Legal Liability of Board Members in Joint Stock Companies

Joint stock companies are the most commonly used types of companies in our country. In commercial life, the execution and management of the company’s activities are undertaken by the company’s board of directors. The board of directors holds authority over various issues ranging from the daily operations of the company to strategic decisions. However, this authority also entails legal responsibilities. Under the Turkish Commercial Code (“TCC”), board members are subject to specific obligations towards the company, shareholders, and third parties. In this article, we will examine the legal liability of board members in detail, referencing the relevant provisions of the Turkish Commercial Code.

1. Legal Basis of Board Members’ Liability According to Article 365 of the Turkish Commercial Code, the management of joint stock companies belongs to the board of directors unless otherwise stipulated in the articles of association. The board is responsible for conducting all business and transactions of the company. Article 369 of the TCC stipulates that board members must act with “the care of a prudent manager” while fulfilling their duties. This provision clarifies that board members must perform their tasks meticulously and that failing to exercise due care may result in legal liability.

TCC Article 369: Duty of Good Faith and Care
“Board members must consider the interests of the company and exercise the care expected of a prudent businessperson.” This regulation emphasizes the duty of attention and care required of board members. If they misuse or neglect their duties, legal liability may arise from the violation of this obligation.

1. Duties and Powers of Board Members Article 370 of the TCC clearly defines the board’s authority to represent and manage the company. The board represents the company to third parties, and all decisions shape the company’s overall strategy and management.

The primary duties and powers of board members include:

• Management and Representation of the Company: Pursuant to Article 370 of the TCC, the board manages the daily operations of the company and assumes representation in external relations. This grants the board broad authority while also imposing a duty of careful management.
• Financial Management: Article 374 of the TCC states that the board is responsible for financial management and decisions regarding the company’s capital structure. In this context, actions such as capital increases or reductions fall within the board’s authority.
• Implementation of General Assembly Resolutions: Article 375 of the TCC indicates that the board is responsible for implementing the decisions made by the general assembly. Board members must act in accordance with the law and the articles of association when executing these decisions.

1. Types of Liability of Board Members The duties and powers assumed by board members in joint stock companies are meticulously regulated by the legislator. The Turkish Commercial Code (TCC) imposes various liabilities on board members towards the company, shareholders, and third parties. When these responsibilities are violated, board members may be held liable for any resulting damages. Below, the liabilities of board members towards the company, third parties, and shareholders are detailed.
2. Liability to the Company
   The primary and most significant responsibility of board members is towards the company. This liability arises from the obligation of members, who have taken on the management of the company, to protect the company’s interests and ensure the preservation of its assets.

a) Basis of Liability to the Company:
TCC Article 553
According to Article 553 of the TCC, board members must act in accordance with the law, articles of association, and general assembly resolutions while performing their duties. If board members neglect or misuse this obligation, they will be liable for the damages caused to the company. This obligation broadly encompasses the requirement to protect the interests of the company.

b) Duty of Care
Pursuant to Article 369 of the TCC, board members are required to exercise “the care and attention that a prudent manager would show” while performing their duties. In this context, board members must act in a way that protects the interests of the company when making decisions. This duty of care is particularly critical during significant investment decisions, acquisitions, or borrowings. If the decisions made jeopardize the company’s financial structure or cause losses due to negligence, board members may be held liable.

c) Duty of Information and Supervision
Article 392 of the TCC establishes the responsibility of board members to oversee the company’s financial status and general activities. Board members are obliged to monitor the company’s financial situation and examine the financial statements. If members fail to notice the company’s financial difficulties or do not take necessary precautions, they may be held liable for damages incurred by the company as a result of such neglect.

1. Liability to Third Parties
   In general, board members are not directly liable to third parties for the company’s debts and obligations; the legal entity of the company is responsible for these debts. However, under certain circumstances, they may incur liability to third parties.

a) Fraud and Deception Situations
Board members may be held personally liable if they cause harm to third parties through fraudulent or deceptive transactions. According to Article 549 of the TCC, particularly in cases involving violations related to the protection of capital, board members incur liability if third parties suffer damages.

b) Closure and Bankruptcy of the Company
In the event of the company’s bankruptcy, the liability of board members towards third parties may arise. Under Article 553 of the TCC, creditors of a bankrupt company may file a lawsuit for compensation for damages incurred due to the misuse of authority or negligence by board members.

c) Liability Arising from Tax and Public Debts
According to the Turkish Tax Law and the Law on the Collection Procedure of Public Claims, board members may also be held liable for the company’s debts to the public. Particularly regarding public debts such as tax debts and social security premiums, personal liability of board members may arise for claims that cannot be collected from the legal entity of the company.

1. Liability to Shareholders
   Board members have an obligation to protect the rights of the shareholders in the company. They must respect shareholders’ rights to obtain information, examine documents, and receive dividends. Various provisions of the TCC explicitly regulate the responsibility towards shareholders, and in case of violations, compensation claims may be made against board members.

a) Duty to Provide Information
Pursuant to Article 437 of the TCC, shareholders have the right to request information about the company’s operations. Board members are obliged to respond to this information request during general assembly meetings and other appropriate forums. If shareholders are provided with incomplete, misleading, or incorrect information that causes them harm, board members may be held liable for these damages.

b) Distribution of Dividends from Company Profits
Shareholders have the right to receive their share of the company profits. The board is responsible for implementing the general assembly’s decisions regarding profit distribution. If the board under-distributes dividends or fails to implement the distribution decision, liability arises towards the shareholders.

c) Transparency and Fair Management Duty
The duty to act fairly among shareholders is one of the board’s most important responsibilities towards shareholders. According to the TCC, the board must protect the rights of all shareholders equally. For instance, decisions favoring a specific group of shareholders or privileges granted to that group may violate the rights of other shareholders and may lead to legal liability for board members.

TCC Article 549: Protection of Capital
“Board members are obliged to ensure the protection of the company’s capital. Otherwise, they may be held liable for damages incurred to third parties.” This provision establishes the board members’ responsibility for safeguarding the company’s financial structure.

1. Conditions of Board Members’ Liability The legal liability of board members arises upon the fulfillment of certain fundamental conditions. According to the TCC, the following conditions must be met for board members to be held liable:
2. Violation of Law: Board members’ liability arises when they act contrary to the TCC, articles of association, or general assembly resolutions. If this violation results in damage to the company or third parties, liability ensues.
3. Occurrence of Damage: For board members to be held liable, a damage must occur. For example, a financial loss to the company as a result of an incorrect decision would result in the liability of the board.
4. Causal Link: There must be a causal link between the act of the board member and the resulting damage. The damage must have occurred directly as a result of the board member’s actions.
5. Factors Reducing or Eliminating Liability In certain situations, board members may be exempted from liability or have their liability limited. The TCC has established some regulations in this regard:

• Delegation of Authority (TCC Article 370): The board may delegate some of its authority. In this case, the member or managers to whom authority has been delegated assume responsibility for the delegated matters.
• Liability Insurance (TCC Article 361): Board members may obtain liability insurance to mitigate their responsibilities that may arise while performing their duties. This can alleviate potential compensation obligations.

Conclusion The legal liability of board members is thoroughly regulated under the Turkish Commercial Code. This liability encompasses not only activities within the company but also relationships with shareholders and conduct towards third parties. Board members are required to act in accordance with the law, articles of association, and principles of good faith while exercising their powers. Given the extensive responsibilities imposed on board members, consulting with a lawyer while conducting company operations will be much safer to prevent potential damages and liabilities.