Loader

Has the Ministry of Trade Prohibited the Distribution of Dividends? 

Has the Ministry of Trade Prohibited the Distribution of Dividends? 

In its letter dated 31.3.2020 sent to the Turkish Union of Chambers and Commodity Exchanges [“TUCCE”]; the Ministry of Trade [“the Ministry”] highlights the importance of equity preservation in commercial corporations and issued the following announcement citing Article 13/5 of the Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Corporations and the Ministry of Customs and Trade Representatives Attending These Meetings [“the Regulation”]:

“Except for state subsidiaries, corporations should not adopt a resolution to distribute previous years' profits, distribute profit in excess of ¼ of their net profit of the year 2019, and authorize their board of directors to distribute advance dividends in their general assembly meetings pertaining to the 2019 fiscal year.”

Accordingly, corporations will not be able to distribute undistributed dividends from previous fiscal years, and they will be able to distribute only up to 25% percent of the profits pertaining to the year 2019 as dividends.

The respective provision of the Regulation, which was cited in the Ministry letter is as follows: “Following an audit or for any other reason, any item specified by the Ministry must be added to the agenda of general assemblies.” The article regulates mandatory agenda items for the general assemblies of joint stock corporations. Therefore, one can conclude that the Ministry intends joint stock corporations to add the content of the announcement mentioned above to their agendas.

On the other hand, another Ministry [Ministry of Treasury and Finance] shared a declaration on this decision and stated “as a measure against the financial effects of Covid-19, we have restricted dividend distributions to 25% of 2019 profits in collaboration with the Ministry of Trade”.[1]

At this point, the legal nature of the Ministry letter as either a prohibitive decision or an advisory one is a point of debate. In fact, the Regulation cited in the Ministry decision does not provide a legal basis for an executive decision to outright prohibit dividend distribution in joint stock corporations. Interpretation of the announcement as a mandatory prohibition or limitation to dividend payments would create an unconstitutional and unlawful situation. The Regulation simply does not grant the Ministry such authority. Furthermore, such an authority cannot be provided by a regulation at all. Hence, the letter should be interpreted as an advisory opinion rather than a prohibition.

While the pandemic brought extraordinary circumstances, constitutional rights should still be protected. Otherwise, acting in accordance with the Ministry decision may, post-pandemic, lead to general assembly resolutions on not distributing dividend getting nullified and even board members being held personally liable.

Therefore, the Ministry letter must be examined from several perspectives. In this article, we will first consider Art. 408 of the Turkish Commercial Code [“TCC”] on the unassignable authorities of the general assembly, follow up with TCC Art. 519 on legal reserves and conclude with shareholders’ rights and the constitutionality of the decision.

Deciding on Distribution of Dividends is an Unassignable Right of the General Assembly

Adopting a decision to distribute dividends is one of the inalienable rights of the general assembly of a corporation in accordance with TCC Art. 408(2). Hence, no other body or institution can legally exercise this right. Likewise, 11th Civil Chamber of the Court of Cassation has stated that the will of the general assembly is irreplaceable, even by a court decision.

In fact, the Court of Cassation has established that a court cannot order dividend distribution even in a case where the general assembly failed to adopt a resolution to distribute dividends at all.[2] The following decision by the 11th Civil Chamber forms one of the best examples of this jurisprudence: “The general assembly is the sole decision-maker for dividend distribution, and given that such a resolution was not adopted by the general assembly, the court wrongfully decided to collect dividends from the defendant and distribute them accordingly to the plaintiffs, therefore necessitating a reversal of the decision.”[3]

At this point, the respective article of the Regulation cited by the aforementioned announcement of the Ministry should not be interpreted as a prohibitive one by itself. After all, the authority granted by the Regulation is solely on the authority to alter the agenda of the general assembly of a joint stock corporation. As such, the Ministerial authority is limited to making an addition to the general assembly agenda. Any other interpretation would mean that the executive branch exercises a right which belongs to general assemblies and is unassignable by law. 

This would first and foremost constitute a breach of the shareholders’ constitutional right to property. As shares of a corporation are a part of the shareholder’s transferrable assets, they are subject to the right to property.[4] Therefore, the exercise of decision-making by the administrative authority regarding distribution of dividends should be considered as an interference with the right to property, meaning that this kind of interference can only be brought by law for the purpose of public interest and without touching the essence of the right.

This decision must manifest itself as law in a formal sense. We believe that the Presidential Decree introduced by the Presidential System of Government as a new legislative instrument can also not be used to interfere with the right to property seeing that regulations regarding fundamental rights cannot be made by Presidential Decrees.

Are Corporations Required to Adopt Resolutions in Line with the Ministerial Decision?

The answer to this question ought to be negative. Considering that the protection norms of the Constitution regarding the right to property remain in force throughout the pandemic and that restriction on this issue can only be made by law, it would be the most appropriate choice to consider the Ministry's letter as an advisory decision. In other words, companies that have not yet held the general assembly meetings can add items to the agenda in line with this advisory decision of the Ministry while the shareholders will ultimately decide whether to distribute the profit or not within the limits of the law.

