A Company Shareholder or Manager Dealing with the Company: Conflict of Interest and Related-Party Transactions

A Related-Party Transaction and a Conflict of Interest Are Not the Same Concept

What is a related-party transaction?

A related-party transaction is a broad umbrella concept denoting the company's transactions in goods, services, financing, leases, security, asset transfers and the like with its shareholders, managers, their relatives, companies under their control or enterprises within the same economic group. The scope of the concept may vary according to the rule applied. The "related person" in tax law, the "related party" in financial reporting and the provisions on dealing with the company or the voting ban in the Turkish Commercial Code (TCC) may not cover exactly the same persons.

For this reason, the fact that a person or company is regarded as a related party does not show that the transaction is automatically invalid or harmful. The actual review is made on the decision process of the transaction, its terms, its conformity with the company's interest, its disclosure and its consequences.

When does a conflict of interest arise?

A conflict of interest arises where there is a situation that makes it difficult for the person making a decision or representing the company to decide impartially between the company's interest and his or her own interest or the interest of another person to whom he or she is connected. For example:

• A member of the board of directors leasing his or her own real estate to the company,
• A manager having services procured at a high price from another company of which he or she is a shareholder,
• Goods being purchased from a business belonging to a shareholder's spouse or child,
• A company real estate being transferred to a relative of the controlling shareholder below market value,
• The company providing unsecured and long-term financing to a related company,
• An unusual remuneration, bonus, attendance fee or expense payment being made to a manager or relatives

require a review of conflict of interest.

Even if the transaction is beneficial to the company, procedure remains important

That the company did not suffer a loss at the end of the transaction does not by itself remove the conflict of interest in the decision process. Conversely, the mere fact that the parties are related is not enough for compensation. Different elements must separately be present for the consequences as to validity, liability and tax.

A Member of the Board of Directors Dealing with the Company in a Joint-Stock Company

The prohibition of dealing with the company under TCC Art. 395

Under Article 395 of the Turkish Commercial Code, a member of the board of directors cannot enter into a transaction with the company, in his or her own name or on behalf of another, without permission from the general assembly. In a transaction made without permission, the law gives the company the possibility to assert the invalidity of the transaction; the other party to the transaction cannot be released from its own obligation by relying on the same claim.

This provision is different from the mere power to represent the company. That a member of the board of directors can represent the company by signature does not mean that he or she can enter into a transaction in which he or she has an interest without general assembly permission.

Must permission be obtained beforehand?

The ordinary model of the law is for the general assembly permission to be obtained before the transaction. In a specific case, the effect of a later ratification on the transaction, the general provisions on representation, the scope of the general assembly resolution, whether the company adopted the transaction and the position of the third party must be assessed together. Blanket permissions that are vague and cover all past and future transactions without limit are also reviewed separately for the voting ban, the rule of good faith and minority rights.

Which transaction should the permission resolution cover?

It is appropriate for the permission resolution to specify at least the type of transaction, the member of the board of directors concerned, the counterparty, the important economic terms and, where necessary, the period. The permission does not remove the manager's duty of care and loyalty; it does not give unlimited authority to enter into a transaction clearly contrary to market conditions.

The ban on taking part in the negotiation under TCC Art. 393

A member of the board of directors cannot take part in the negotiation of matters in which the personal and non-company interest of the member or of relatives specified in the law conflicts with the interest of the company. A member aware of the conflict must disclose it. In case of doubt, the board of directors assesses the participation question by a resolution in which the member concerned does not vote.

The purpose of this rule is to protect not only the voting result but also the formation process of the decision. A person with a conflict of interest steering the other members, determining the flow of information one-sidedly or preventing alternative offers from being discussed is also important in the liability review.

Cases in which a shareholder cannot vote under TCC Art. 436

A shareholder cannot vote in general assembly deliberations on a transaction or dispute of a personal nature between the company and the shareholder, the shareholder's spouse, descendants, ascendants or companies under the shareholder's control. The voting ban concerning members of the board of directors' own release from liability also applies separately.

The decision of the 11th Civil Chamber of the Court of Cassation dated 22.01.2019, E.2017/1281, K.2019/575, emphasizes that, when assessing the permissions under TCC Art. 395 and Art. 396, the voting ban in TCC Art. 436 and the relationship of the group of companies cannot be overlooked. Therefore, achieving a majority in the general assembly does not mean that the resolution is valid once prohibited votes are taken into account.

Transactions of a Shareholder and a Manager with the Company in a Limited Liability Company

An ordinary shareholder and a manager are not in the same position

A limited liability company shareholder entering into a contract with the company merely in the capacity of shareholder is not generally prohibited. However, where the shareholder is at the same time a manager, the duty of care and loyalty under the TCC, the protection of company secrets, the non-competition rule, the power of representation and the conflict of interest rules apply more intensely.

