LAW 514 LEGAL STRUCTURE OF FINANCIAL INSTITUTIONS AND MARKETS

1. LAW 514 LEGAL STRUCTURE OF FINANCIAL INSTITUTIONS AND MARKETS Prof.Dr.Huriye Kubilay Spring Semester/2013

2. INTRODUCTION TO FINANCE LAW • TurkishCode of Obligations: The New Code of Obligations ("the New Code") became effective in Turkey as of 1 July 2012. • Turkish Commercial Code, 6102Effectiveness: July1, 2012. • Capital Market ActThe New Capital Markets Law has been published in the Official Gazette on 30 December 2012and it wasenteredintoforce at thesamedate. • BankingAct, 5411Effectiveness: November, 01.2005 • Bank CardsandCreditCardsAct, 5464 Effectiveness: March 1, 2006 • InsuranceAct, 5684 Effectiveness: June 14, 2007.

3. General TransactionConditionshttp://www.erdem-erdem.av.tr/erdem-erdem.php?katid=12110&id=14779&main_kat=14774 • The newTurkishCode of Obligationsincludes a section regarding «GeneralTransactionConditions" (Art. 20-25). One of the significant issues introduced by the new TurkishCode of Obligations, numbered 6098 (“NCO”) is the concept of “GTCwhich was not included in the oldCode of Obligations (“CCO”), and reflects the concept of “Terms and Conditions” widely incorporated in standard form contracts in English and American Law. • Frequentandwide-rangeuse:GTCis being used in every area of life, because oftechnological developments and accelerating everyday life.

4. The TCO is based on “freedom of contract” principle and concept of “individual contract” drafted as a result of mutual negotiations of the parties. Individual contract is the contract in which the declarations of intent such as offer, counter offer, acceptance are achieved as a result of reciprocal negotiations. However, in present-day, enterprises such as finance companies, insurance companies or companies that offers goods and services to consumers use standard form contracts –also known as adhesion contracts- which are unilaterally and abstractly prepared for their later utilization in more than one transaction with respect to services rendered by them.

5. ADHESION/STANDARD FORM CONTRACTS • GTT is a contractual term inserted in these contracts. They also referred to as “adhesion contracts” or “standard form contracts”.

6. As to GTC, there is imbalanced relationship between the parties in favor of one party over the other during the preparation of the agreement; the terms of the agreement are not negotiated. Mostly, the prices are set forth based on the tariffs. In such case, the party, who will enter into an agreement with the related enterprise, has no opportunity other than accepting or rejecting the text which was prepared unilaterally.So a statutoryintervention is needed.In actual case, the parties are usually composed of one private individual and large organization do not negotiate equitably, because one of the parties has the power to determine the terms of the contract in favor of itself.

7. The provisions ofTCO regarding GTC are not new for Turkish law system, but expand the framework for better consumer protection.

8. PROTECTION WITH GENERAL PROVISIONS • Firstly, legalprotection tried to be achieved based on the mandatory provisions of Code of Obligations, Civil Code or Commercial Code such as bona fides, violation of law, public morality or public order or fraudulent actions.

9. CONSUMER PROTECTION ACT, 4077 • GTT is mainly regulated with respect to the transactions of which the addressees are consumers under article 6 titled “Unfair Conditions of Contracts” of the Act concerning Protection of Consumers numbered 4077 (“Act nr. 4077”).

10. UNFAIR CONDITIONS • In accordance with Article 6, added to the Act nr. 4077 with an amendment announced in the Official Gazette dated 14.03.2003, the terms and conditions of contract, which are set forth in the agreement unilaterally by the seller or the provider of the services without any negotiation with the consumer -in other terms adhering party - and which are against the bona fides, and thus causes extensively imbalanced relationship against the consumer, are defined as “Unfair Conditions”. This article also indicates that unfair conditions are not binding for the consumers and can be put aside by the judge.

11. UNFAIR CONDITIONS REGULATION • Again, in accordance with article 6, as per article 7 of the “Regulation on Unfair Conditions under Consumer Contracts” (“Unfair Conditions Regulation”) announced in the Official Gazette dated 13.06.2003 and numbered 25137 emphasize the invalidity of the unfair conditions and it sets forth that if the contract stands, the remaining parts of the contract will be valid.

