LEGAL LIABILITY OF INDEPENDENT BOARD MEMBERS

With the deepening of capital markets and the rise of corporate governance standards, the structure of boards of directors has evolved into a mechanism that not only ‘manages’ but also ‘oversees’. Independent board members, who are at the centre of this evolution, constitute the primary guarantee for establishing trust through their impartial decision-making abilities and oversight functions over executive bodies.

Today, independent members are positioned not only as board members in companies but also as the legal guarantee of transparency and the protection of rights. While independent board membership does not involve an executive role, it should not be considered a status where legal liability is completely eliminated in certain decisions and processes. Independent members bear personal liability in proportion to their faults within the scope of their participation in decision-making processes and their oversight obligations, limited to their areas of responsibility.

This study examines independent board membership and, in this context, the legal liability of independent board members, examining the points that distinguish independent board membership.

Legal Basis of Independent Board Membership

Regulations concerning independent board membership are set out in the Turkish Commercial Code No. 6102 (‘TCC’), the Corporate Governance Circular (“Circular”), the Circular on the Determination of Corporate Governance Principles (‘CGC Circular’) and the Capital Markets Law No. 6362 (‘CML’).

Definition and Scope of Independent Board Membership

Independent board member refers to the title given to board members who sit on the boards of joint stock companies subject to the CMB and who possess certain characteristics. The most important characteristic of independent board members is that they do not have executive duties and are independent of management. These members are responsible for supervising the executive board members and protecting the interests of minority shareholders who are not represented in management. Article 5/2 of the Communiqué requires that the boards of directors of companies whose shares are traded on the Borsa Istanbul Star Market, Main Market and Secondary Market include members who are ‘qualified to perform their duties without being subject to any influence’ and who are referred to as independent members.

Rights & Powers of Independent Board Members

The powers of independent board members can be categorised under three headings: prevention, disclosure and serving on committees. These powers do not grant independent board members the authority to make executive decisions or conduct company activities; rather, they envisage a preventive, balancing and transparency-ensuring role with regard to certain transactions.

Conditional Approval & Transparency Authority in Decision-Making Processes

Independent board members play a critical role in certain transactions that may significantly affect the interests of the company and its stakeholders. In this context, related party transactions, frequent and recurring transactions, and transactions involving the company providing guarantees in favour of third parties are subject to the board of directors’ decision, and the affirmative vote of the majority of independent members is required for such transactions to be carried out. These transactions are among the areas where the legal liability of independent board members is most concentrated and where the highest risk exists in practice.

Authority to Disclose Information to the Public

In certain circumstances, even if the board of directors has a sufficient number of votes to pass a resolution, if the independent board members do not vote in favour of certain transactions, the resolution may still be passed and implemented. However, the transaction and the reasons for the independent members’ opposition must be disclosed on the Public Disclosure Platform (KAP). In this context, disclosure to the public is envisaged in cases where significant changes are made to common and continuous transactions between related parties (Communication Article 10) and where the majority of independent members do not vote in favour of transactions involving the provision of collateral in favour of third parties (SPK Article 17/1, Communication Article 12). In this context, independent board members assume active responsibility not only in decision-making processes but also in ensuring public transparency and providing accurate information to investors.

Authority to Serve on Committees

Independent board members contribute to strengthening the corporate structure of joint-stock companies by serving on committees formed within the board of directors.

Legal Liability of Independent Board Members

The liability of independent board members is personal and based on fault, in accordance with Article 553 of the Turkish Commercial Code. Although there is no specific regulation regarding the liability of independent board members, their liability differs in some cases from that of executive board members, as they are non-executive members. [1]

Legal Liability of Board Members

If board members cause damage by breaching their obligations arising from the law and the articles of association, compensation for such damage may be sought.[2] The source of the legal liability of board members is Article 553 of the TCC.

5.1) Conditions for the Liability of Board Members

Breach of the Law and Articles of Association

For the liability of board members to arise, they must have breached their duties or obligations under the law or the articles of association.