Because TCC Art. 395 is a provision specific to members of the board of directors of a joint-stock company, it should not be applied mechanically to managers of a limited liability company. In a limited liability company, the specific result is determined on the basis of TCC Art. 613, Art. 626 and Art. 630, the company agreement, general assembly resolutions, the provisions on representation and the nature of the transaction.

The manager's duty of loyalty and removal for just cause

The manager is obliged to look after the company's interest and to perform the duty with care. Unexplained money transfers to a related company, invoices that do not correspond to reality or to an economic need, leases or service transactions far from market conditions may lead to the withdrawal of the manager's authority and liability for loss.

In its decision of the 11th Civil Chamber of the Court of Cassation dated 08.12.2021, E.2020/6450, K.2021/6956, a manager's having high-value payments made to an affiliated company that did not conform to the ordinary course of commercial life and the manager's inability to explain the reason for the transfers were assessed as a breach of the duty of care and loyalty, and the result adopted was the withdrawal of the authority of management and representation.

The other shareholder cannot alone decide to remove or declare invalidity

A shareholder's being disturbed by a related-party transaction does not enable that shareholder to remove the other shareholder from management or disregard the company agreement on his or her own. The general assembly decision quorums, the voting ban, just cause, capacity to sue and the standing of the company's legal personality to be a party must be examined separately.

Transactions with Relatives and Affiliated Companies

Transactions with a spouse, children and other relatives

Kinship alone does not render a transaction invalid. However, if kinship affects the economic interest of the decision maker, the independence of the market research and the normality of the transaction terms, it may give rise to a conflict of interest. The review should be directed not only at the family relationship but at the actual economic relationship.

A transaction with another company belonging to a shareholder

It is possible for another company of a shareholder to be a supplier or customer. However, the following questions must be answered:

• Has an independent offer of the same nature been obtained?
• Are the price, maturity, security and payment terms consistent with comparable transactions?
• Who took the decision, and did the person concerned take part in the negotiation?
• Is the transaction based on the company's genuine need?
• Have the services or goods actually been delivered?
• Does the transaction serve the transfer of company assets to a related party?

Transfer of company assets to a related person

In the transfer of real estate, a vehicle, a trademark, software, a machine or a customer contract to a related person, independent valuation and alternative offers become important. The sale of a significant amount of assets of the company as a whole may fall within the non-transferable authority of the general assembly. The effect on the continuation of the company's activity, as well as the economic value of the transaction, should be assessed.

Which Company Body Must Approve the Transaction?

Can a board of directors resolution be sufficient?

Ordinary supply and service transactions may fall within the authority of the company's management body. However, the member with a conflict of interest must not take part, the statutory quorums must be met and the company's internal authority system must be observed. A board of directors' decision on a matter falling within the non-transferable authority of the general assembly does not make the transaction lawful.

Cases requiring general assembly permission

In a joint-stock company, general assembly permission is required for a transaction under TCC Art. 395. Matters such as the sale of a significant amount of the company's assets and the election, release from liability and remuneration of members of the board of directors may also be left to the general assembly by law. In a limited liability company, important decisions and special quorums in the company agreement are examined separately.

Checking the company agreement and internal directive

In addition to statutory authority, the articles of association, the company agreement, the internal directive, the signature arrangements, the shareholders' agreement and group policies must be read together. An approval requirement in a shareholders' agreement may not in every case directly affect the validity of the company's decision; however, it may give rise to breach of contract and liability for damages.

How Are Validity, Annulment and Nullity Distinguished?

Breach of the prohibition on dealing with the company

The sanction in TCC Art. 395 is a special invalidity regime that the company may assert. This result is not applied automatically to every related-party transaction. The permission, representation, ratification and third-party dimensions must be assessed according to the specific case.

A defect in the company body resolution

If the related-party transaction rests on a general assembly or board of directors resolution, the annulment, nullity or non-existence of the body resolution may constitute a separate dispute. Where the quorum is not met once votes in breach of the voting ban are removed, the legal nature of the resolution is determined according to the type of resolution and the effect of the violation on its constitutive elements.

A representative dealing with himself or herself

In its decision of the 11th Civil Chamber of the Court of Cassation dated 25.05.2022, E.2020/8334, K.2022/4052, it was stated that transactions in which there is a conflict of interest between the representative and the principal, and which the representative makes in his or her own favor, do not bind the principal unless there is express authority or later ratification. This principle matters in transactions where the person representing the company has a direct or indirect interest on the other side.

