Dividend Distribution During Covid-19 Pandemic

The Law on Reducing the Effects of the Novel Coronavirus (COVID-19) Pandemic on Economic and Social Life and the Law on the Amendment of Certain Laws No. 7244 (“Law”), published in Turkish Official Gazette of 17 April 2020, introduced a significant regulation for corporations.

The Provisional Article 13 added to Turkish Commercial Code (“TCC”) reads as follows:

“PROVISIONAL ARTICLE 13 – (1) In the corporations, it can be resolved to distribute only up to twenty five percent of the net profit of 2019, the past year profits or free reserves cannot be subject to distribution or the shareholders general assembly cannot authorize the Board of Directors to make advance dividend payment until 30/9/2020. This provision does not apply to companies in which the state, special provincial administration, municipality, village or other public legal entity is a shareholder holding more than 50% of the shares of those companies, or companies in which a public fund owns 50% of the company, and the state owns 50% of the public fund. The President is entitled to extend the period stated in this provision by three months or to shorten same.

(3) The Ministry of Trade is authorized to determine the exceptions on the corporations subject to this article, and the principles and procedures for the application, by consulting with the Ministry of Treasury and Finance.”

The provisional article introduces a temporary restriction on the shareholders general assembly’s right to freely dispose on the annual profit, which is among the non-transferrable rights of general assembly at joint stock companies as per art. 408 TCC. This restriction applies to all corporations, including the limited liability companies. According to the legislative intention, the purpose is to prevent reduction of company resources by cash dividend distributions, to protect equity structures and eliminate the need for additional financing as a part of precautionary policies during Covid-19 pandemic.

Actually, this limitation was declared by Ministry of Trade by a writ sent to the the Union of Chambers and Commodity Exchanges of Turkey on 31/3/2020 but it remained as a recommendation due to lack of a legal basis. The restrictions became binding by the Law No. 7244.

According to this provision, from the date of 17/04/2020 until 30/09/2020, the corporations;

• Cannot distribute dividend from its 2019 net profit over twenty five percent of the annual net profit,

• Cannot make a dividend distribution from past year profit or free reserves (even below twenty five percent),

• Cannot adopt a shareholders resolution to make advance dividend distribution.

• Besides, if the general assembly adopted a dividend distribution resolution for the 2019 financial year, but the payment is not yet made to shareholders or only partially made, the payments exceeding for more than 25% of the 2019 net profit must be postponed to end of the period stated in first paragraph.

The period stipulated in the law can be shortened or extended by the President by three months. So, the law provides possibility to arrange the restriction period by an administrative act depending on the economic impacts of Covid-19.

Since this provision provides a “prohibition to resolve”, a general assembly resolution adopted between the date of 17/04/2020 and the date of 30/09/2020 againts these restrictions would be a resolution against the law. Considering that the prohibition relates to “resolution” rather than the “timing of the distribution”, we are in the opinion that it would also not be possible to adopt a resolution to “make a distrubtion above the permitted percentage or from the reserves, but to make the actual distribution after 30/9/2020”. Indeed, given the President’s right to extend the restriction by three months additional period, the Board of Directors would be expected to refrain from proposing such a resolution to the shareholders meeting. Accordingly, if the shareholders wish to make a dividend distribution above the limitation or from the reserves, such resolution should be taken after the date of 30/9/2020 (or any extension by the President).

If a general assembly resolution against these restrictions is adopted, the trade registry would not register such resolutions. In respect of the resolutions which do not require registration, it would be recommendable for the Board of Directors to file annulment action against the resolution as per articles 445 and 466 TCC, in order to avoid the risk of a liability for non-execution of general assembly resolutions or non-acquittal in the future. In any case, any dividend distribution paid in violation of these restrictions would be deemed as unlawful payment and shareholders can be asked to refund these amounts to the company (art. 152 TCC, art. 611 TCC). Failure to ask for refund can give rise to Board members` liability.

Finally, in the last paragraph of provisional article 13, Ministry of Trade is authorized to regulate exceptions to this restriction and set out the rules and procedures of implementation. At this point, it is understood that certain corporations can be held exempt from the prohibition on dividend distribution. Considering that a right to dividend is part of property rights, creating a distinction in limitation of property rights among the shareholders by an administrative act may give rise to a constitutionality issues.

Fatma Kurt Erdoğan, Esq.