Fault

Pursuant to Article 369 of the TCC, board members are obliged to exercise the care that a prudent manager would exercise and to protect the company’s interests in accordance with the principle of good faith when performing their duties.

Damage

If no damage has occurred, there can be no question of legal liability.

Causal Link

The final condition is the existence of a causal link between the act contrary to the law and the articles of association and the damage.

5.2) Transfer of Management and Representation Authority

As mentioned in Article 553/2 of the TCC, if the board of directors delegates its duties and powers – except for non-transferable and irrevocable duties and powers – in accordance with the principle of due care and supervises whether the person to whom the powers are delegated performs their duties properly, the board will not be liable for the acts and decisions of that person.

5.3) Differentiated Joint Liability

According to the provision in Article 557 of the TCC, if more than one board member is liable to compensate for the same damage, each member shall be jointly and severally liable for the damage to the extent that the damage can be attributed to their fault and the requirements of the situation.

Cases of Liability under the Turkish Commercial Code

Cases of Primary Liability

The non-transferable duties and powers of board members are regulated in Article 375 of the TCC. With regard to the duties and powers listed in the aforementioned article, independent board members, together with other board members, shall be primarily and jointly and severally liable for any damage incurred. These duties give rise to a high duty of care for all board members due to their importance in terms of the company’s management and corporate structure. However, the possibility of apportioning liability cannot be entirely ruled out, taking into account the specific circumstances of the case and the severity of the fault.

Delegation of Authority & Supervisory Responsibility

Independent board members are board members who are not responsible for execution. Pursuant to Article 367 of the TCC, management authority may be partially delegated by the board of directors. Independent board members are part of this structure as members who are not responsible for execution and are subject to a supervisory obligation with regard to the delegated powers.

The limits of this obligation are set out in Article 553/3 of the TCC. According to this article, ‘no one can be held liable for violations of the law or the articles of association or for corruption beyond their control; this exemption from liability cannot be invalidated on the grounds of a duty of supervision and care’.

Liability Cases under the Capital Markets Law

Transactions & Operations Requiring the Approval of Independent Board Members

For certain transactions regulated in the Communiqué, the majority of independent board members must vote in favour. In this context, the liability of the members will also be at stake. These are:

Related Party Transactions

Pursuant to SPK Article 17/2 and Circular Article 9, companies and their subsidiaries must obtain a prior board of directors’ decision for certain types of transactions with related parties. If the transaction amount is expected to exceed 10%, the decision must be approved by a majority of the independent board members. If the independent members do not approve, the transaction is disclosed on the Public Disclosure Platform (KAP) and submitted to the general assembly for approval; board decisions not taken in accordance with these procedures are considered legally invalid.

Frequent and Recurring Transactions

Pursuant to Article 10 of the Communiqué, the scope and terms of frequent and recurring transactions conducted by partnerships and their subsidiaries with related parties shall be determined by the board of directors; in the event of significant changes in this regard, a new decision shall be taken.

If the amount of these transactions within an accounting period exceeds the predetermined ratio, the approval of the majority of independent board members is required. If approval is not granted, the reason for the opposition is disclosed in the Public Disclosure Platform (KAP); however, this does not prevent the transaction from being carried out.

The Company Providing Guarantees in Favour of Third Parties

Pursuant to Article 12 of the Communiqué, partnerships and their subsidiaries cannot, as a rule, provide guarantees, pledges, mortgages, or sureties in favour of third parties; however, exceptions are provided for their own legal entities, fully consolidated partnerships, third parties within the scope of ordinary commercial activities, and directly participated affiliates.

The approval of the majority of independent members is required for board of directors’ decisions regarding the provision of guarantees in favour of third parties within the scope of ordinary commercial activities; members who are related parties may not vote. If approval is not granted, the reasons for the opposition shall be disclosed in the Public Disclosure Platform (KAP); this does not prevent the transaction but must be disclosed to the public.

