Unlawful Exercise of Control Within Corporate Groups

Under the Turkish Commercial Code (TCC), the relationships between a parent company and its controlled subsidiaries are subject to a specific legal regime governing corporate groups.

The TCC defines a company as a “controlling company” if it directly or indirectly holds the majority of voting rights or has the majority power in the governing body of another company. Moreover, even in the absence of a shareholding relationship, if contractual commitments establish certain conditions, a parent–subsidiary relationship may arise, and both entities become subject to the corporate group regime.

While a controlling company may hold partial or full control over its subsidiary, it is legally required to exercise this control in accordance with the law. Otherwise, the TCC grants shareholders and creditors of the subsidiary the right to bring various claims and lawsuits against the controlling company and its board of directors for damages.

Unlawfulness and Loss

As a rule, a controlling company may not use its dominance to the detriment of its subsidiary. According to the TCC’s rationale, “unlawfulness arises from an act, decision, or omitted measure that causes a loss to the subsidiary, harms its creditors, and lacks a legitimate justification from the subsidiary’s perspective.” In other words, the use of control is not inherently unlawful—what is prohibited is its use in a manner that causes the subsidiary to incur a loss.

Although the Code does not define the term “loss” precisely, it provides examples such as:

• transferring business, assets, funds, receivables, or staff to another group company;

• being forced to engage in transactions that reduce or transfer profits;

• providing guarantees or sureties or assuming debt;

• unjustifiably closing facilities or restricting investments.

Importantly, the concept of “loss” under the TCC is broader than the concept of “damage” in contract law. A loss can also occur if the subsidiary is deprived of a potential opportunity, even if its assets are not diminished.

The TCC allows for a temporary tolerance of such losses, assuming they will be compensated during the same fiscal period. This tolerance is based on the belief that the controlling company will act in the interest of the group and has the capacity to manage it effectively. If the loss is compensated within the same fiscal year, the act is no longer deemed unlawful.

Equalization

Compensation for losses caused by the unlawful exercise of control is referred to as “equalization.” This can be done either by providing equivalent benefits or rights to the subsidiary or by granting a legal claim (entitlement). Regardless, the remedy must occur within the fiscal year in which the loss was incurred. For the benefit of the subsidiary, any entitlement granted should be exercised without delay to avoid disputes.

For example, if the subsidiary gives a guarantee or surety, equalization may take the form of a counter-guarantee provided by the parent company, allowing recourse against the counter-guarantor. Alternatively, providing preferred dividend rights or profit guarantees to the affected shareholders may also be considered equalization. In cases where equalization is made through granting a right, one example is where a university foundation acting as the parent company requires subsidiaries to donate part of their profits, but exempts a particular subsidiary for a certain period, based on a contractual commitment. This exemption constitutes a form of granted entitlement.

Full Control

In some cases, the controlling relationship amounts to “full control,” defined as a situation where one company holds 100% of the shares and voting rights—either directly or indirectly—of another company. Under such conditions, the subsidiary is required to comply with the instructions of the parent company. However, these instructions must not be unlawful. The parent company may not issue directives that exceed the subsidiary’s financial capacity, endanger its existence, or cause loss.

Otherwise, the resulting damages are not the responsibility of the subsidiary’s board of directors or executives, and unless the loss is equalized, the subsidiary and its shareholders may bring compensation claims against the controlling company and its management.

When full control does not exist, a subsidiary is not obligated to comply with all instructions from the parent company. In such cases, the subsidiary’s managers retain discretion, especially when the parent’s instructions may violate the principle of group trust. Ignoring this discretion could expose the subsidiary’s board members to liability, as has been confirmed by the Turkish Court of Cassation in various rulings.

Legal Actions

If a loss arising from misuse of control is not properly compensated, the following claims may be brought:

1. A compensation claim by the shareholders of the subsidiary (with alternative remedies)

2. A compensation claim by the subsidiary’s creditors

3. A lawsuit challenging the inadequacy of the equalization

4. An action for annulment or nullity of the general assembly resolution that caused the loss

Another form of unlawful control is using voting power to pass general assembly or board decisions that harm the shareholders of the subsidiary—for example, restructuring the subsidiary (via merger, division, or type change), dissolving it, or making financial or charter amendments without just cause. These decisions may give rise to:

1. Compensation claims

2. Lawsuits demanding the purchase of the plaintiff’s shares

3. Actions to annul or declare nullity of the general assembly resolution

4. Actions to declare nullity of the board resolution

Conclusion

Companies within a corporate group—particularly those in control—must act in accordance with the principles discussed above when dealing with group members or issuing instructions. Misusing the interests of a subsidiary may lead to legal liability toward the subsidiary’s shareholders and creditors. Ensuring the group’s interests are considered holistically and that intercompany transactions are pre-planned legally and financially will help minimize litigation risks.

Author

Ömer Faruk Çıkın