On 31.03.2020, an announcement was made by the Ministry of Trade ("Ministry") to limit the dividend distribution decisions to be taken at the shareholders meetings to be held for 2019 fiscal year. Although the underlying reason for the related announcement was to protect stock companies, this announcement had been subject to various critics at the doctrine since the amendment made by virtue of this "announcement" was making an amendment on the Turkish Commercial Code and this was not in line with the general principles of law. These critics are now revoked by the new amendments brought via the Commuting the Effects of New Coronavirus (Covid-19) Outbreak on Economic and Social Life and Amending Certain Laws numbered 7244 ("Law No. 7244") and the Communiqué on the Procedures and Principles Regarding Implementation of Provisional Article 13 of the TCC ("Communiqué").

By Law No.7244, provisional article 13 has been added to the TCC, with respect to distribution of dividends during the shareholders meeting for 2019 fiscal year.

The Communiqué has been published on 17.05.2020 by the Ministry. The Communiqué sets forth the principles regarding the provisional article 13 of the TCC, which regulates the distribution of dividends. The main aim is to secure the stock companies during the pandemic period.

In accordance with these new amendment, a stock company, if not subject to any exceptions regulated under the Communiqué (such as the companies in which funds (in which state, special provincial administration, municipality, village or other public legal entity have more than 50% ownership) have direct or indirect ownership more than 50% in total capital) (i) cannot distribute any dividend that is more than 25% of their net profit as an agenda item of its shareholders meetings for the 2019 fiscal year, (ii) cannot distribute retained earnings and free reserve funds arising from previous years from 17.04.2020 until 30.09.2020. In addition, during this same period shareholders cannot grant its board of directors the authority to distribute dividends (if shareholders previously granted the management body the authority to distribute dividends, the advance payments shall be postponed until 30.09.2020) and even if the shareholders adopted a dividend distribution resolution for the 2019 fiscal year before the enforcement of the Law No.7244, but the payment was not yet made or only partially made, the companies shall postpone dividend payments for more than 25% of their net profit for the 2019 fiscal year until 30.09.2020. That determined period may be extended or shortened for up to 3 months by the President.

As we stated hereinabove, we would like to rearticulate that the previous years' profits and free reserve funds shall not be subject to distribution besides one exception; capital increase through internal resources. It means the companies may continue to add the retained earnings and free reserve funds to the capital. According to the Communiqué, if shareholders have already adopted a dividend distribution resolution before the entry into force of these regulations (17.04.2020), despite having incurred a loss, payments for the unpaid portion shall be postponed until 30.09.2020. No interest is accrued on postponed payments.

Exceptions to which the above-mentioned regulations will not be applied have been determined in the Communiqué. These exceptions are as follows:

  1. Companies which adopted to distribute dividends in the amount of TL 120.000 and lower. This exception has its own exemptions as follows; (i) those who benefit from short-time working and/or those who benefit from unpaid leave right allowance due to the Unemployment Insurance Law numbered 4447, (ii) those who use National Treasury-backed loan surety and still have unpaid credit debt balance due to the Public Finance and Debt Management Law numbered 4749.
  2. Companies which decide to distribute dividend for purposes of making payment for the capital commitment made by the company in cash to another stock company provided that this capital payment constitutes more than half of the dividend to be distributed.
  3. Companies which decide to distribute dividends for purposes of using cash for the liabilities that have become due until 30.09.2020 within the scope of loan agreements or project finance contracts executed by the company.

In order to benefit from these exceptions, the related companies shall submit the evidencing documents to the Ministry. The Communiqué states that in order to negotiate the dividend distributions in the shareholders meeting, it is compulsory for the companies which are within the scope of above-mentioned exceptions to obtain declaration of conformity from the Ministry. Companies shall also submit the notarized resolution, the relevant fiscal year's financial statement and its profit or loss statement to the Ministry for that applications.

The last one important clarification in the Communiqué is about the financial statements to be taken as basis for the dividend calculation. The Communiqué regulates that, the companies that are obligated to prepare its financial statements in direction of independent auditing requirements, has to take the financial statements as basis which are prepared in accordance with the Turkish Accounting Standards; whereas the others must take the financial statements as basis which are prepared in accordance with the Tax Procedural Law numbered 231 ("Law No.231"). In any case, the dividend amount to be distributed must not exceed the total amount of the funds subject to dividend distribution as per the records kept in accordance with the Law No.231.

As a result;

  • Until 30.09.2020, above-mentioned restrictions shall be taken into account for distributing dividends. li>Exceptions and exemptions which are determined in the relevant legislation should be evaluated for each specific case. li>It should be noted that the responsibility of the members of the board of directors to act prudently and cautiously to protect the equity of companies under the TCC still is in force. li>If a stock company is subject to the exceptions, the company needs to follow the procedure newly introduced by the Communique and obtain approval from the Ministry before the dividend distribution decision. li>Need to be careful on the financial statements to be taken as basis for calculation of dividends.

The reason for this amendment is stated as not to reduce company resources by distributing dividends, to protect the existing equity structures of companies and ensuring that no additional financing needs arise. So, attention should be paid to the issues mentioned above and regulative updates should be followed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.