Liability Of The Parent Company Arising From The Breach Of Trust In Group Companies

ANALYSIS OF ARTICLE 209 OF THE TURKISH COMMERCIAL CODE

Group companies had substantial importance in Turkish commercial and legal world with their existence without any normative rule under legislation. Therefore, the legislative aimed to fill this significant gap with set of provisions, which has been introduced under Article 195-210 of the Turkish Commercial Code numbered 6102 entered into force on 1 July 2012 (the ‘TCC’ or the ‘Code’). One of the most radical changes brought by the TCC is the liability of the parent company within a group, arising from the trust, as described under Article 209 of the TCC.

According to the relevant article, the parent company shall be liable from the trust which is based on its reputation, provided that such a reputation attains a level where it inspires trust to the consumers and the community. The level of this reputation shall be evaluated along with the circumstances of each case[1].

In light of the above, there are certain requirements for Article 209 to apply. First and the most important, there needs to be an existence of a ‘group’ within the meaning of Article 195, i.e. existence of a ‘domination relationship’ between at least two companies, as defined therein[2]. Consequently, in case of lack of such relationship, Article 209 shall not be applicable.

Furthermore, as mentioned above, the publicly recognized reputation of the group needs to result in a confidence in public. Therefore, if the group does not have a reputation, or has a reputation which does not result in confidence, Article 209 shall not apply. In this aspect, the crucial point is the reputation being special, in terms of arising confidence; i.e. any confidence does not raise the application of the said article. Taking into account that the legislative does not have a specific definition on the reputation that arises confidence, as mentioned above, this shall be determined in accordance with the circumstances of each case.

Lastly, in order for article 209 to become applicable, the abovementioned trust should be used by the subsidiary against third party, who suffers a loss as a result of relying on such trust. The third party may (i) act or (ii) refrain to act, counting on the trust and confidence established by the group. These affirmative and privative acts should be in a way that will raise further trust, which induces the third parties (i.e. consumers, customers, etc.) to enter into a transaction with the sister company (i.e. the subsidiary). It should also be noted that there needs to be an ‘adequate causality’ in terms of evaluating the loss arisen from such an action or refrainment, which is also the case in the application of such theories in most civil law countries in Europe (i.e. Switzerland and Germany).

To focus on a more specific issue under such rule, the preamble of Article 209 mentioned letters of comfort as a particular appearance of the liability arising from trust. Under Turkish law, the letters of comfort are defined from a perspective of a group company structure, as they are declarations by the parent company in relation to its subsidiaries, addressed to the third parties, aiming to ease the conclusion of an agreement with the subsidiary. The parent company may leave an impression that it is giving a guarantee, even though in general, it does not have the intention to undertake any legal obligation.

From the same perspective, the legislative introduced Article 209, in order for the parent company to be deemed responsible. Even though there is no written letter of comfort, but there is a trust at the society arising from the reputation of the parent company, this Article shall be applied. Therefore, the said provision grants a legal binding nature to the comfort letters in that context, and deems the parent company liable which is hiding behind the veil of its subsidiary.

Kind regards,

GUR LAW FIRM


[1] Ahmet Battal, Sirketler Toplulugunda Guvenden Dogan Sorumluluk, Marmara Üniversitesi Hukuk Fakültesi Hukuk Araştırmaları Dergisi (MÜHF-HAD) Book: 18, Issue: 2, Year: 2012, p. 249
[2] According to Article 195 of the TCC, if a company, directly or indirectly, (i) holds the majority of the voting rights of another, or (ii) has the right to ensure the appointment of the members forming a resolution quorum in the management body of another company, according to the articles of association (‘AoA’) of such, or (iii) holds the right to dispose the majority of voting rights of another company according to an agreement, solely or with other shareholders based on an agreement, in addition to its own voting rights, or (iv) is able to control the other company in accordance with an agreement or through other means, the former company is deemed as the controlling company and the latter is deemed as the dependant company or subsidiary.