One of the measures taken to mitigate the threat imposed on economic life by the novel coronavirus (Covid-19), which has been declared a pandemic by the World Health Organization, is related to the dividend distribution of capital companies.
In this context, with provisional Article 13 added to the Turkish Commercial Code numbered 6102 ("TCC") through the Law No. 7244 on the Mitigation of the Impacts of the Novel Coronavirus (COVID-19) Outbreak on Economic and Social Life and on the Amendment of Certain Laws, certain limitations have been introduced regarding the dividend distribution decisions to be adopted by the capital companies until 30 September 2020, for the purposes of not reducing company resources by means of cash dividend distribution, protecting companies' existing equity structures, and avoiding additional financing needs1.
Subsequently, through the Communiqué on the Methods and Principles Regarding the Application of Provisional Article 13 of the Turkish Commercial Code No. 61022 ("Communiqué") issued by the Ministry of Trade ("Ministry"), exceptions to these limitations, as well as the conditions and procedures for capital companies to benefit from such exceptions, have been determined.
In this Newsletter, the limitations under provisional Article 13 of the TCC and the exceptions regulated under the Communiqué are addressed, and the procedures and principles of benefiting from such exceptions are explained.
Limitations Regarding Dividend Distribution
Pursuant to provisional Article 13 of the TCC, except for the companies of which more than fifty percent of the share capital is directly or indirectly owned by the state, special provincial administration, municipality, village or other public legal entities, as well as the funds of which more than fifty percent of the share capital is owned by the state, the following limitations shall apply until 30 September 2020 regarding the distribution of dividends of capital companies. The President is authorized to extend and/or shorten this period by three months.
- It can be resolved on the distribution of only up to 25% of the annual net profit for the year 2019.
- Previous years' profits and free legal reserves cannot be made subject to distribution.
- General assembly cannot authorize the board of directors to distribute advance dividends.
- If the general assembly had previously decided to distribute dividends for the year 2019, but the shareholders have not yet been partially or completely paid, payments for the portion exceeding 25% of the annual net profit for the year 2019 shall be postponed until 30 September 2020.
According to the wording of the Article, not only the payments exceeding 25% are restricted until 30 September 2020, but it is also not possible for the general assembly to take a decision on this matter until the specified date.
It should be mentioned that there is a significant difference between the provisions of the TCC and the Communiqué regarding free legal reserves. Provisional Article 13 of the TCC regulates that if the general assembly decided to distribute dividends for the year 2019 prior to the entry into force of such Article, but the shareholders have not yet been partially or completely paid, payments for the exceeding portion shall be postponed until 30 September 2020. This provision is limited to the profit for the year 2019, and does not include any expression regarding the payments to be made in accordance with the decisions for the distribution of previous years' profits and free legal reserves. However, Article 4/3 of the Communiqué regulates that if a decision for making a distribution from the free legal reserves has been adopted, although the fiscal period has ended with losses, payments for the portions that have not been yet paid shall be also postponed until 30 September 2020. On the other hand, the Communiqué does not include any specific provisions regarding the decisions for distribution of previous years' profits taken before the entry into force of provisional Article 13 of the TCC.
A similar situation is also noted regarding the payments to be made in accordance with the authorization granted to the board of directors for distribution of advance dividends for the year 2020 before the entry into force of the Article. Whereas the TCC does not introduce an obligation to postpone such payments, Article 4/4 of the Communiqué regulates that if the board of directors has been authorized by the general assembly to distribute advance dividends, advance payments shall be postponed until 30 September 2020.
Another regulation of the Communiqué, which is not included in the TCC, is that interest shall not accrue on the postponed payments (Article 4/3 of the Communiqué).
Finally, pursuant to Article 4/1 of the Communiqué, dividend distribution limitations shall not apply to capital increases to be made from internal resources in accordance with Article 462 of the TCC. Accordingly, it is possible for the shareholders to acquire gratis shares via capital increase through internal resources.
Procedure to Benefit from Exceptions
Pursuant to Article 6 of the Communiqué, for the discussion of dividend distributions to be made in accordance with the exceptions regulated under the Communiqué at the general assembly, an affirmative opinion must be obtained from the Ministry. The common documents to be submitted to the General Directorate of Domestic Trade ("General Directorate") within the scope of the applications are the notarized copy of the decision of the governing body regarding holding the general assembly, as well as the financial statements and profit or loss statements of the company for the accounting period.