7.2) Special Cases Giving Rise to Liability under the Capital Markets Law

Liability Arising from Information Contained in the Prospectus

A prospectus must be prepared for the public offering of capital market instruments. According to Article 10/1 of the Capital Markets Law, “Issuers are liable for damages arising from incorrect, misleading, or incomplete information contained in the prospectus. If the damage cannot be compensated by the persons concerned or if it is clear that it cannot be compensated, the public offerors, the lead brokerage firm acting as an intermediary in the issue, the guarantor (if any), and the members of the issuer’s board of directors shall be liable to the extent that the damage can be attributed to them, depending on their fault and the circumstances of the case.” Pursuant to this provision, independent board members who are at fault in the process of preparing and presenting the information contained in the prospectus to the public may be held liable for the damages incurred, taking into account the severity of their fault and the specific circumstances of the case.

Liability Arising from Financial Statements and Reports

The issuer and the members of the board of directors, to the extent of their fault, shall be liable for damages arising from the preparation or presentation of financial statements and reports in violation of SPK Article 14/1 or their failure to be true and fair. As the committee responsible for auditing, which primarily reviews and evaluates financial statements and reports, consists of independent members, the independent members shall be liable for any damages arising from these documents, provided that negligence exists.

Liability Arising from Public Disclosure Documents

Pursuant to Article 32 of the Capital Markets Board Regulation, those who sign public disclosure documents such as prospectuses, special situation disclosures and financial reports, and the legal entities on whose behalf they are signed, are jointly and severally liable for damages arising from incorrect, misleading or incomplete information contained in these documents. In this context, board members are also liable.

As understood from the wording of the relevant article, the principle of differentiated joint and several liability will not apply here, and if liability is established, each board member will be jointly and severally liable for the damage.

Liability Arising from Dividend Advances

According to Article 9 of the Communiqué, a dividend advance is an advance distributed in cash to shareholders based on the interim financial statements of partnerships whose shares are traded on the stock exchange. Pursuant to Article 20 of the CMB, the total dividend advance to be distributed in an accounting period may not exceed half of the previous year’s period profit, and a new distribution cannot be made without offsetting previous period advances.

Board members are liable for damages arising from interim financial statements being prepared in a manner that is inaccurate or contrary to legislation, in proportion to their fault (CMB Art. 20/2). As the audit committee consists of independent members, the liability of independent board members will come into question in the event of fault. [3]

CONCLUSION: Areas of Responsibility, Key Risks, and Considerations

Independent board membership is a role that does not involve executive authority but may give rise to legal liability in certain decisions and processes. In this context, the liability of independent board members is essentially based on fault and is limited to their area of responsibility and actual contribution. The following summarises the key areas of liability, specific risks, and important considerations for independent board membership:

Main Areas That May Give Rise to Liability

The risk of liability for independent board members may arise particularly in the following circumstances:

• Failure to exercise due care in decisions and processes relating to non-transferable board duties regulated under Article 375 of the Turkish Commercial Code (TTK),
• Breach of reasonable care in the selection of persons to whom management authority is delegated and in the supervision of their activities,
• Transactions subject to the approval of independent members in accordance with capital markets legislation,
• Incorrect, misleading or incomplete information in prospectuses, financial statements, activity reports and public disclosure documents,
• Failure to properly fulfil the duty of supervision and review in areas of responsibility within board committees, particularly the audit committee.
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• Key Risks Specific to Independent Board Membership

The most common risks encountered in practice with regard to independent board membership may include the following:

• Voting on certain decisions of the board of directors as a ‘formal approval body’ without sufficient information and documentation, despite not being involved in the execution of such decisions,
• Accepting decisions without thorough examination of their content due to the intensity of the board or committee agenda,
• Failure to provide reasoned grounds for dissent or to reflect dissent in the minutes when dissent is warranted
• Failure to adequately question the accuracy of information in publicly disclosed documents such as KAP disclosures and financial reports
• A false sense of security that the status of independent member automatically eliminates responsibility.
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• Key Points to Note

In order to manage legal risks within the scope of independent board membership, it is particularly important to pay attention to the following points:

