THE LEGAL LIABILITY OF INDEPENDENT BOARD MEMBERS

With the deepening of capital markets and the rise in corporate governance standards, the structure of boards of directors has evolved from being merely a ‘governing’ body to also serving as a ‘supervisory’ mechanism. Independent board members, who are at the heart of this evolution, form the primary safeguard for establishing trust through their impartial decision-making authority and supervisory functions over executive bodies.

Today, independent members are positioned not merely as board members within companies, but also as the legal guarantee of transparency and the protection of rights. Whilst independent board membership does not entail an executive role, it should not be regarded as a status where legal liability is entirely eliminated in certain decisions and processes. Independent directors bear personal liability in proportion to their negligence within the scope of their participation in decision-making processes and their supervisory duties, limited to their areas of responsibility.

This study examines independent board membership and, in this context, the legal liability of independent board members, focusing on the aspects that distinguish them from other board members.

The 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 Regulation (“Regulation”), the Regulation on the Determination of Corporate Governance Principles (“CGP Regulation”) and the Capital Markets Law No. 6362 (“CML”).

Definition and Scope of Independent Board Membership

An independent board member refers to the title given to board members of joint-stock companies subject to the CPL who hold seats on the board and possess certain characteristics. The most important characteristic of independent board members is that they do not hold executive roles and are independent of management. These members are tasked with supervising executive board members and protecting the interests of minority shareholders who are not represented in management. Article 5/2 of the Regulation mandates that companies whose shares are traded on the Borsa Istanbul Star Market, Main Market and Secondary Market must have members on their boards of directors who are “capable of performing their duties without being subject to any influence” and who are designated as independent members.

Rights and Powers of Independent Board Members

The powers of independent board members can be categorised under three headings: prevention, disclosure and participation in committees. These powers do not grant independent board members the authority to make executive decisions or to manage company operations; rather, they envisage a role that is preventive, balancing and ensures transparency in relation to specific transactions.

Authority Regarding Conditional Approval & Transparency in Decision-Making Processes

Independent board members play a critical role in certain transactions that could significantly affect the interests of the company and its stakeholders. In this context, transactions involving related parties, routine and ongoing transactions, and transactions involving the company providing guarantees in favour of third parties are subject to the board’s decision; the execution of such transactions requires the affirmative vote of a majority of independent members. These transactions represent areas where the legal liability of independent board members is most concentrated and where the highest risks are present in practice.

Disclosure Obligations

In certain circumstances, even if the board of directors meets the quorum requirement, should independent board members fail to vote in favour of certain transactions, whilst the adoption and implementation of the decision are not prevented, it may be mandatory to disclose the transaction in question and the grounds for the independent members’ opposition on the Public Disclosure Platform (‘KAP’). In this context, public disclosure is required where there is a significant change in transactions between related parties that are widespread and ongoing (Regulation Art. 10), and where a majority of independent members do not vote in favour of transactions involving the provision of guarantees in favour of third parties (CMA Art. 17/1, Regulation Art. 12). In this context, independent board members assume an active responsibility not only in decision-making processes but also in ensuring public transparency and the proper information of investors.

Authority to Serve on Committees

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

Legal Liability of Independent Board Members

The liability of independent board members is also personal and based on fault, in accordance with Article 553 of the Turkish Commercial Code. Whilst there is no separate regulation regarding the liability of independent board members, their liability differs in certain cases from that of executive board members, as independent board members are not executive members. [1]

Legal Liability of Board Members

Where board members cause damage by breaching their obligations arising from the law or the articles of association, the issue of compensation for such damage arises.[2] The source of the legal liability of board members is Article 553 of the TCC.

Conditions for the Liability of Board Members

Breach of the Law or 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 whilst performing their duties and to safeguard the company’s interests in accordance with the principle of good faith.

Damage

If no damage has occurred, it is not possible to speak of legal liability.

Causal Link

The final condition is the existence of a causal link (causal link) between the act contrary to law or the Articles of Association and the damage.

Delegation of Management and Representation Powers

As provided for in Article 553(2) of the Turkish Commercial Code; provided that the board of directors delegates its duties and powers—excluding those duties and powers that cannot be delegated or waived—in accordance with the duty of care, and exercises oversight to ensure that the person assuming such powers performs their duties properly, the board shall not be liable for the acts and decisions of that person.

Joint and Several Liability

Pursuant to the provision in Article 557 of the Turkish Commercial Code, where more than one member of the board of directors is liable to compensate for the same loss, each member shall be jointly and severally liable with the other members for that loss to the extent that the loss may be attributed to them based on their fault and the circumstances of the case.

