INTRODUCTION
Profit generation is undoubtedly the main purpose and objective of the investor, who establishes a company by putting capital in kind or in cash, or who becomes a shareholder of an established company, in starting and continuing the commercial activity in question. While the profit obtained ensures the continuation of the investment and commercial activity, the investor also obtains a financial return from his investment with the distribution of this profit.
In this study, the question of whether dividend distribution is compulsory in joint stock companies, which are the most preferred type of capital companies by investors, is discussed within the framework of the old and new legislation and the doctrine.
CONCEPTS OF PROFIT AND DIVIDEND
In its simplest definition, the concept of“profit” is the excess of assets over liabilities at the end of a certain period. This surplus is the “profit” of the enterprise in that period.
This period is known as the “accounting year” in joint stock companies. The period of this accounting year, which generally covers the period between 1 January – 31 December, is indicated in the articles of association of the joint stock company. Article 508/II of the Turkish Commercial Code No. 6102 (“TCC”) stipulates that the annual profit shall be determined according to the annual balance sheet of the company, and the “year” referred to here is the accounting year rather than the calendar year.
Dividend (dividant, dividend), on the other hand, is a concept that we encounter in capital companies (for example, joint stock companies in terms of this study) and means an asset distribution made by companies to their shareholders over their existing profits. The shareholder, who obtains the dividend, gains a profit by obtaining the dividend from the investment made by putting capital. Accordingly, dividend is economically a return to the investor (shareholder) of the investment made in the capital of the company[1].
In addition, dividends may be distributed not only to shareholders but also to “other persons participating in the profit”, and accordingly, dividend refers to the share of the profit decided to be distributed to shareholders and other persons participating in the profit.
- DIVIDEND AND RESERVE FUND RELATIONSHIP
The TCC regulates the principles regarding the distribution of dividends in relation to the “reserve fund”, and in this context, it is useful to mention the concept of reserve fund.
The “reserve fund” is the money set aside at a certain rate from the annual net profits of the company, which is not distributed to shareholders and kept as reserve capital in the company. The purpose of setting aside reserves is to protect the company against economic risks.
Pursuant to Article 509/II of the TCC, dividends may only be distributed from net profit for the period and free reserves. Accordingly, if the company does not make a profit in the accounting year, it cannot distribute dividends, since the first condition for the distribution of dividends is that the company has made a profit.
In this context, before the dividend distribution is made, the net profit for the period, which constitutes the source of the distribution, must be determined. The company must first determine its annual net profit at the end of the accounting period. For this determination, the balance sheet and income statement of the company for the previous year are prepared.
At the end of the accounting period, after determining the annual net profit with the financial statements, the Company makes the calculation as follows in accordance with Article 519 of the TCC:
“(1) Five per cent of the annual profit shall be set aside as general legal reserve fund until it reaches twenty per cent of the paid-in capital.
(2) Even after the limit referred to in paragraph 1 has been reached;
a) The portion of the premium received from the issue of new shares that has not been used for issuance costs, redemption provisions and charitable payments,
b) The amount remaining after deducting the expenses of issuance of new share certificates to be issued in lieu of the amount paid for the share certificates cancelled due to cancellation,
c) Ten per cent of the total amount to be distributed to the persons who will receive a share of the profit after a five per cent dividend is paid to the shareholders,
added to the general legal reserves (Second Legal Reserve).
(3) If the general legal reserve fund does not exceed half of the capital or issued capital, it may be used only to cover losses, to continue the business when business is not going well, or to take measures to prevent unemployment and mitigate its consequences.”
It should be emphasised that the allocation of the second legal reserve depends on the distribution of the first profit. If the company does not distribute the profit, the second legal reserve is not set aside. In the event that the profit is distributed, after the first dividend distribution, the second reserves are set aside and then the second dividend distribution is made.
On the other hand, while the legislator has granted certain flexibilities to companies with respect to the allocation of reserves, it has also stipulated certain limitations with respect to the distribution of dividends. It is as follows;
- Pursuant to Article 521 of the TCC, the articles of association of the company may include a provision stipulating that “more than five per cent of the annual profit shall be set aside for the reserve fund and that the reserve fund may exceed twenty per cent of the paid-in capital”, and the articles of association may also stipulate that other reserve funds may be set aside. Accordingly, the reserve fund ratios set forth in the TCC are minimum ratios, and these ratios may be increased by the articles of association of the company.