• Requesting written information and documentation for every important decision and transaction submitted to the board of directors, basing the review on concrete data as much as possible,
• Refraining from casting a positive vote when deemed necessary and expressing dissent in a clear, reasoned manner that is recorded in the minutes, and making a disclosure to KAP when conditions so require.
• Treating committee work not as a formal duty but as an effective and practical oversight tool,
• Carefully evaluating the content of documents to be disclosed to the public (especially financial reports and special situation disclosures) before signing or approving them,
• Conducting management and oversight activities in a documented, traceable, and transparent manner that limits personal liability.
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• Risks That May Arise in Case of Non-Compliance

Failure to act in accordance with the above-mentioned areas of responsibility and points to note may give rise to the following legal and factual risks for independent board members:

Personal Liability Risk

If the company, shareholders or creditors suffer damage as a result of board decisions or neglected oversight obligations, independent board members may be personally liable for damages in proportion to their fault. This liability is not limited to the term of office and may be asserted even after leaving office if the damage arises subsequently.

Capital Markets Sanctions and Administrative Fines

In cases of breach of disclosure obligations, or where prospectuses or financial reports contain false, misleading or incomplete information, the Capital Markets Board (CMB) may impose administrative fines and other administrative sanctions. These sanctions may also be imposed on independent board members where fault is found.

Risk of Joint and Several Liability

For certain public disclosure documents and capital market transactions, joint and several liability may arise among board members who sign the relevant documents or participate in the decision-making process. In such cases, the entire loss may be claimed from the independent board member; even if recourse is possible afterwards, the risk and liability increase.

Increased Liability Due to Failure to File a Dissenting Opinion

Failure to record a reasoned dissenting opinion in the minutes against decisions considered contrary to the law or the company’s interests may lead to the independent board member being deemed to have endorsed the decision or failed to exercise due care. This facilitates the emergence of liability and increases the burden of proof.

Risk of Loss of Reputation and Trust

Independent board membership entails not only legal but also serious corporate reputation responsibilities. Being associated with controversial transactions within the company or in the public eye may have a negative impact on future offers for different board or senior management positions.

Specific Risks Arising from Committee Activities

Serving on critical committees, such as the audit committee, increases risks related to financial reporting and internal control processes. Failure to conduct sufficient review and questioning in these areas may raise allegations of negligence on the part of the independent board member regarding matters they ‘should have known.’

GRC LEGAL COMMENT

Although independent board membership is often mistakenly perceived as a risk-free ‘signature/approval authority’ in practice, the legal system imposes an active oversight duty on these members to monitor decision-making processes rather than company operations. Although the fact that members are removed from day-to-day operations may constitute a defence argument in determining liability for negligence, it should not be forgotten that they are in the most exposed position to financial risks, particularly due to their roles on audit committees and their key approval roles in strategic transactions. In this case, to ensure legal security, it is critical that independent members examine data from management with the diligence of a reasonable manager and eliminate any gaps in the flow of information by exercising their right to written information.

In this context, the risks that may arise in the scope of independent board membership can have concrete and personal consequences, particularly if the functions of oversight, supervision and public transparency are not properly fulfilled, despite the non-executive nature of the role. A significant portion of these risks can be managed through conscious participation in decision-making processes, assessments based on sufficient information, and, when necessary, clearly expressed dissent. In this context, independent board membership can be characterised as a role involving a duty of attention, diligence, and document-based decision-making, rather than executive risks.

[1] PAZARBAŞI, Gülşen; The Legal Liability of Independent Board Members, Istanbul Bilgi University Institute of Social Sciences, Master’s Thesis in Economic Law, Istanbul 2017, p.77.

[2] PAZARBAŞI, Gülşen; The Legal Liability of Independent Board Members, Istanbul Bilgi University Institute of Social Sciences, Master’s Thesis in Economic Law, Istanbul 2017, p.25.

[3] PAZARBAŞI, Gülşen; The Legal Liability of Independent Board Members, Istanbul Bilgi University Institute of Social Sciences, Master’s Thesis in Economic Law, Istanbul 2017, p.96.