Cases of Liability Under the Turkish Commercial Code

Primary Liability Cases

The non-delegable duties and powers of board members are regulated in Article 375 of the Turkish Commercial Code. With regard to the duties and powers listed in the said article, independent board members shall also be primarily and jointly and severally liable for any resulting damage, alongside other board members. Given the importance of these duties in terms of the company’s management and corporate structure, they give rise to a high duty of care for all board members. However, taking into account the specific circumstances of the case and the severity of the fault, the possibility of apportioning liability cannot be entirely ruled out.

Delegation of Authority & Supervisory Liability

Independent board members are those who do not hold executive positions. Pursuant to Article 367 of the Turkish Commercial Code (TCC), management authority may be partially delegated by the board of directors. Independent board members hold their positions within this structure as non-executive members and are subject to a duty of supervision with regard to the delegated authorities.

The scope of this liability is defined by Article 553/3 of the Turkish Commercial Code. According to this provision, ‘no person may be held liable for breaches of the law or the articles of association, or for acts of corruption, arising from circumstances beyond their control; this exemption from liability cannot be invalidated on the grounds of the duty of supervision and care’.

Cases of Liability Under the Capital Markets Law

Transactions and Operations Requiring the Approval of an Independent Board Member

For certain transactions regulated in the Circular, the condition that a majority of independent board members cast a favourable vote is required. In this context, the liability of the members will also be relevant. These include:

Transactions with Related Parties

Pursuant to Article 17(2) of the Capital Markets Board Regulation and Article 9 of the Circular, a prior board resolution is mandatory for certain types of transactions to be conducted by companies and their subsidiaries with related parties. Where it is anticipated that the transaction amount will exceed 10%, the decision in question must be approved by a majority of the independent board members. Should the independent members fail to give their approval, the transaction is disclosed on KAP and submitted to the general meeting for approval; board decisions not taken in accordance with these procedures are deemed legally invalid.

Recurrent and Ongoing Transactions

Pursuant to Article 10 of the Circular, the scope and conditions of recurrent and ongoing transactions entered into by companies and their subsidiaries with related parties are determined by the board of directors; should there be significant changes in these matters, a new resolution must be adopted. Should the value of such transactions within a financial period exceed the prescribed threshold, the approval of a majority of the independent board members is required. If approval is not granted, the grounds for the objection are disclosed on KAP; however, this does not prevent the transaction from being carried out.

The Company’s Provision of Guarantees in Favour of Third Parties

Pursuant to Article 12 of the Circular, partnerships and their subsidiaries may not, as a general rule, provide guarantees, pledges, mortgages or sureties in favour of third parties; however, exceptions are provided for their own legal entities, partnerships subject to full consolidation, third parties within the scope of ordinary commercial activities, and directly held subsidiaries. Board resolutions regarding the provision of guarantees in favour of third parties within the scope of ordinary commercial activities require the approval of a majority of independent members; members who are related parties may not vote. If approval is not granted, the grounds for the objection must be disclosed on KAP; this does not prevent the transaction but public disclosure is mandatory.

Special Circumstances Giving Rise to Liability Under the Capital Markets Law

Liability Arising from Information Contained in the Prospectus

The preparation of a prospectus is mandatory for the public offering of capital market instruments. Pursuant 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. Where it is impossible to recover damages from the persons in question, or where it is clearly evident that such recovery is impossible, the public offerors, the lead underwriter acting as an intermediary in the issue, any guarantor, and the members of the issuer’s board of directors shall be liable to the extent that damages may 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 preparation and public disclosure of the information contained in the prospectus may be held liable for the resulting damages, 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, in proportion to their negligence, are liable for damages arising from the preparation, presentation, or inaccuracy of financial statements and reports in contravention of Article 14/1 of the Capital Markets Board (SPK) Regulation. As the audit committee responsible for reviewing and evaluating financial statements and reports consists of independent members, liability of these independent members will arise in the event of damage arising from such documents, provided that negligence is established.

Liability Arising from Disclosure Documents

Pursuant to Article 32 of the Capital Markets Board (SPK) Regulation, those who sign 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 any damages arising from incorrect, misleading or incomplete information contained therein. In this context, members of the board of directors are also liable. As is clear from the wording of the relevant provision, the principle of differentiated joint and several liability does not apply here; should liability be established, each board member shall be jointly and severally liable for the loss.

Liability Arising from Dividend Advances

Pursuant to Article 9 of the Circular, a dividend advance is an advance distributed in cash to shareholders based on the interim financial statements of companies whose shares are traded on the stock exchange. In accordance with Article 20 of the Capital Markets Board (CMB) Regulation, the total dividend advance to be distributed in a financial period may not exceed half of the net profit of the previous year, and a new distribution may not be made without offsetting previous period advances.

