Authors: Corporate Law Department, Prof. Dr. Ali Paslı, Att. Mustafa Şahin

Introduction

In joint stock companies, the legal liability of the members of the board of directors constitutes a liability regime that guarantees the lawful performance of the company’s management and representation functions. The Turkish Commercial Code (“TCC”) links this regime not only to a legal framework based on duties of care and loyalty, but also to an accountability system grounded in corporate governance principles. Within this system, the mechanism of release (ibra) is a critical tool that both limits the liability of the board of directors and serves as an instrument by which the general assembly exercises its supervisory power over the management.

Release (ibra) is a declaration of will by which the general assembly accepts that the management and representation activities carried out during a specific financial period are lawful and states that it will not assert any liability claims against the members of the board of directors in respect thereof. However, release is neither merely a technical waiver nor a simple “vote of confidence” procedure. The resolution on release is an institution that bears both legal and managerial characteristics, must be assessed with particular care in terms of its content, and directly affects the relationship between the board of directors and the shareholders.

Normative Framework and Powers of the General Assembly

Release is an institution that has been systematically regulated for the first time under the TCC. The Code qualifies the release of the board of directors as a non-transferable power of the general assembly, thereby accepting that the resolution on release may be adopted only through the collective will of the shareholders. As one of the mandatory items on the agenda of the ordinary general assembly, release must be submitted to the shareholders at each financial period. This approach renders the release resolution an inseparable element of corporate governance.

The provisions of the Code on release do not leave the institution to be shaped solely through case law, but rather place it on an explicit normative basis. The irreversibility of the release resolution, its effects on the shareholders’ right to bring an action and its consequences with respect to the company’s creditors are regulated within this framework. Accordingly, release has been designed as a unilateral disposition of the general assembly that produces effects both in the internal relationship and vis-à-vis third parties.

Legal Nature of the Release Resolution

In terms of its legal nature, release is a hybrid act that incorporates both elements of a negative acknowledgment of debt and a waiver of liability claims. The general assembly determines that the activities of the board members in respect of a given period are lawful and declares that it will not bring an action for liability on behalf of the company concerning such activities. In this respect, release is not only a mechanism that affects compensation claims relating to the past financial period, but also a managerial decision reflecting the general assembly’s assessment of the company’s management policy.

Due to this hybrid structure, the release resolution is binding on the company; however, it does not produce identical effects for the shareholders and creditors. The claims of shareholders and creditors relating to their direct damages are not automatically extinguished by virtue of release.

The resolution on release may be adopted by the general assembly in two forms, either explicitly or implicitly.

Explicit Release, Implicit Release and the Loss of Voting Rights

Release is regulated in the Code as an institution that may arise both explicitly and implicitly. Explicit release is a resolution adopted as a result of a separate vote on the item “release of the board of directors” on the agenda of the general assembly. The general assembly may release some of the board members or all of them.

Implicit release, on the other hand, is the legal consequence attached to the approval of the balance sheet pursuant to Art. 424 TCC. Under the TCC, the approval of the balance sheet by the general assembly, unless otherwise stated, produces the effect of release for the relevant financial period. The rationale behind this is that the balance sheet constitutes the legal reflection of the board’s duty of accounting and that the financial statements form the centre of gravity of the company’s activities.

However, for the approval of the balance sheet to give rise to release, the balance sheet must be drawn up in accordance with the principles of clarity and accuracy. Where certain items are deliberately concealed in the balance sheet, where practices preventing the true financial position of the company from being seen are in place, or where there are deficiencies that violate the shareholders’ right to information, implicit release does not provide protection. In such cases, even if the balance sheet is approved, the members of the board of directors cannot be deemed to have benefited from release.

Whether implicit or explicit, and provided that a higher quorum is not stipulated under the articles of association, the resolution on release shall be adopted with the ordinary quorums set forth in Art. 418 TCC.

It should further be emphasised that, where the members of the board of directors and the authorised signatories involved in the management are also shareholders of the company, such persons may not exercise the voting rights attached to their shares in the resolution on explicit or implicit release to be adopted by the general assembly (Art. 436/2 TCC).

Moreover, persons who are prohibited from voting should not be allowed to influence the release resolution indirectly. For example, a legal entity controlled by a board member who is to be released may not vote the shares it holds in the company in the vote on release.

Scope of the Release Resolution

The resolution on release produces legal effect only with respect to those activities that have been presented to the general assembly or that the shareholders have had the opportunity to become aware of. If the acts of the board of directors involving gross negligence, fraud or intent have not been presented to the shareholders, the resolution on release does not create any legal protection in respect of such acts.

It must be borne in mind that release relates to a specific financial period. A release resolution for one period does not extend to other periods; allegations of unlawfulness arising in subsequent years do not fall within the scope of that release. Similarly, release produces legal consequences only in relation to matters falling within the powers and duties of the board of directors. Acts of other corporate bodies or third parties are not naturally covered by the release resolution.

Restrictions on Voting and the Legitimacy of the Resolution

The prohibition on board members who are shareholders from participating in the vote on their own release is one of the most important safeguards of the release mechanism. This rule ensures that the decision is taken by a pure and independent shareholder will, prevents conflicts of interest and demonstrates that the release resolution has been formed in line with corporate governance principles.

