Authors: Capital Markets Law Department, Prof. Dr. Ali Paslı, Attny. Mustafa Şahin

Introduction

For the preservation of corporate assets and the sustainability of corporate governance in publicly held companies, transactions conducted with related parties require a higher level of oversight and transparency compared to equivalent transactions with unrelated third parties. This requirement arises from the inherently increased likelihood of Disguised Profit transfers within related party configurations.

Under Turkish capital markets law, this risk is controlled through three interrelated layers: (i) Article 17 of the Capital Markets Law No. 6362 (“CML”), titled Corporate Governance Principles, regulates the decision-making and approval processes for related party transactions; (ii) the Corporate Governance Communiqué (II-17.1) details the procedural rules and thresholds applicable to such transactions according to their nature; and (iii) Article 21 of the CML prohibits Disguised Profit transfers and, upon detection, triggers restitution, compensation, and sanction mechanisms.

This normative structure is complemented by Turkish Accounting Standard 24 “Related Party Disclosures” (“TAS 24”), which serves as the reference framework for defining related parties from an accounting perspective. The following sections first analyze the concept of related parties and the transaction regime systematically, and then examine the scope, elements, and consequences of the prohibition on Disguised Profit transfers.

1.1. Related Parties

Turkish capital markets legislation does not contain a statutory definition of “related party.” Instead, Article 9 of the Corporate Governance Communiqué refers to the definition provided under TAS 24. This approach aims to align legal compliance and financial reporting consistency within the same framework.

Accordingly, the company whose shares are traded on the stock exchange is considered the “reporting entity,” and relationships within the scope of TAS 24 are assessed across the company–individual–entity axis. A person, or their close family members, is considered related if they have control or joint control over the reporting entity, significant influence over it, or serve as key management personnel of the entity.

At the entity level, configurations such as being members of the same group, shareholding or joint venture relations, connections between subsidiaries controlled by the same third party, post-employment benefit plan relationships, clusters of entities controlled by the same person, and service providers of key management personnel all give rise to related party status.

In corporate governance practice, this definition provides the reference framework for the decision-making processes of the reporting entity (the publicly held company) and determines which transactions will trigger additional approval, valuation, and disclosure mechanisms.

1.2. Board of Directors’ Approval and General Assembly Procedure under Article 17 of the CML

Article 17 of the CML mandates that, for transactions with related parties whose nature is determined by the Capital Markets Board (“Board”), the board of directors must adopt a resolution setting out the terms of the transaction. Execution of such resolution requires the approval of a majority of the independent board members.

If the majority of independent members do not approve, the matter must be disclosed to the public via the Public Disclosure Platform (“PDP”) with sufficient information and subsequently submitted to the general assembly for approval. At the general assembly, the transaction parties and their related persons are not permitted to vote; no meeting quorum is required, and resolutions are passed by the simple majority of those entitled to vote. Board and general assembly resolutions not taken in line with this scheme are invalid.

The purpose of this rule is to make potential conflicts of interest within the management body visible through internal control, to protect the balance between minority and investor interests, and ultimately to ensure that the transaction is carried out under market conditions.

Furthermore, the Board has regulated the related party transactions requiring the approval of independent board members in the Corporate Governance Communiqué. In this context, the procedures applicable to transactions with related parties are divided into two categories: (i) related party transactions that are frequent and continuous in nature—referring to transactions of the same type conducted or to be conducted at least twice within a single fiscal year, whether of a commercial nature or not within the ordinary course of business—and (ii) related party transactions that are not frequent or continuous. The Communiqué sets quantitative thresholds for the latter category, as detailed below.

1.3. Procedures for Non-Recurring Related Party Transactions

For single transactions—such as acquisitions of assets or services, or assumption of obligations—with a related party (including subsidiaries), if the transaction amount exceeds 5% of the company’s total assets in the latest publicly disclosed financial statements, or of the annual revenue in the latest annual financial statements, or of the company’s value calculated on the basis of the arithmetic average of the adjusted six-month weighted average share prices prior to the date of the board resolution, a valuation must be obtained before the transaction.

The same proportional analysis applies to asset or service sales; where the net book value of the asset exceeds the transaction value, the net book value shall prevail. When the ratio reaches 10%, in addition to the valuation requirement, approval by the majority of independent board members must be obtained in the board resolution, and related board members are excluded from voting.

If the independent majority does not approve, the matter must be disclosed through the PDP and submitted to the general assembly for approval. No separate valuation is required for share transfers executed on the stock exchange. For lease transactions, the net present value based on discounted cash flow is used.

In cases where ratios yield negative or nonsensically high results and thus lose applicability, this situation may be excluded from ratio analysis, provided that the justification is disclosed via the PDP.

1.4. Procedures for Recurring and Continuous Related Party Transactions

For recurring and continuous related party transactions, the board of directors must determine the transaction scope and conditions in advance and adopt a new resolution in case of significant changes in terms. If the total transaction value during the same fiscal year is expected to exceed 10% of the cost of sales (for purchases) or of revenue (for sales), a board report containing transaction terms and market comparisons must be prepared, and the full report or its summary must be disclosed on the PDP.