- Article 522 of the TCC, on the other hand, stipulates that the articles of association of the company may set aside reserves for the purpose of establishing or maintaining charitable organisations for the directors, employees and workers of the company, or to be given to public legal entities for such purposes. However, it is obligatory to establish a foundation or a cooperative by separating the reserve funds and other assets allocated for charity purposes from the company.
- Pursuant to Article 523 of the TCC, dividends to be distributed to shareholders cannot be determined unless the legal reserves and the optional (discretionary) reserves stipulated in the articles of association of the company are set aside.
- In addition, according to the same article, the general assembly of the company may also decide to set aside reserves other than those stipulated in the law and the articles of association, if (i) it is necessary for the restoration of the company’s assets, (ii) it is justified in terms of the continuous development of the company and the distribution of dividends as stable as possible, taking into account the interests of all shareholders.
- Furthermore, even if there is no provision in the articles of association, the company may, by a resolution of the general assembly, set aside reserves from the balance sheet profit for the purpose of establishing or sustaining charity funds and other charitable organisations for the employees of the company or for other charitable and charitable purposes.
As can be seen, the legislator has indicated the minimum rates for the allocation of reserves; however, in some cases, more reserves may be set aside for certain reasons and conditions, and dividends may be distributed only after these reserves are set aside.
Accordingly, it is clear that the reserves that the company is obliged to set aside or that are set aside voluntarily in accordance with its articles of association directly affect the amount of dividends to be distributed by the company.
DIVIDEND DISTRIBUTION DECISION AND AUTHORISED BODY
Pursuant to Article 408/II-d of the TCC, the duty and authorisation of the general assembly of a joint stock company to decide on the use of profit and dividend distribution are among the non-transferable duties and authorisations of the general assembly. Accordingly, in the event that the company is in profit according to the financial statements and there is a profit to be distributed after the legal / voluntary reserves are set aside, the distribution of profit by the joint stock company will be possible only if the general assembly takes a decision on this issue. In other words, a joint stock company cannot distribute dividends with or without a resolution of the board of directors; the only authorised body in this regard is the general assembly.
Pursuant to Article 13 of theRegulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Representatives of the Ministry of Customs and Trade to be Present at These Meetings, one of the items that must be included in the agenda of the ordinary general assembly meeting is the agenda item on ” determining the method of profit utilisation and the rates of profit and profit shares to be distributed” . Accordingly, the decision on whether or not to distribute dividends in joint stock companies is taken by the general assembly at the ordinary general assembly meetings.
Accordingly, the process regarding the distribution of dividends is as follows:
- The board of directors of the joint stock company invites the general assembly to the ordinary general assembly meeting and prepares the agenda in accordance with the ordinary agenda items. In addition, the balance sheet, annual report, proposals for dividend distribution and documents on the determination of the amount to constitute the reserve fund are also prepared.
- In the ordinary general assembly meeting, the shareholders approve the balance sheet and income statement and discuss and vote on the agenda item on whether or not to distribute profit. However, the general assembly is not bound by the proposal of the board of directors. Upon the decision to distribute dividend in this voting, the profit to be distributed is also determined in the meeting. If the general assembly decides not to distribute dividends, no dividend distribution shall be made and this fact shall be recorded in the minutes of the meeting.
- Pursuant to Article 507 of the TCC, each shareholder has the right to participate in the net profit for the period, which is decided to be distributed to the shareholders in accordance with the provisions of the law and the articles of association, in proportion to his/her share. Pursuant to Article 508 of the TCC, unless otherwise stipulated in the articles of association of the company, the dividend shall be calculated in proportion to the payments made by the shareholder to the company for his capital share. However, according to the second paragraph of Article 507, the articles of association may grant privileges or special benefits to certain types of shares. In such a case, a calculation is made according to the privileges or special benefits included in the articles of association in the distribution of dividends.
THE QUESTION OF WHETHER DIVIDEND DISTRIBUTION IS OBLIGATORY OR NOT
During both the old Turkish Commercial Code numbered 6762 (“eTCC”) and the new TCC, the issue of whether “dividend distribution at the rate of 5%” is obligatory or not has been widely discussed. There are different opinions in the doctrine regarding this discussion.