12. TCO • The provisions of TCO with respect to GTCare regulated under articles 20-25. The current legal systems put a three-dimensional assessment system with respect to the assessment of GTT: • validity assessment, • interpretation assessment and • content assessment

13. DEFINITION • As per article 20 of TCO, GTCis defined as “the contract terms which are previously and unilaterally prepared by one party with a purpose of using them for several numbers of similar contracts and submitted to the other party during the signing of a contract”.Within the context of this definition, three primary factors taken into account:(i) the use of contractual terms for several numbers of identical agreements,(ii) previously and unilaterally preparation, and(iii) submission to the other party.

14. Validityassessment • In accordance with article 21 of TCO, in order for the GTC fall under the contract, it is necessary for the party who prepared the contract to give clear information to the other party regarding the existence of these terms, to provide the opportunity to the other party for learning the content of these terms and it is also necessary that the other party accepts such terms. • In the event of breach of the above provisions, the relevant GTCare deemed as not-included in the contract as invalid terms.

15. InterpretationAssessment • According to Article 23, if a term in GTCis not expressed with a plain language and easily understandable or ambiguous then it shall be construed against the party who prepared the contract and in favor of the weaker party. This provision with respect to the interpretation assessment is a reflection of the main principles of Roman Law “in dubio contra stipulatorem” (in doubt, the contract construed against the drawee).

16. Content Assessment • Article 25 of the TCO sets forth that within GTCcannot contain terms which are against bona fides, against the other party and significantly disadvantageous for the other party.

17. Enterprise Lawhttp://the-atc.org/data/updates/120410turkey_tr_insights_tcc_01112011.pdf Preserving the characteristics of the oldTCC, TCC, 6102is orientated to harmonize the TurkishEnterprise Law with European Law. Main pointsregarding this reform refer to accounting principlesforenterprises, commercialbooks, commercialregistry, unfair competition and further to agency contract. «Business enterprise» is defined in such a mannerthatcovers e-commerce.

18. New Accounting Principles and CommercialBooks One of the most remarkable reforms of the TCCis enforcing modern accounting rules and newnorms for commercial books. In this framework,TCCprescribes that all the accounting systemsof Turkish enterprises shall be arranged inconformity with Turkish AccountingStandards,which have been and will be further enforcedaccording to internationally accepted financialstandards(IFRS).

19. In addition to that, the enterpriseshall document and file all of its commercialtransactions, if necessary electronically, whichmeans that electronic registry mechanisms shallbe integrated within the accounting system of anenterprise(Art. 64/2 TCC). On the other part, anyrecords to appear in the commercial books of amerchant shall be complete, correct, on time andsystematic ( Art. 65/2 TCC). The most distinctiveaim of the lawmaker is, as reflected in the Code,“to enable an expert to achieve a proper pictureof the operations and of the financial situationof the enterprise within a reasonable period".

20. Inconnection with this hypothesis, rules referringto commercial books, accounting systems andauditing shall be regarded as a whole and thepractice shall be conducted in a manner to enabletransparencyandreliability.

21. Commercial Registry: MERSIS • Establishing an electronicallybased registry system is one of the most crucialconcerns of TCC. Electronic registry will serve toimplement the principle of “ true and fair view”.

22. Through the electronic registry, the transparencyof the enterprise records will be reinforced,whereas positive and negative functions of theregistry system shall be conducted in a moreefficient manner. In addition, the State and theChamber of Commerce, which shall hold thecommercial registry, are successively responsiblefor the damages arising from the transactionscarried out by the registry holder (Art. 25/2 TCC). • With a global approach, the rules regarding theelectronic registry and the rules in respect with theinformation technologies shall serve for a betterimplementationof thetransparency.

23. Business name • The rules referring to the businessname have been reformed in order to enable atransparent and reliable system. In this system,the lawmaker aims to enable third parties to getproper information about the legal situation ofthe enterprise. Particularly, the TCC underlines theprinciples of transparency and true and fair view(Art.39 TCC ff.) In addition to that, Art. 39 TCCevidently demonstrates the correlation betweenthe legal regime surrounding the business nameand the rules related to information technologies.

24. Protection of business name • Ifanybusiness name has beenregistered in anyregistrydepartment of Turkey, it cannot be usedbyanothermerchantwithoutmaking an additiontodiscern (Art.45, TCC). Thiskind of protection has beenacceptedforonlythebusinessnames of legal personmerchantsduringtheeffectiveness of old TCC, 6762. Thebusinessnames of naturepersonshavebeenprotectedonly in theboundaries of RegistrationRegionwhichthebusiness name wasregistered.