In this category, approval by the majority of independent board members is not mandatory; however, if such approval is not granted, the reasoning of dissent must be publicly disclosed. In this way, the market receives a signal of arm’s length and fair dealing, establishing an evidentiary chain for subsequent audits and potential investor claims.

2. Prohibition of Disguised Profit Transfers: Scope, Elements, and Proof

Article 21 of the CML prohibits publicly held companies, collective investment undertakings, and their subsidiaries or affiliates from reducing their profits or assets—or preventing their increase—through contracts or practices with related parties that contain prices, values, or terms contrary to arm’s length conditions and market practices.

Moreover, failure by such entities to undertake activities expected from a prudent and honest merchant, thereby increasing the profit or assets of related parties, is also deemed a Disguised Profit transfer.

The CML requires that the arm’s length nature of these transactions be documented and that all evidentiary documents be retained for at least eight years. If the Board determines that a profit transfer has occurred, it shall require restitution of the transferred amount with legal interest; the restitution obligation is directed at the party who gained the undue advantage, without prejudice to other legal or criminal sanctions.

For a violation to occur, four elements must co-exist: (i) the transferring party must be a publicly held company, a collective investment undertaking, or one of their subsidiaries or affiliates—indirect transfer chains and intra-group structures are not excluded; (ii) the recipient must be a “related person/entity” defined through management, control, or capital relations; (iii) the transaction must have a disguised character—such as prices, values, or terms contrary to market norms, prudence, or honesty, or intentional omission of required actions; and (iv) there must be a tangible economic consequence in the form of a decrease in the company’s profit or assets, or prevention of their increase.

For evidentiary purposes, valuation reports, comparable transaction examples, independent expert opinions, and board minutes carry probative significance. In cases of passive misconduct (e.g., refraining from litigation, non-participation in tenders, deliberate delay), documentation of “omission-based” processes that caused damage is required.

3. Tax Law Dimension: Disguised Profit Distribution through Transfer Pricing

Disguised Profit transfers have consequences not only under capital markets law but also under tax law. Article 13 of the Corporate Income Tax Law No. 5520 regulates “disguised profit distribution through transfer pricing,” based on the criteria of arm’s length principle and Treasury loss.

Transactions such as purchases, sales, manufacturing, construction, leasing, lending, services, and similar payments are, as a rule, considered sales or acquisitions of goods or services. This regime requires simultaneous observance of the arm’s length principle across both legal domains: transparency and approval obligations under capital markets law, and accurate pricing and documentation obligations under tax law.

4. Consequences of Violations of the Disguised Profit Transfer Prohibition

A violation of Article 21 of the CML gives rise to civil, administrative, and criminal consequences concurrently.

Civil law aspect:

Upon the Board’s determination of a Disguised Profit transfer, the party benefiting from the transaction becomes subject to a restitution obligation. The transferred amount must be returned to the company (or the relevant collective investment undertaking) together with legal interest. This restitution obligation is often accompanied by liability for damages: the board members who caused the loss and the persons/entities benefiting from the advantage may be held jointly and severally liable for the company’s damages. If restitution is not made within the period granted by the Board, the receivable shall be collected through judicial proceedings.

Administrative aspect:

The Board may disclose its findings to the public to ensure transparency and inform investors and, pursuant to Article 94 of the CML, may directly initiate legal action to recover the unlawfully transferred amounts within the prescribed period.

In respect of unlawful transactions, annulment actions may be filed within three months of detection, and actions for nullity or inexistence within five years. If necessary, interim measures constituting direct intervention in management may be imposed: signature authorities of responsible persons may be suspended, and if a criminal complaint has been filed, such persons may be removed from office pending trial; new board members may be appointed to serve until the next general assembly.

Criminal aspect:

Depending on the circumstances of the case, a Disguised Profit transfer may constitute the criminal offense of breach of trust. Article 110/1(b) of the CML classifies the reduction of a company’s profit or assets through a non-arm’s-length transaction with a related party as an aggravated form of the offense, prescribing a minimum imprisonment term of three years.

Conclusion

In publicly held companies, related party transactions represent a critical vulnerability point of corporate governance. Any deviation from the principles of arm’s length and transparency immediately triggers, under Article 17 of the CML and the Corporate Governance Communiqué (II-17.1), decision-making and approval mechanisms; and under Article 21 of the CML, restitution, compensation, and sanctions.

Unless the relational framework established by TAS 24 is properly identified, the thresholds (e.g., 5% valuation, 10% independent approval/reporting) are observed, and documentation discipline is maintained, such transactions become legally unsustainable.

The multilayered regime—encompassing annulment and nullity actions, management interventions, and criminal consequences—creates strong deterrence to protect investors and minority shareholders. In practice, a sustainable solution is achievable only through standardization of pre-transaction arm’s length analyses, independent valuations, and transparent PDP disclosures.