According to the view that dividend distribution is obligatory in joint stock companies, the wording of the law is clear: Article 466/II-3 of the TCC stipulated “after 5% dividend is set aside for the shareholders”, and accordingly, at the time of the TCC, setting aside 5% profit for the shareholders was deemed sufficient to fulfil this obligation[2]. However, Article 519/II-c of the New TCC regulates “after five per cent dividend is paid to the shareholders” . Accordingly, the legislator envisages that dividends should not only be “set aside” but also “paid” to the shareholders in the new TCC period, and it is concluded that dividend distribution is obligatory in this context.
According to Tekinalp, the term “net profit for the period” used in Article 507/1 of the TCC is not a term foreign to corporate and balance sheet law, and directly refers to “distributable profit”, since the source of distributable profit is the net profit for the period, and this term prevents the joint stock company from not distributing profit[3].
According to an opinion in the same direction, the first dividend is the first share allocated to the shareholders and is characterised as a share (interest) given to the capital. For this reason, it is obligatory to set aside and pay the first dividend over the capital paid by the shareholders, as clearly stated in the TCC[4].
According to the other view that dividend distribution is not obligatory, both the literal and systematic interpretation of Article 519/II-c of the TCC precludes the inference of a “dividend distribution obligation” from this provision.
Firstly, the provision in question is under the subtitle “C) Reserves, I- Legal reserves, 1. General legal reserves”. This systematisation clearly reveals that this provision is essentially related to the allocation of legal reserves, not to the distribution of dividends. As a matter of fact, the wording of the subparagraph subject to discussion does not go beyond the framework drawn by the margin heading; it only stipulates the conditions under which the second legal reserve fund must be set aside, and while stipulating this, it requires the payment of “five per cent dividend to the shareholders” as a minimum condition. Accordingly, if a five per cent dividend is distributed to the shareholders after the first legal reserve is set aside, 10 per cent of the distribution exceeding this rate must be set aside as the second legal reserve. In this case, the profit distribution in question is intended to determine in which case the obligation to set aside a second legal reserve will arise. The only legal conclusion that can be directly deduced from this provision is that if the profit at the rate specified in the law is not distributed, the obligation to set aside a second legal reserve will not arise. Otherwise, it would not be appropriate to deduce a five per cent profit distribution obligation from this article, which has nothing to do with profit distribution from a systematic point of view[5].
According to this view, in the preamble[6] of Article 519/II-c of the TCC, it is stated that the ideas and provisions underlying the content of the provision in the TCC have been preserved, and since the wording of the article caused interpretation difficulties under the TCC, the important amendment has been made only at this point. In this respect, it is not possible to recognise an effect of the aforementioned wording change, which completely changes the established system regarding dividend distribution, when this explanation in the preamble is obvious and there is not even the slightest hint of a system change[7]. As it is understood from the justification, Article 519 of the TCC is no different in meaning from its counterpart in the ECCL, Article 466, although it is only a change of expression/word. As a matter of fact, it is accepted that the wording change in the article was made based on the idea that it would be more accurate to express the concept of dividend with the word “paid” instead of “set aside”[8].
Another basis for the proponents of this view is Article 348 of the TCC titled “Founders’ interests”. In the said article, it is stated that “… However, after the reserve fund written in the first paragraph of Article 519 and five per cent dividend for the shareholders are set aside from the distributable profit, at most one tenth of the remaining amount shall be paid to the founders in the context of usufruct shares.” As can be seen, the expression “after being set aside” is used in this article as in the TCC[9].
Another basis for the proponents of this view is the regulation on publicly traded companies. Even publicly held companies, whose investment purpose is much more prioritised compared to others, are not obliged to distribute dividends. The relevant CMB Communiqué, in its article titled “Dividend Distribution Policy”, stipulates that dividends shall be distributed by a resolution of the general shareholders’ meeting in accordance with the dividend distribution policies to be determined by the general shareholders’ meeting and in accordance with the provisions of the relevant legislation ; however, it does not stipulate any obligation in terms of dividend distribution.