25. Unfaircompetition • Competitionlawandtheregime concerning unfair competition are twodisciplines, which are continuously treatedwith a modern view in European and Swisslawsystems. The new legal regime concerningunfair competitondefines the concept of unfaircompetition and demonstrates the connectionbetween this legal regime and the competitionlaw.

26. Other dimensions of the reform shall bementioned as the enumeration of several versionsof unfair competition and further more efficientrules for the compensation of the damages arisingfrom unfair competition. The Code enumeratesand classifies many trade practices as unfaircompetition cases in conformity with the decisionsof the European Court of Justice.

27. Some examples for unfair competition are asfollows: • Fraudulent sale and advertisement practices • Procuring a person to invade or dissolve hiscontract. • Benefiting from other’s products in aninequitablemanner • Acquiring and declaring other’s business secrets. • Invading certain rules enforced for a certainbranchof profession • Utilizing inequitable general terms andconditions,

28. TCC pays special attention to preserve the Turkishjurisprudence evolved by the Turkish Court ofCassation up to date. Despite adopting the Swisslaw reform in respect with unfair competition,the lawmaker intends to maintain the formationof Turkish law in this discipline. New rules forunfair competition distinguish themselves bysafeguardingconsumerrights.

29. Inspite of theexistence of special regulations for consumer protection, TCC equivalently elevates the consumervalue, since competition restrictions invadethe consumer’s legal status. The core of unfaircompetition law is orientated to protect not onlyrivals but all themarket participators.

30. Agencycontract • As the focal point of foreign investment, theagency contract is very common in practice.For this reason, the legal regime concerning theagency contract faces an extensive legal reform. • On the contrary, other similar agreements such asfranchising agreement and exclusive sales agencyagreement are not treated by TCC. Apparently,TCC seems to restrict the practice of theseagreements solely with general principles of lawand with certain regulations of Competition Law.

31. Principal-Agent • The most remarkable points of the new rules areas follows: The rule for the unauthorized agencyhas changed in a manner, that in the event that acontract has been concluded by an unauthorizedagent and further in the event that the principaldoes not assume this contract at once after hehas been informed of the conclusion of thisagreement, the unauthorized agent is responsibleto fulfill this agreement (Art. 108 TCC).

32. Agencyfee • On the other hand, TCC reinforces the agent’sright to acquire the agency fee. Accordingly,the agent shall deserve a fee for each of histransactions, equivalently for the transactions notimplemented by the agent but implemented in hisgeographic area. Art. 113 TCC preserves the rightof fee, even in the case that the agency contracthas been terminated. The agent deserves the claimfor fee for the transactions started before thetermination of thecontract.

33. The obligations of the principal • The obligations of the principalhave beenequivalently enumerated in TCC, whereas TCCdemonstrates which obligations shall be fulfilledby the principalin order to urge the agent toeffectuate his obligations (Art. 120 TCC). TCC characteristicallysafeguards the rights of the agents, sinceTurkish enterprises appear as agents rather thanprincipals.

34. Portfolıocompensatıon • Another new dimension of agency contracts isportfolio management. In spite of the lack ofregulation, Turkish Higher Court has implementedportfolio compensation for the agencyagreements dissolved without the fault of theagent. Taking into consideration the regulationin Swiss Law and the decisions of Turkishjurisprudence, TCC enforces a specific norm forportfolio compensation, namely Art. 122 TCC.

35. According to this regulation, in the event that1. the agency contract has not been dissolvedon the basis of the fault of the agent, 2. thatthe principalacquires eminent benefits fromthis dissolution 3. that the agent is deprived ofputting forward a legal claim, which he is entitledto put forward under normal circumstances and4. finally that the principle of equity necessitatesthe payment of such a compensation, the agentmay ask for a portfolio compensation, which shallbalance the enrichment of the principalthanks tothe clients acquired by the agent for the principaland the loss faced by the agent because of thedissolution of the contract without the fault of theagent.

36. TCC advances to release a concrete normwhich allows the portfolio compensation for othersimilar types of agreements such as exclusive salesagencyagreements.

37. CompanyLaw • General aspects Through TCC, Turkish company law experiencesa comprehensive reform. The generalprinciples of company law as well as to joint stockcompanies and limited liability companieswill be tackled.

38. General principles • The first chapter of Company Law is dedicatedto general principles. Considering moderndevelopments in European and Swiss law systems,the Code proposes to enforce many principles andlegal institutions which are to a large extent newtoTurkishlaw.

