Article:

New Secondary Legislation Is Published in Connection With the Minimum Contents of the Annual Activity Report of Equity Companies

With the entry into force of the Turkish Commercial Code numbered 6102 of 2011 (Code) on 1 July 2012, a major step was taken for the modernization of the Turkish corporate law. The Code laid down the foundations for a number of new features, aiming, in essence, to promote and increase transparency and accountability of the management, shareholder participation and reinforcement of shareholders rights. In an effort to increase the transparency and accountability of the equity companies, the Code introduced the “true and fair view” principle under Article 515, the reflection of which can also be observed in several other provisions of the Code relating to accounting practices as well as the preparation and presentation of the financial statements.

Unlike the Turkish Commercial Code numbered 6762 of 1956 (Repealed Code), the Code introduces under its Article 516 certain adjectives standing as criteria on how the report should be. More specifically; “The annual activity report of the board of directors shall reflect the business stream and the financial position of the company, in all aspects, in an accurate, complete, straight-forward, realistic and honest manner for the relevant year...”

As to the content of the annual activity report, the Code refers in its Article 516/3 to a regulation to be issued by the Ministry of Customs and Trade and on the basis of this provision, the Regulation on the Minimum Contents of the Annual Activity Reports of Companies (Regulation) has been published in the Official Gazette numbered 28395 and dated 28 August 2012.

The Regulation aims at eliminating any uncertainty by determining the content of the annual activity report, which should reflect a “true and fair view” of the company concerned, from the perspective of the financial matters for the relevant year.

This Client Alert aims at offering some basic insight on the core issues that companies are advised to consider when preparing annual activity reports in the light of the relevant provisions of the Code and the newly adopted Regulation.

The Function of the Annual Activity Report and the Responsible Corporate Body

The main function of the annual activity report is to serve as the key information document enabling shareholders and other related parties to track down the activities of the company and to allow them ascertain whether or not the company is managed in line with corporate governance principles. The annual activity report, therefore, contributes to achieving transparency of and accountability for the management.

Both under the Code and the Regulation, for joint stock companies, the board of directors and for the limited liability companies, the manager (or the board of managers) is the corporate body responsible for preparing the annual activity report. In other words, preparation of the annual report is one of the inalienable duties of the management bodies. Given that the annual activity report is considered as a document by virtue of which the board of directors (or the manager(s)) render an account with respect to the business of the company, the ultimate responsibility arising from such report would be borne by the members of the relevant corporate body.

In this respect, if and when the annual activity report of a company is -as a matter of fact- drafted by (or in cooperation with) a third party who is not a member of the management body of the company concerned, extra caution should be exercised by the members of the responsible corporate bodies, on the content of the annual activity report.

The Content of Annual Activity Report

Pursuant to the Regulation, the annual activity report, in essence, should include the following sections:

• General information, i.e., information on the relevant financial year, share capital, shareholder structure of the company, etc.

• Financial benefits provided to the management body and the members of the executive management, i.e., total amount of the financial benefits such as remuneration, premiums, bonuses, fringe benefits etc.

• Information on research and development activities

• Business activities and material developments in connection therewith, i.e., information on investments made, internal control system and auditing activities, affiliates and their share capitals, lawsuits initiated against the company, the outcome of which may affect its financial situation, etc.

• Financial situation, i.e., management body’s analyses and evaluation on the financial position, success rate of business targets, determination and evaluation on whether the company is insolvent, information on the policy adopted for the distribution of the profit, etc.

• Evaluation of risks and assessment of the management body, i.e., information on risk management policy of the company -if any is implemented- prospective risks concerning the sales, efficiency, revenue generation capacity, profitability, debt/ equity ratio and similar matters

• Miscellaneous issues, which are not covered above and which, in the opinion of the management body, should be mentioned under the annual activity report.

In addition to the above, and in line with the “true and fair view” principle, Article 4 of the Regulation provides a number of general principles in terms of content and form requirements applicable to annual activity reports.

In terms of content, the annual activity report is required to reflect the business activities and the financial position of the company and should do so in an accurate, complete, straight-forward, realistic and honest manner. It follows that, misleading, exaggerated or untrue statements should be avoided.

In terms of form requirements, the annual activity report should be drafted in a plain and easily understandable form, avoiding complex technical terminology. Where the use of a technical term is necessary, the report should include explanations which would allow the report to be understood by an “average person”.

Signing of the Annual Activity Report and Liability of Management

The Regulation explicitly underlines that the annual activity report should be signed by all members of the management body (i.e., for the joint stock companies; both by the chairman and members of the board of directors and as for the limited liability companies, by the manager and in case there are more than one manager, by all members of the board of managers).

Where a member of the management body has a dissenting or different opinion regarding the information included in the annual activity report, such member should express its objections within the report, along with relevant justifications or such dissent or difference of opinion.

It is worthy to note that pursuant to Article

437 of the Code, the annual activity report shall be available for shareholders’ review at least fifteen (15) days before the general assembly meeting of the company and must be read and deliberated upon, during the general assembly meeting. As result, if the annual activity report lacks the necessary signatures, this may result in the cancellation of the respective general assembly resolution.

As noted above, the annual activity report will be a key element in evidencing how the company was managed during the past financial year. In other words, it is the foremost tool shareholders have to establish whether or not the management body has managed the company as a “prudent manager”.

Considering that the annual activity report is expected to provide a “true and fair view” of the financial position of the company, any missing, incomplete or misleading information contained therein would give rise to claims engaging the civil liability of members of the management body. These claims can be made by shareholders but also by other related parties such as the creditors of the company. Furthermore, an annual activity report containing any untrue, misleading or fraudulent statement may result in the criminal liability of the members of the management body, under Article 164 of the Turkish Penal Code numbered 5237 of 2004.

Timing of the Annual Activity Report

The annual activity report should be prepared within two (2) months following the end of the relevant financial year. The companies adopting the standard financial year between 1 January and 31 December should have their annual activity report ready by 28th February of the subsequent year. Reports issued after the abovementioned deadline would also be valid; however any delay may result in the liability of the board of directors (or the manager(s)), where such delay has given rise to any damage.

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