of Directors have a duty of care and loyalty based on Article 396 of the TCoC, which regulates the non-competition of the members of the board of directors in joint-stock companies.

In Turkish law, regarding the duty of care and loyalty, which is one of the obligations of the members of the Board of Directors, the legislator has adopted the obligation of objective care with the measure of a prudent businessman by using the expression "...by following the honesty rule" in the provisions of article 369/1 of the TCoC. The text of the article titled duty of care and loyalty is; "The members of board of directors and third parties in charge of management shall be liable to carry out their duties with due care of a prudent director, and protect the company's interests by following the honesty rule." This honesty rule included in article 369/1 of TCoC is based on the "objective good faith" principle stipulated in article 2 of Turkish Civil Code. Therefore, within the framework of universal law principles, it is important that there is no disproportion between the responsibilities and powers of the BoD members and that equality and balance are ensured.

Whether a service or a proxy, the relationship between the joint-stock company and the members of the board of directors, contains trust between the joint-stock company and the members of the board of directors in all respects. To the extent required by the principle of trust created by this relationship of trust, the members of the board of directors are under a duty and obligation of loyalty to the company and the shareholders. The concept of loyalty is much broader than the concept of duty of care. The duty of loyalty, which means keeping the interests of the company at the forefront, is an obligation that comes into play when the interests of the member or his/her relatives conflict with the company's interests. This feature also expresses the main element of the non-competition rule stipulated for the members of the board of directors pursuant to Article 396 of the TCoC.

CONCLUSION

In accordance with Article 396 of the Turkish Code of Commerce, the non-competition clause valid for the members of the board of directors in joint-stock companies stipulates that they cannot conduct any business of commercial nature falling under the scope of activity of the company in their account or any other person's account without obtaining permission of the general assembly, and they cannot become a partner with unlimited liability in any company carrying out the same activities.

The member can conduct any business in the same scope of activity with the company with the consent of the general assembly. Therefore, since the prohibition of competition, which is valid for the members of the board of directors, cannot be regarded as mandatory, the relevant member of the board of directors will be exempted from the prohibition of competition in case of the consent of the general assembly. However, it is an exceptional situation that the members of the board of directors can carry out the transactions specified in the article of the law with the consent of the general assembly. The rule should be accepted as the members of the board of directors are subject to the prohibition of competition. For this reason, considering the existence of the duty of care and loyalty of the members of the board of directors towards the company, it would be fair to interpret the non-competition provision specified in article 396 of the TCoC in the strict sense.