Registration or an accounting entry does not make the transaction lawful

That the transaction has been recorded in the commercial books, invoiced or paid through a bank does not by itself cure a defect in the decision and representation. These records may show the existence and amount of the transaction; the legal basis and conformity with the company's interest must be proved separately.

Arm's Length Terms and Transfer Pricing

The concept of related person in tax law

Article 13 of the Corporate Income Tax Law regulates the disguised distribution of earnings by corporations through transactions with related persons at a price or consideration contrary to the arm's length principle. The purchase and sale of goods or services, leasing, loans of money, remuneration, bonuses and similar payments may be subject to this review.

A tax adjustment and the private law consequence of the transaction are different

That the tax administration adjusts the tax base because of a difference from the arm's length price does not mean that the transaction is necessarily invalid under private law. Conversely, a contract valid under private law may be criticized from a tax standpoint. For this reason, the report should be prepared on two separate axes:

• Company body, representation, permission, voting ban and liability,
• Arm's length price, document system, withholding, VAT, corporate earnings and transfer pricing.

How should a comparability study be made?

Depending on the nature of the transaction, independent offers, market data, a valuation report, comparable contracts, the cost structure and the commercial rationale should be recorded. The explanation "it is a group company" or "it is a shareholder" is not by itself an arm's length analysis.

Financial Reporting and Additional Rules in Publicly Traded Companies

TMS 24 related-party disclosures

Turkish Accounting Standard 24 provides for the disclosure in the financial statements of related-party relationships, transactions and balances. A financial statement disclosure does not replace the approval process of the transaction; however, it is important for users to assess the company's financial position correctly.

The capital markets regime in publicly traded shareholdings

For related-party transactions of a significant nature and of a widespread and continuing character in publicly traded companies, the regulations of the Capital Markets Board, board of directors resolutions, independent members, valuation and public disclosure obligations may apply. In a specific transaction, the current thresholds and procedures should be checked against the regulations in force on the date of the transaction.

Manager Liability and Compensation for the Company's Loss

The basic elements of liability

For compensation against a manager, as a rule the following:

• A breach of the law, the articles of association or the duty of office,
• Fault,
• The existence of a loss of the company or of a shareholder,
• An adequate causal link between the breach and the loss

must be shown. Although the existence of a related-party transaction does not automatically reverse the burden of proof, the manager's documenting of the decision process and the commercial rationale is decisive for the defense.

A company's loss and a shareholder's direct loss are distinguished

A reduction in company assets mostly constitutes the company's direct loss. A fall in share value may be a shareholder's reflective loss. Who will bring the action, on whose behalf and with what claim is determined according to this distinction.

Removal of a manager or member of the board of directors

If the transactions show that the manager has seriously breached the duty of loyalty or has removed the trust necessary for the good management of the company, in a limited liability company the withdrawal or limitation of the authority of management and representation, and in a joint-stock company dismissal and liability routes, may come into play.

What Routes May Shareholders and the Minority Use?

Information and inspection

A sound litigation strategy cannot be built without learning the parties, the amount, the payment flow and the contract documents of the transaction. The procedures for information and inspection differ in joint-stock and limited liability companies; the subject of the request and the period must be specified clearly.

Special audit

If the statutory conditions exist, a special audit may be requested to clarify particular transactions. A special audit is not a general review investigating all company activities without limit; it should be directed at specific facts necessary for the exercise of shareholder rights.

Annulment of a general assembly resolution or a declaration of nullity

If the related-party transaction was approved by a general assembly resolution, annulment of the resolution or its nullity may be assessed for the voting ban, equal treatment, the rule of good faith and breach of the law or the articles of association. The three-month preclusive period in an annulment action must also be observed.

Liability action and interim injunction

If the transfer of company assets has not yet been completed, a targeted interim injunction request may be more effective than a compensation action to be brought later. However, instead of freezing all company assets indefinitely, proportionate protection should be sought over the asset or payment that is the subject of the action.

How Should Evidence Be Prepared?

Internal company decision and authority documents

• The articles of association or company agreement,
• Resolutions of the board of directors or the board of managers,
• General assembly minutes and attendance lists,
• The internal directive and signature circulars,
• The shareholders' agreement and group policies.

Transaction and payment documents

• Contracts and their annexes,
• Invoices and delivery notes,
• Bank movements,
• Current account statements,
• Delivery, service and performance records,
• Security and maturity documents.

Comparable and valuation evidence

• An independent valuation report,
• Alternative offers,
• The terms of similar transactions,
• Market prices and cost analysis,
• A transfer pricing study.