For this reason, the validity of the release resolution depends not only on the proper conduct of the voting procedure, but also on the existence of an informed will on the part of the general assembly. If information has been withheld, the release resolution becomes contentious in terms of both its legitimacy and its legality.

Legal Consequences of the Release Resolution for the Parties

The release resolution eliminates the possibility of bringing liability actions in the name of the company. The company may not assert liability claims against the board members with regard to the transactions which are subject to release. However, in respect of actions to be brought by shareholders on behalf of the company for their indirect damages, the position will depend on how they voted in the release resolution.

Shareholders who have voted in favour of release or who have acquired shares in the company in awareness of the release resolution may not bring a liability action on behalf of the company. This result is natural. It would breach Art. 2 of the Turkish Civil Code if shareholders who voted in favour of the release of the board members were to file a liability action despite the release resolution. Accordingly, in particular where all shareholders entitled to vote in the release resolution have voted in favour, the release resolution creates a very significant effect and both the company and the shareholders lose their right to bring liability actions for indirect damages. By contrast, shareholders who have voted against the release resolution, who have not attended the meeting or who have abstained may file an action; however, they must exercise this right within a limited period, namely within six (6) months from the date of the release resolution (Art. 558/2 TCC). In such case, the limitation periods under Art. 560 TCC shall not apply. The six-month period is a preclusive period and runs from the date of release. This system establishes a special regime in which the right of action of dissenting shareholders is restricted in temporal terms.

The claims of the company’s creditors relating to their direct damages are not extinguished by release. However, as can be seen, in respect of claims for indirect damages to be asserted on behalf of the company, release has a restrictive effect.

Limitation Periods and Irrevocability

Art. 560 TCC introduces a fundamental provision on limitation periods in liability actions. Under this provision, three distinct limitation periods are envisaged for the liability of board members. Accordingly, the right to claim compensation against those who are liable becomes time-barred two (2) years after the date on which the claimant became aware of both the damage and the person liable. As is clear from the wording of the provision, the two-year period begins to run from the moment the claimant learns of both the damage and the responsible person.

In addition to the two-year period, the TCC also provides for a five (5)-year limitation period, which runs in any event from the date on which the act giving rise to the damage occurred.

Apart from these, Art. 560 TCC provides for another limitation period. If the act giving rise to liability also constitutes a criminal offence and is subject to a longer limitation period under the Turkish Criminal Code, such longer limitation period will also apply to the compensation claim.

Limitation may be invoked by the defendant board members as a defence. The general provisions of the Turkish Code of Obligations apply to the suspension and interruption of limitation. It is not possible to amend limitation periods by contract (Art. 6 TCC).

There is also no possibility of revoking (annulling) the release resolution through a subsequent general assembly resolution (Art. 558/1 TCC). The reason for this is that the release resolution is constitutive and creates a new legal status. The irrevocability of the release resolution is a principle designed to ensure legal certainty. The release resolution may not be subsequently altered or invalidated by the general assembly. On the other hand, it should be noted that Art. 558/1 TCC preserves the application of Art. 445 TCC. Art. 445 concerns actions for annulment. Since release is a general assembly resolution, the release resolution may be annulled by means of an action for annulment. In this context, the release resolution may be annulled in the presence of defects of consent such as fraud, serious lack of information or the material deception of the general assembly. In this framework, release will afford protection only if it has been adopted in conformity with the principle of good faith; otherwise, the legal consequences attached to it will not arise.

Corporate Governance Perspective

From the perspective of corporate governance principles, release is not merely a technical legal institution; it is also a process in which the shareholders’ power to evaluate and supervise the company’s management is concretely exercised. The effective use of the right to obtain and review information is a decisive element for the legitimacy of the release resolution.

The company’s management should not regard the release process merely as a legal formality. It must fully inform the shareholders on matters such as the accuracy of the balance sheet, the transparency of related party transactions, the clarity of the annual report and the handling of conflicts of interest. Such an approach turns the release mechanism into both an accountability tool and an internal confidence mechanism within the company.

Conclusion

The release mechanism is an exceptional instrument that removes or narrows the liability of board members under Turkish joint stock company law, yet in practice it is often reduced to a more “routine” decision than it deserves. However, when Arts. 408, 418, 424, 436, 553, 558, 560 and 6 TCC are considered together, it becomes clear that the release resolution is subject to a strict legal regime in terms of its substance, procedure and consequences. When deciding on the release of management and representation activities, the general assembly must form not only a formally correct, but also a substantively informed will; otherwise, the release resolution becomes an instrument that undermines rather than strengthens corporate governance principles.

In this context, it should be particularly emphasised that, as a rule, the approval of the balance sheet results in release; however, no implicit release effect can be recognised where the balance sheet is drawn up in breach of the principles of clarity and accuracy, where the true financial position of the company is concealed or where the shareholders’ rights to obtain and review information are violated. Likewise, compliance with the rules on loss of voting rights under Art. 436/2 TCC in both explicit and implicit release resolutions is essential in order to ensure that the decision reflects an independent shareholder will, free from conflicts of interest. It must also not be overlooked that release is limited to those acts which have been presented to the general assembly or which the general assembly has had the opportunity to become aware of, and to the financial period to which the release relates; acts involving gross negligence, fraud or intent which have been concealed cannot benefit from the protection afforded by release.