Companies that Decide on Distribution of Dividends in an Amount under TRY 120,000
Excluding the companies that employ those who receive short-term working support pursuant to additional Article 2 and provisional Article 23 of the Unemployment Insurance Law No. 4447, and/or who benefit from wage support due to being placed on unpaid leave within the scope of the Covid-19 measures pursuant to provisional Article 24 of the same Law, and which utilize a Treasury-supported loan surety, and still have unpaid loan balances pursuant to provisional Article 20 of the Law No. 4749 on Regulation of Public Finance and Debt Management and the related Decisions, the limitations under provisional Article 13 of the TCC shall not apply to the companies that decide on the distribution of dividends in the amount of TRY 120,000, or below (Article 5/1-a of the Communiqué).
In the applications of the capital companies seeking to benefit from this exception, the documents to be obtained from the relevant authorities evidencing that the relevant supports have not been received shall be submitted to the General Directorate (Article 6/1-a of the Communiqué).
Companies that Decide on Distribution of Dividends to be Used by the Shareholders in the Fulfilment of their Capital Contribution Obligations
Provided that more than half of the distributed dividends shall be used by the shareholders in the fulfilment of their capital contribution obligations towards another company in full and in cash in accordance with the provisions of the TCC, companies that decide on the distribution of dividends shall be within the scope of the exception (Article 5/1-b of the Communiqué).
When the wording of the Article, where it states that the capital contribution obligation should be "in accordance with the provisions of the TCC", is taken into consideration, it can be said that the capital contribution obligations towards foreign companies do not fall within this scope. This is because only the capital contribution obligations towards Turkish companies are subject to the provisions of the TCC.
In order to benefit from this exception, among others, documents evidencing the capital contribution obligations to another company of those who are entitled to receive more than half of the dividends shall be included in the application file to be submitted to the General Directorate (Article 6/1-b of the Communiqué).
Companies that Decide on Distribution of Dividends to be Used by the Shareholders in the Fulfilment of their Obligations within the Scope of Loan or Project Finance Agreements
The last exception within the scope of the Communiqué is provided to the companies that decide on the distribution of dividends, provided that the distributed dividends shall be used in cash by the shareholders in the fulfilment of their obligations, which become due and payable by 30 September 2020, within the scope of executed loan or project finance agreements (Article 5/1-c of the Communiqué). In such companies, payments related to the amounts that exceed the shareholders' fulfilment obligations shall be postponed until 30 September 2020 (Article 5/2 of the Communiqué). This provision regarding postponement does not cover the other exceptions regulated under the Communiqué; it only concerns the exception within the scope of loan and project finance agreements.
Companies covered by the exception must submit the documents evidencing the shareholders' performance obligations within the scope of the relevant loan and project finance agreements to the General Directorate, in order to obtain the affirmative opinion of the Ministry. (Article 6/1-c of the Communiqué).
Calculation of Dividends
Pursuant to Article 7 of the Communiqué, in the calculation of dividends, for the companies that are required to prepare their financial statements in compliance with the standards determined by the Public Oversight Accounting and Auditing Standards Authority, i.e. companies that are subject to independent audit, financial statements prepared according to Article 88 of the TCC shall be taken as the basis; whereas, for other companies, financial statements prepared according to the Tax Procedure Law No. 213 ("TPL") shall be taken as the basis. In addition, the dividend amount that is foreseen to be distributed cannot exceed the total amount of the resources subject to the dividend distribution available in the records that are kept according to the TPL.
It can be said that through this Article, the Communiqué not only introduces a provision within the scope of provisional Article 13 of the TCC but, as well, sets a general rule regarding the method for the calculation of dividends.
Within the scope of the measures taken against Covid-19, significant limitations have been introduced regarding the distribution of dividends through provisional Article 13 added to the TCC on 17 April 2020. Exceptions to these limitations have been regulated with the Communiqué published on 17 May 2020. Upon review of the provisions of the Communiqué, one may notice that the scope of exceptions is not extensive. In addition, it can be said that the fact that the general assemblies within the scope of exceptions can be made only upon the affirmative opinion of the Ministry, instead of automatic application of exceptions, will significantly reduce the number of companies to benefit from the exceptions. This is because when there is less than four months until the expiry of the limitation, as of the date of this Newsletter, taking into consideration the processes such as collection of the necessary documents, application to the Ministry, awaiting a response and, subsequently, awaiting the general assembly invitation and announcement periods to expire, it would not be wrong to say that the exceptions will not (be able to) find a field of application. It should also be mentioned that the Communiqué falls short in terms of advance dividends. It is still unclear what will happen if advance dividends for the year 2019 have been distributed prior to the entry into force of provisional Article 13 of the TCC, but the dividend distribution cannot be made in an amount that is sufficient to cover such advances due to the limitations.
1. Preamble of Article 12 of the Law No. 7244.
2. The Communiqué (Official Gazette, 17.05.2020, No. 31130) entered into force through publication.
Originally published on May 2020
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