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Practice Differences About Interpretation Of Representation Rules

The New Turkish Commercial Code (“TCC”) brought completely different rules about the representation of Companies, among which especially two deserve special mention. The first of these rules is the mandatory condition that a board member must be authorized to represent the Company without any limitation with its sole signature or two with their joint signature. The other one is about the limitation of the authorization of signatories through a so called “Internal Directive”, which scope should be determined with a board resolution.

Even though, the rules seem to be very simple and applicable at the first look, the practice thereof by trade registries have caused a huge frustration at Turkish Lawyers, who had to explain to their foreign clients that the top management may not be involved in daily operations of the Company, as they had to make a choice between “limitless authorization” and “limited authorization”.

The reason, why the top management were requested to make such a choice, was the latest addition to TCC through Art. 371/7, which is as follows: “Additionally to the representatives stated above, the board of directors, may also appoint board members without representation authority and employees of the company as trade representatives or trade representative assistants with limited authority. The scope of the authority of trade representatives appointed in this manner must be determined with an internal directive in accordance with Article 367. In such case, the internal directive must be registered and announced. However,the representatives subject to the internal directive, may not be appointed atthe said internal regulation. The Board of Directors are jointly and severallyresponsible for the damages caused to the corporation or third parties becauseof the actions or inactions of the trade representatives, appointed inaccordance with this clause.

The trade registry interpretes this regulation as a prohibition for “limitless authorized board members” to be appointed also as a representative subject to an internal directive. In other words, a board member or board members, who was/were authorized by the Board of Directors to represent the Company without any subject or money limitation with its sole or their joint signature, may not be appointed, for example, as an A Group Signatory, who can sign a contracthaving a value under 100.000 USD together with a B Group Signature, since suchauthorization “limitation” would be in contradiction to Art. 370/2,which says that at least one board member must be authorized to represent theCompany without any limitation. Another conclusion of this interpretation isthe fact, that a board of directors consisting of, for example, 5 persons mustappoint at least one member with sole signature authorization, whereby the remainingboard members may be (not must!) appointed as “limitedrepresentatives” subject to an internal directive.  

The application of the abovementioned rules by the trade registries in Turkey is common with regard to cases, where the board of directors has appointed a board member to represent the Company with its “sole signature”. However, there is a different practice between the Istanbul Trade Registry and the other trade Registries in Turkey about the interpretation of Art. 371/7 TCC, if the company has appointed two or more board directors to represent the Company with their joint signature. In such case, the Istanbul Trade Registry says that aboard member, who needs the signature of another board member to bind the company, maybe also appointed as a signatory subject to the internal directive. The logic of the Istanbul Trade Registry is actually not wrong,since the “joint signature structure” requires an additional signature, whereby the “sole signature structure” requires the only one signature, which has the natural consequence that a “limitless representative” is indeed limited, if he/she needs also the signature of, for example, a B Group Signatory to bind the Company for a contract having a value of, for example, 100.000 USD, according to the internal directive. TheTrade Registries are of the opinion, that it makes no sense to appoint a person, who may bind the company with his/her sole signature without any limitation, also as an A Group or B Group signatory, whose authority is limited through the internal directive rules. However, if a board member may represent the company only together with another board member (joint signature structure), it should be also possible that such board member may represent the company also with an A Group or B Group signatory subject to the internal directive (says the Istanbul Trade Registry). The other trade registries inTurkey prefer to apply directly the wording of Art. 371/7 TCC, which clearly says that only “board members without representation authority” may be appointed as signatories subject to the internal directive.

We are of the opinion that both interpretations are not fully correct since the appointment of a board member as a “limitless representative” should not prevent him/her to participate to daily operations of lower degree signatories and have control over them. If the law and the practice thereof should not be interpreted flexible enough to allow limitless representatives toparticipate daily operations, the regulation about the liability of boardmembers for actions of limited representatives (according to Art. 371/7, lastsentence) would not have a legal ground and could not be considered as fair. Nevertheless, the law says that a board member shall be liable for the causeddamages of “limited representatives”, even though they cannot signwith them. Therefore, we believe that it would be much more practical, if thelimitless representatives regardless if they have sole or joint signatureauthority, should be entitled to be appointed also as a lower degree signatory(A Group, B Group, 1st or 2nd Degree Signatory) subject to an internaldirective.

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