Board of Directors Members' Legal Liability: Insights from Court of Cassation Decisions

Obligations to be Fulfilled by the Members of the Board of Directors 

Article 369 of the TCC stipulates that the members of the board of directors are obliged to perform their duties in the company "with the diligence of a prudent manager" and to protect the interests of the company by the rule of honesty. The expression stating that the members of the board of directors are obliged to perform their duties "with the care of a prudent manager" regulates the duty of diligence, and the expression stating that they are obliged to protect the interests of the company by the rule of honesty regulates the duty of loyalty.

Among these, the duty of care, on the one hand, constitutes an independent obligation that board members are obliged to comply with by law; on the other hand, it also serves as a criterion to determine whether the board members are at fault in the transactions and actions they perform within the scope of their duties. In other words, a member of the board of directors who takes due care in the performance of his/her duties following Article 369 of the TCC not only fulfills an independent obligation arising from the law but also prevents any subsequent attribution of fault to him/her about the acts or transactions he/she has performed in the performance of his/her duties.^[1] 

At this point, the measure of care to be taken as a basis for the board member to be deemed to have fulfilled his/her duty of care in his/her transactions and actions is important. In the preamble of Article 369 of the TCC, the expression "due diligence of a prudent director" is expressed as "prudent director criterion" and explained as follows "The prudent director measure recognizes that the board member may make a "business judgment rule" in accordance with the corporate governance principles and is based on the principle that the board member shall not be held liable in cases where the risk arises therefrom. Pursuant to the generally accepted rule, if appropriate investigations are made and information is obtained from the relevant persons and a decision is made by the board of directors, even if the developments are completely in the opposite direction and the company suffers a loss, there can be no negligence."^[2] 

The preamble to Article 369 of the TCC indicates that a member of the board of directors may be deemed to have fulfilled his/her duty of care if he/she has performed a transaction or an action within the limits of his/her duties and powers, in light of and by the reasonable, scientific and concrete data available under the circumstances of the day, and by protecting the interests of the company. Although it is understood that the general understanding stated in the text of the justification should be taken as the basis for the evaluations within this scope, it should be noted that different evaluations may be made according to the characteristics of each concrete case. 

As mentioned above, Article 369 of the TCC also regulates the obligation of loyalty of the members of the board of directors. Under Art. 369 of the TCC, it is stated that the members of the board of directors must pursue the interests of the company in their transactions and actions by the rule of honesty, and thus, the general framework of the obligation of loyalty is set forth.  

Among the other obligations of the members of the board of directors, the "Prohibition of Participation in Negotiations" regulated under Article 393 of the TCC, the "Prohibition of Transactions with the Company and Borrowing Money from the Company" regulated under Article 395 of the TCC, and the "Prohibition of Competition" regulated under Article 396 of the TCC may be considered as special cases of the obligation of loyalty. 

Under the prohibition of participation in the meetings regulated under Article 393 of the TCC, a member shall not participate in the meetings where the matter falling within the scope of the prohibition is to be discussed, in the event of a conflict of interest between his/her personal or non-company interest and the interest of the company, or that of his/her descendants, or that of his/her spouse, or that of one of his/her relatives by blood or by marriage, including the third degree. However, the members who do not object to the attendance of this member at the meeting or take a decision to allow this member to attend the meeting despite the knowledge of a conflict of interest and the member acting in violation of this prohibition may be held liable to indemnify the damages incurred by the company due to this reason. 

Under the prohibition of transacting with the company, which is another aspect of the obligation of loyalty, the members of the board of directors may not transact with the company on their behalf or behalf of others without obtaining permission from the general assembly. It is possible to abolish the prohibition to conduct transactions with the company by a provision to be included in the articles of association of the company, and this respect, it is possible to eliminate this prohibition not with the authorization that may be granted by the general assembly in each concrete case, but in a manner to be valid for all members and in all cases.^[3] In addition, pursuant to Article 395/2 of the TCC, non-shareholder members and their non-shareholder relatives are prohibited from borrowing cash from the company, and within this framework, it is not possible for the company to provide surety, guarantee or collateral for such persons or to take over the debts of such persons. Within the framework of the prohibition of competition regulated under Article 396 of the TCC, it is stipulated that the members of the board of directors may not, without obtaining the authorization of the general assembly, engage in a commercial business that falls within the company's field of activity on their own behalf or on behalf of others, and/or may not enter into a company engaged in the same type of commercial business as a partner with limited liability. 

Although not directly regulated under the TCC, the members of the board of directors are also subject to the confidentiality obligation as a special aspect of the obligation of loyalty. It is understood that the members of the board of directors are subject to the confidentiality obligation, within the limits of the law and the articles of association, considering the powers they have in terms of the execution and representation of the company and their ability to obtain the widest range of information about the company within this scope. 

In addition, under Article 357 of the TCC, the members of the board of directors are obliged to observe the principle of equal treatment in all their transactions and actions, and they may be held liable for breach of this principle if all the conditions described in the second part of this Newsletter article are present. 