Board members are liable for losses arising from the preparation of interim financial statements that are untrue or contrary to legislation, in proportion to their degree of fault (SPK Article 20/2). As the audit committee consists of independent members, the liability of independent board members will come into play in the event of fault. [3]

CONCLUSION: Areas of Liability, Key Risks and Points to Note

The role of an independent board member involves no executive authority; however, it is a position that may give rise to legal liability in certain decisions and processes. In this context, the liability of independent board members is, in principle, based on fault and is limited to their scope of duties and actual contribution. The key areas of liability, the risks specific to these areas, and the fundamental points to be considered regarding independent board membership are summarised below:

Key Areas Where Liability May Arise

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-delegable board duties as set out in Article 375 of the Turkish Commercial Code,
• Breach of reasonable care in the selection of persons to whom management authority has been delegated and in the oversight of their activities,
• Transactions subject to the approval of independent members in accordance with capital markets legislation,
• The presence of 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 where duties are undertaken within board committees, particularly the audit committee.

1. Key Risks Specific to Independent Board Membership

The most frequently encountered risks in practice regarding independent board membership may include the following:

• Voting on certain board decisions without sufficient information or documentation, despite not being involved in executive duties, and being viewed as a mere “rubber-stamp”,
• Accepting decisions without a thorough examination of their content due to the heavy workload of the board or committee agenda,
• Failure to provide a reasoned justification for dissent where required, or failure to record such dissent in the minutes,
• Failure to conduct sufficient scrutiny regarding the accuracy of information in publicly disclosed documents such as KAP announcements and financial reports,
• The development of a mistaken sense of security that the status of an independent member automatically removes liability.

1. Key Points to Note

To manage legal risks within the scope of independent board membership, particular attention must be paid to the following points:

• Requesting written information and documents regarding every significant decision and transaction presented to the board of directors, and ensuring that the review is based on concrete data as far as possible,
• Refraining from casting a vote in favour where deemed necessary, and ensuring that any dissent is expressed clearly, with justification, and recorded in the minutes; making a notification to KAP where conditions warrant
• Treating the committee’s work not as a mere formality but as a practical and effective oversight tool,
• Carefully assessing the content of documents to be disclosed to the public (particularly financial reports and special situation disclosures) prior to signature or approval,
• Conducting management and oversight activities in a manner that is documentable, traceable, and, in short, transparent, so as to limit personal liability.

1. Risks That May Arise in the Event of Non-Compliance with These Matters

Should the responsibilities and matters requiring attention outlined above not be adhered to, the following legal and practical risks may arise for independent board members:

• Risk of Personal Liability for Damages

Should the company, shareholders or creditors suffer loss as a result of board decisions or a failure to fulfil supervisory duties, an independent board member may be held personally liable for damages in proportion to their degree of fault. This liability is not limited to the term of office and may be asserted even after the member has stepped down if the loss comes to light subsequently.

• Capital Markets Sanctions and Administrative Fines

In cases such as breaches of disclosure obligations, or the inclusion of incorrect, misleading or incomplete information in prospectuses or financial reports, the Capital Markets Board (SPK) may impose administrative fines and other administrative sanctions. These sanctions may also be directed at independent board members where negligence is established.

• Joint and Several Liability Risk

In relation to certain disclosure documents and capital market transactions, joint and several liability may apply amongst board members who sign the relevant documents or participate in the decision-making processes. In such cases, the full amount of the loss may be claimed from the independent board member; even if there is a subsequent right of recourse, the risk and liability increase.

• Increased Liability Due to the Absence of a Dissenting Note

Failure to record a reasoned dissenting note in the minutes regarding decisions deemed 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 diligence. This situation facilitates the emergence of liability and increases the burden of proof.

• Risk of Loss of Reputation and Trust

An independent board membership entails not only legal but also significant corporate reputational liability. Being associated with controversial transactions within the company or in the public eye may have a negative impact on future offers for board or senior management roles.

• 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 scrutiny and questioning in these areas may raise allegations that the independent board member has been negligent regarding matters they “ought to know”.

GRC LEGAL COMMENT

Although independent board membership is often mistakenly perceived in practice as a risk-free “signing/approval authority”, the legal framework imposes an active duty of oversight on these members, focusing on the monitoring of decision-making processes rather than company operations. Whilst the fact that members remain outside the day-to-day operations may constitute a defence in determining liability for negligence, it must 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 context, to ensure legal certainty, it is critical that independent members review data from management with the diligence of a reasonable manager and address any disruptions in the flow of information by exercising their right to obtain written information.

In this context, the risks that may arise within the scope of independent board membership—despite the non-executive nature of the role—can lead to concrete and personal consequences, particularly if the functions of audit, oversight and public transparency are not properly fulfilled. A significant portion of these risks can be managed through conscious participation in decision-making processes, assessments based on sufficient information, and, where necessary, the clear expression of dissent. In this context, the role of an independent board member can be characterised as a duty involving attention, diligence and a responsibility to make decisions based on documentation, rather than operational 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.