The general assembly should be considered free in its decision regarding dividend distribution. This controversial decision obliging general assemblies to limit dividend distribution is no different than a general decision prohibiting dividend distribution altogether.

Another question regarding the decision is if a joint stock corporation could refuse to distribute dividends solely based on the decision of the Ministry? In other words, can the decision of a joint stock corporation not to distribute profit based on this decision of the Ministry be subject to an action for annulment by the shareholders? That is a more refined question. Taking a decision contrary to the decision of the Ministry cannot result in the joint stock corporation being subject to an administrative sanction.

The legal authority of the Ministry is limited to enabling the discussion of the issue in the agenda of the general assembly. It can also be said that the Ministry will have made this decision on the agenda and taken an advisory decision on this issue. However, it should not be concluded that a general assembly resolution taken in line with this decision will automatically comply with the articles of association, the law and the principle of goodwill.

The essential point is to highlight that there is no obligation imposed on general assemblies. Hence, the ministerial decision should be discussed accordingly, and a decision should be adopted in line with the will of the general assembly.

It is Obligatory to Distribute a Minimum of 5% of the Profits as Dividends to the Shareholders, and This Issue Should also be Taken into Consideration While Preparing the Agenda

According to Art.519(2)(c) of the TCC, “ten percent of the total amount of profits to be distributed to relevant persons sharing profits shall be added to the primary reserves upon payment of a 5% dividend to shareholders.”

In line with the established jurisprudence of the Court of Cassation and generally accepted interpretation among legal scholars, this provision requires the distribution of a minimum amount of dividends to the shareholders every year. In this context, -while it remains a controversial norm- every joint stock corporation has to distribute at least 5% of profits as dividends every year.[5]

In cases where the minimum of 5% dividend distribution is not made despite the conditions regarding dividend distribution have been met, 11th Civil Chamber of the Court of Cassation generally decides on the annulment of the agenda item. [11th CC of the Court of Cassation, 12.11.2019, E. 2019/177, K. 2019/ 7106]

In this context, the validity of the defense will be highly controversial in a legal dispute that will arise if the dividend is not distributed based on the decision of the Ministry or the provision of the regulation, and the relevant general assembly decision may later be subject to annulment. In addition, personal liability may arise for the board of directors’ members in cases where companies choose to comply with this decision.

Dividend Distribution Can Only be Restricted by Law

Shareholders' right to receive dividends is essentially a financial asset, and has a value that can be measured in money. A sort of property right of financial nature on the company assets constitutes the basis of such right of a shareholder to receive dividends.[6]

In this context, interference with dividend distribution can only be possible on legal grounds pertaining to interventions to the property right. The right to property is among the fundamental rights and freedoms recognized in the Constitution. Accordingly, the limitation of fundamental rights and freedoms is regulated in Article 13 of the Constitution. Pursuant to this article, fundamental rights and freedoms can only be limited by law and relying on the reasons specified in the relevant articles of the Constitution, “without touching their essence”.

The limitation of the property right, which is a fundamental right pursuant to the constitution, is only possible by law. The decision of the Ministry or the Regulation does not carry the "statutory condition" required in the Constitution to limit the property right. For this reason, the Ministry’s decision does not comply with the law.

In conclusion, while there is no doubt that dividend distribution can be restricted or even prohibited altogether in joint stock corporations due to the extraordinary nature of the current conditions, given the protection of the right to receive dividends within the scope of the property right at the constitutional level, it would be appropriate to introduce the restriction through an amendment of the law. The Constitution remains in force throughout the pandemic, and a law on the matter needs to be enacted by the Turkish Grand National Assembly.

 

[1] https://twitter.com/HMBakanligi/status/1246119727052795906 [Accessed on 04.04.2020]

[2] Court of Cassation 11th CC 15.01.2019 2017/3136 E. 2019/338 K., Court of Cassation 11th CC 27.11.1980, 4961 E. 5245 K. Court of Cassation 11th CC 12.4.1983, 464 E. 1914 K.

[3] Court of Cassation 11th CC 16.04.2018 2016/10141 E. 2018/2779 K.

[4] Gemalmaz, H. Burak, Avrupa İnsan Hakları Sözleşmesinde Mülkiyet Hakkı [Right to Property in the European Convention on Human Rights], İstanbul Üniversitesi Sosyal Bilimler Enstitüsü Kamu Hukuku Anabilim Dalı, Doctoral Thesis, İstanbul 2008, s. 235 Published as Gemalmaz H. Burak, Avrupa İnsan Hakları Sözleşmesinde Mülkiyet Hakkı, Beta Yayınları, April 2017, 2nd edition

[5] Tekinalp, Ünal/ Poroy, Reha/ Çamoğlu, Ersin, Ortaklıklar Hukuku I [Corporate Law I], Revised 14th Edition, p.898

[6] Tekinalp, Ünal/ Poroy, Reha/ Çamoğlu, Ersin, Ortaklıklar Hukuku I [Corporate Law I], Revised 14th Edition, p.874