In addition to the ones mentioned above in general terms, other liabilities foreseen for the members of the board of directors under the TCC include special liability arising from the unlawfulness of documents and statements (Art. 549 TCC), misrepresentation of capital and knowledge of insufficient payment (Art. 550 TCC), fraud in valuation (Art. 551 TCC) and collection of money from the public (Art. 552 TCC). In addition to the above-mentioned obligations regulated under the TCC, it is also possible to stipulate additional obligations for the members of the board of directors in the articles of association of the companies, provided that they do not contradict the law. 

Conditions for the Legal Liability of the Members of the Board of Directors 

Under Article 553/1 of the TCC, if the members of the board of directors violated their obligations arising from the law or the articles of the association through their fault, they shall be liable to the company, shareholders, and creditors of the company for the damages they cause. In this context, it is understood that if all conditions are met, the parties mentioned in the article may file a liability lawsuit against the members of the board of directors. 

Article 555 of the TCC stipulates that the company and each shareholder may request compensation for the damages incurred by the company, provided that the compensation is paid to the company. Therefore, the company, the shareholders and the creditors of the company may apply to the liability of the members of the board of directors for the compensation of the damages not suffered by the company, but directly suffered by them (e.g. preventing the shareholder from exercising the pre-emptive right in the capital increase, etc.), and the company and the shareholders may also file a liability action for the compensation of the damages directly suffered by the company. In this context, the contrary^[4] of the general rule in Turkish law, which states that a person cannot claim compensation for the damages suffered due to an action that is not directly directed against him/her, is applicable within the framework of Article 555 of the TCC. It should be noted that under Article 556/1 of the TCC, this possibility for the creditors of the company is only available in the event of the bankruptcy of the company. In the case subject to the decision of the 11th Civil Chamber of the Court of Cassation dated 09.06.2016 and numbered 2015/14405 E. 2016/6410K.; the plaintiffs, who are the shareholders of the company, claimed that the members of the board of directors unlawfully granted them a limited period for the payment of the balance of the increased amount within 15 days in the capital increase, some of which was made through cash capital commitment, and that they suffered damages for this reason, and requested compensation for their damages. Although the court of first instance dismissed the lawsuit based on Article 555/1 of the TCC, stating that the plaintiffs could only file a lawsuit for the payment of the amount to be awarded to the company, the 11th Civil Chamber of the Court of Cassation ruled that the damage, if any, may be like direct damage and should be examined. In another decision of the 11th Civil Chamber of the Court of Cassation dated 25.02.2021 and numbered 2019/2317E. 2021/1708K., it is stated that the company creditors may have damages that are independent of the company's damages, and in this case, it does not matter whether the company is damaged or not, and in this type of lawsuit, the creditors may demand that the compensation be paid to them. 

To bring a liability action against the members of the board of directors, the existence of an unlawful act, fault, damage and causal link are sought within the framework of the general principles of the Turkish Code of Obligations No. 6098. First of all, we would like to state that our explanations regarding the existence of damage are as above. Article 553/1 of the TCC, on the other hand, regulates that another condition required for the liability to arise is fault, and that for the liability of the members of the board of directors to arise, they must have breached the obligation to which they are subject through their fault. In this context, the liability regime for the members of the board of directors is fault liability, and the party who submits the lawsuit is obliged to prove the fault of the member of the board of directors. In the case subject to the decision of the 23rd Civil Chamber of the Court of Cassation dated 06.02.2019 and numbered 2016/2905E. 2019/310K. although the plaintiff filed a liability lawsuit against the members of the board of directors, claiming that the defendant board members were at fault in the failure to submit the tax returns, he could not prove that the board members were at fault. The 23rd Civil Chamber of the Court of Cassation reversed the decision of the Court of First Instance for the acceptance of the lawsuit, stating that, based on the expressions in the first version of Article 553/1 of the TCC, it was understood that the members of the board of directors were obliged to prove that they were not at fault, but based on the current version of the article, the fault of the members ceased to be a presumption and it was regulated that the members would not be liable as long as the plaintiff proved that they were at fault.

For a liability action to be brought, an unlawful transaction or act and the existence of a causal link between this transaction or act and the damage are also required. In this respect, if the members of the board of directors violate their obligations outlined in the first section of this Newsletter article through their negligence and as a result, damage arises, they may be liable for the compensation of this damage. 

On the other hand, Article 557 of the TCC stipulates that if more than one member of the board of directors is liable to compensate for the same damage, each of them shall be jointly and severally liable for the compensation of the damage, to the extent of the fault attributable to him/her, and together with the other members of the board of directors to whom fault can be attributed in the same manner, according to his/her fault and the requirements of the situation. In this respect, it is understood that the principle of differentiated succession applies to the liability of the members of the board of directors.^[5]

Conclusion

Finally, under Article 560 of the TCC, the right to claim compensation for damages from the responsible parties is 2 years from the date of the plaintiff's learning of the damage and the responsible party, and in any case 5 years from the date of the occurrence of the act giving rise to the damage. If there is a release decision regarding the relevant transaction of the members of the board of directors, it is necessary to make a separate evaluation in this context, and the issue of release is not addressed in this Newsletter article.