Digital records and correspondence

Emails, messaging, access logs and electronic approval records must be obtained lawfully and preserved. The evidentiary force of a mere screenshot may be weak if its source, integrity and the account from which it was taken are not explained.

Preventive Transaction Checklist for Companies

Before a related-party transaction is made, the following sequence should be followed:

1. The related person and the conflict of interest are identified.
2. The decision and representation authority is determined.
3. The negotiation and voting ban is applied.
4. The necessary general assembly or board of directors permission is obtained.
5. The arm's length price and the commercial rationale are documented.
6. The contract and delivery terms are put in writing.
7. The tax and financial reporting effect is examined.
8. Payment and performance are audited after the transaction.
9. If there is a group of companies or public listing, special obligations are checked.
10. The consistency of the decision, contract and accounting records with one another is ensured.

Conclusion

In a transaction with a company shareholder or manager, the basic question is not merely "are the parties related?" Whether the transaction rests on the company's genuine need, whether the decision and representation authority was properly used, whether the person concerned withdrew from the negotiation and voting, whether the terms are consistent with comparables, and whether there is a loss to the company must be assessed together. Company law, tax, financial reporting and, where necessary, capital markets rules establish different reviews over the same transaction. For this reason, correct approval and documentation before the transaction, and targeted selection of evidence and claims once a dispute arises, are decisive.

Frequently Asked Questions

Can a company shareholder sell goods or services to his or her own company?

Yes, as a rule. However, if the shareholder is at the same time a manager or representative, the conflict of interest, decision authority, voting ban and duty of loyalty are examined separately. The price and other terms must be consistent with comparables, the delivery must be genuine and the transaction must serve the company's interest.

Can a member of the board of directors enter into a contract with the company?

Under TCC Art. 395, the member cannot enter into a transaction with the company, in his or her own name or on behalf of another, without general assembly permission. Where there is no permission, the company may assert special invalidity. The scope of the transaction and the effect of later ratification are assessed according to the specific case.

Can a manager with a conflict of interest vote?

In the board of directors, TCC Art. 393, and in the general assembly in particular the prohibitions under TCC Art. 436, may apply. Merely withdrawing from the vote is not always sufficient; there may also be an obligation not to take part in the negotiation and to disclose the conflict.

Is a related-party transaction necessarily invalid?

No. A related-party relationship is not by itself a ground for invalidity. The legal consequence is determined by examining authority, permission, the voting ban, the company's interest, comparable terms and special regulations.

Is a payment made to a relative of a company shareholder lawful?

The payment must be in return for genuine goods or services, be made by a resolution of the competent body and be based on comparable terms. Kinship intensifies the review, but by itself does not make the payment unlawful.

Does a finding of non-arm's-length terms in a tax audit make the contract invalid?

Not automatically. The tax base and disguised profit distribution consequences in tax law and the private law validity of the contract are assessed separately.

How can a minority shareholder investigate a related-party transaction?

The routes of a request for information and inspection suited to the type of company, questions at the general assembly, a special audit and, where necessary, an application to the court may be used. The request should be directed at specific transactions, periods and groups of documents.

Can an interim injunction be obtained to stop a related-party transaction?

If it is shown that, were the transaction to be completed, obtaining the right would become difficult and the standard of prima facie proof is met, a proportionate measure may be requested over the asset or payment that is the subject of the action. Requests that unnecessarily stop the entire company's activity may be rejected.

Sources

1 — Turkish Commercial Code No. 6102, in particular Art. 369, Art. 393, Art. 395, Art. 396, Art. 436, Art. 553, Art. 613, Art. 626 and Art. 630. Link to source

2 — Corporate Income Tax Law No. 5520, Art. 13, and the General Communiqué on Disguised Profit Distribution through Transfer Pricing. Link to source

3 — Public Oversight, Accounting and Auditing Standards Authority (KGK), TMS 24 Related Party Disclosures. Link to source

4 — Capital Markets Board (SPK), Corporate Governance Communiqué (II-17.1) and related current regulations. Link to source

5 — Court of Cassation 11th Civil Chamber, E.2020/6450, K.2021/6956, dated 08.12.2021. Link to source

6 — Court of Cassation 11th Civil Chamber, E.2017/1281, K.2019/575, dated 22.01.2019. Link to source

7 — Court of Cassation 11th Civil Chamber, E.2020/8334, K.2022/4052, dated 25.05.2022. Link to source

8 — Court of Cassation 11th Civil Chamber, E.2023/5785, K.2024/7409, dated 21.10.2024. Link to source

9 — Court of Cassation 11th Civil Chamber, E.2022/6269, K.2024/2677, dated 02.04.2024. Link to source