39. TCC encompassesdetailedrulesconcerningmergers, scissions (splitting) andtransformationsof enterprises (Art. 134-194 TCC). Existing rulesare inadequate to meet the needs of the practice.Considering many decisions of Turkish CompetitionAuthority, there is a very evident lack of rules withmaterial law character, subject to regulate thetransformation of enterprises. New rules of thisdiscipline originate from European and Swiss lawsystems.

40. Groupcompanies • Another novelty of the TCC is the legal regimeprescribed for the group of companies. Taking intoaccount the academic acquisition of the “HighLevel Group of Company Law Experts”’, TCCenforces a comprehensive legal system for thegroup of companies. First of all, TCC demonstratesmain elements of the group of companiesand enumerates fundamental instruments ofcontrol. By the means of these instruments, TCCequivalently raises a presumption of control,this means that the rules related to the groupof companies will have a critical role in TurkishCompanyLaw.

41. Parentcompany-Subsidiarycompany • The new system implements special liabilityregimes for parent companies. Such liabilitygrounds on the misuse of the control or on theconfidence restored by the parent company in theviewof thirdparties.

42. Reforms on joint stock companies • Foundation Existing rules related to the foundationof the joint stock companies enable “gradualfoundation”, which means that the founders,undertaking a certain part of the capital, maymake announcements in order to raise capital. • In this alternative, the company shall be foundedupon the collection of the whole capital. It shallbe recorded that this method of foundation hasnot gained currency in Turkish practice. • INSTANTANEOUS FOUNDATION • İzmir ScienceandTechnology Park Inc.

43. As a consequence of this event, TCC renounces themethod of gradual foundation and replaces thismethod with the method of public offer. In thisnew alternative, the company shall transform acertain part of the capital into pecuniary sharesand execute the public offer of these shares withina period of 2 months from the foundation of thecompany (TCC, Art.346).

44. With this perspective, TCC elevatesessential characteristics of joint stock company,by raising its anonymous character. Through thismethod, even private (not listed) companies maybenefit from the advantages of capital markets.

45. Renouncing the “Ultra Vires” principle • According to Art. 137 of the current TCC, anytransactions of a company which fall outsidethe scope of the business activities prescribed inthe articles of association are deemed as invalid.Such transactions are named as “ultra vires”transactions, since all the transactions referring tothe core business activities stated in the articles ofassociation of the company are valid and “intravires”. In line with the 1st Company Law Directiveof EU, TCC renounces this principle.

46. Joint stock company with a sole shareholder • Considering the developments in EU Law, TCClaunches the joint stock company with a soleshareholder (one-man company Art. 338/1TCC). Three essential functions of this regulationare 1) to reconcile the legal regime with theeconomic truth 2) to establish a new modelfor investors who require limited liability 3) toconstitutea model facilitatingthelaunchingand the conduction of group of companies,institutionalization of enterprises and further theestablishmentof foundations.

47. On theotherhand, this reform enables a shareholder to buy othershareholders’ shares and turn the company intoa company with a sole shareholder. In the eventof such a transfer of shares to a sole shareholder,the board of directors is bound to register this factwith the commercial registry within seven daysfrom the transfer. Otherwise the board of directorsshall be liable for the damages borne by thirdparties because of this transfer.

48. Registeredsharecapital • TCC allowsthejointstock companies to adopt registered capital(Art.332 TCC). Particularly, it shall be stated thateven joint stock companies which are not publiclyheldmay equivalently benefit from this system.This reform reflects TCC’s tendency to diminish thedistance and differences between several kindsof joint stock companies. Even companies with alimited circle of shareholders, which consciouslyrefrain from becoming publicly-held companies,may need to adopt registered capital. The start-upcapital for the companies, adopting the system ofregistered capital amounts to 100.000 TL.

49. Conditionalcapitalincrease • General Assembly maydecideconditionalincrease of capital. Thepurpose of thiscapitalincrease is toprovidetherighttoacquire of newsharestocreditorsoremployees.

50. Qualified sharecapital • Any property rights and property itemsmay be submitted as a part of capital to a jointstock company (Art. 342 TCC). Consideringthe evolution of technology and implementingrelated modern rules, intellectual property rightsare classified as a sort of qualified share capital,whereas it is enabled to propose a web site as aqualifiedcapitalinstrument.