July 2019 – An overview of the standard of liability of board members and executives in connection with M&A transactions in Turkey.
Standard of liability
What is the standard for determining whether a board member or executive may be held liable to shareholders in connection with an M&A transaction?
As we explained above, the liability of directors are subject to the business judgement rule that enables directors to make commercial decisions without being subject to second-guessing by the court. Whilst there is not a general rule specifically related to M&A transactions, the courts would apply this rule to a specific case considering objectively whether the director breached his fiduciary duty, good faith, obligation to perform his or her duty with diligence and care through wilful misconduct. The court would assess whether the director can be objectively said to have applied the level of care expected of a diligent person in the position of such director.
Type of transaction
Does the standard vary depending on the type of transaction at issue?
No. The basis of liability claims are the general provisions of Turkish corporate law so the court would examine the facts relevant to a specific dispute when applying the standard of care.
Type of consideration
Does the standard vary depending on the type of consideration being paid to the seller’s shareholders?
Potential conflicts of interest
Does the standard vary if one or more directors or officers have potential conflicts of interest in connection with an M&A transaction?
Yes. As per article 396 of the TCC, directors may not engage in any transaction that may compete with the business of the company without obtaining the prior approval of the general assembly of the shareholders. In such circumstances the relevant transaction would be void or invalid if the relevant disclosure is not made or approval is not obtained.
Additionally, as per article 393 of the TCC, the directors may not participate in any negotiation in relation to a transaction that potentially creates conflict of interests between themselves or their relatives and the company. Otherwise, the relevant board of directors resolution approving the transaction would be invalid and the director and other directors who allowed the director to participate in the negotiations would be liable for potential losses incurred by the company.
Does the standard vary if a controlling shareholder is a party to the transaction or is receiving consideration in connection with the transaction that is not shared rateably with all shareholders?
Potentially this may be the case. The standard of liability of directors is general and abstract, and accordingly does not vary depending on specific circumstances. However, of course, the courts would examine the specific transaction brought before it and determine whether the act of the directors would fall under the scope of the business judgement rule or a more specific statutory restriction applies (such as those listed above: restriction against personal benefit from transactions). Where the directors are found to be in breach of that standard, the court may hold them liable for an act that may otherwise appear as an ordinary commercial decision.
If the consideration in connection with a transaction is not shared rateably according to the shareholding and such variation has not already been agreed between the shareholders (for example, through a liquidation preference in the articles of association or shareholders’ agreement or other form of express consent), a shareholder could potentially bring a claim against the directors or the company for inequitable treatment that is a core protection for shareholders under article 357 of the TCC. The claim would need to demonstrate that the difference in allocation of the share price could not be justified on objective grounds, for example, that the shares being sold were all of the same class to which the same rights were attached.
For more information please contact Ebru Temizer, Partner, at firstname.lastname@example.org, or Yavuz Sahin Sen, Associate, at email@example.com.