There are decisions of the Court of Cassation in both directions. For example, the 13th Civil Chamber of the Court of Cassation, in its decision dated 16.05.2003 and numbered 2002/13209 E., 2003/5053 K., stated that “As a rule, a limited liability company, which is a type of capital company, becomes a shareholder in order to benefit from the profit to be provided by this company in accordance with Article 533 of the TCC. … For this reason, in the concrete case, since it is understood that the defendant company has not distributed dividends since its establishment, disputes have arisen between the shareholders on this issue and the defendant company has become resistant, it should be accepted that the plaintiff shareholder has the right to request the determination and collection of the dividend from the court. In this case, while the court should decide according to the general development of the sector in which the defendant company operates, the economic activities and objectives of the defendant company, and whether the defendant company should distribute dividends in 1999 in order to ensure the continuous development of the company’s operations or to ensure the distribution of stable dividends as much as possible, and if necessary, to what extent it should be distributed, it is not appropriate to decide to partially accept the lawsuit on written grounds based only on the company balance sheet.” , the local court cancelling the general assembly decision should also determine the amount of profit to be distributed. However, it is criticised in the doctrine that the court can establish such a provision by replacing the general assembly.
However, the 11th Civil Chamber of the Court of Cassation, in its principled decision dated 14.10.1982 and numbered 1982/3556 E. and 1982/3887 K., stated : “It is obligatory to evaluate the provisions of Articles 385, 466/f. 2b, 3 and 469/2 of the TCC together with respect to dividend distribution. Indeed, Article 385 of the TCC recognises the vested right to receive dividends and stipulates that no change can be made in this right without the consent of the shareholder, and Article 466, paragraph 2, subparagraph 3 of the said Law stipulates that 5% dividends shall be allocated to the shareholders. However, the provision of Article 469/2 of the same Law stipulates that for the purpose of the continuous development of the partnership and to ensure the distribution of profit to the shareholders as regularly as possible, if it is appropriate and beneficial, the general assembly may allocate extraordinary reserves exceeding the limit stipulated in the law and the articles of association, and under the aforementioned conditions, it is made possible to decide not to distribute dividends. However, the necessary condition for the connection and sensitive balance in this matter is that the general assembly resolution not to distribute dividends is only for the purpose of the continuous development of the company and the regular distribution of dividends to the shareholders. In addition, in this regard, the rule that unnecessary reduction or non-distribution of dividends may undermine the trust and interest in joint stock companies and that the decision should not be contrary to the rules of objective goodwill should also be carefully considered.” and stated that dividend distribution is not compulsory, but the balance of interests between the company and the shareholders should be considered in making or not making this distribution.
Some authors, on the other hand, state that the TCC’s failure to impose a sanction for the company that fails to distribute dividends should be emphasised rather than the aforementioned discussion[10].
CONCLUSION
As a result, in order to distribute dividends, firstly, the joint stock company must have made a profit according to the financial statements of the relevant period and also the company must maintain its capital. If there is a profit, the joint stock company shall set aside reserves in accordance with the principles set out in the law and the articles of association. The body that decides whether or not to distribute dividends after the allocation of reserves is the general assembly.
The issue of whether it is obligatory for a joint stock company to distribute dividends is discussed in the doctrine through various arguments, and the jurisprudence of the Court of Cassation is not unified on this issue. The Turkish Commercial Code No. 6102 could not prevent the debates in the former law period; on the contrary, it paved the way for discussions with the wording changes made in the text of the article and the justification of the article.
In our opinion, at the point of dividend distribution, it is essential to ensure both the economic continuity of the company and to provide a financial return to the shareholders who have contributed capital to the company in order to obtain profit. In this context, as in the principle decision of the Court of Cassation quoted above, this issue should be evaluated and decided by considering the economic and commercial situation of the company and by establishing a balance between the interests of the company and the shareholders.
At this point, it would be beneficial for the Court of Cassation to put an end to the debates in the doctrine to a great extent by establishing an up-to-date and principled decision on the subject.
Şengün & Şengün and Partners Law Office
Senior Lawyer
Yesim YETIK
SOURCE
Ateşağaoğlu, Erdem, Dividend Distribution in Joint Stock Companies in Terms of Tax Law, On İki Levha Publishing, Istanbul, January 2012
Çonkar, M. Halil, Some Issues Regarding the Right to Dividends in Public Joint Stock Companies, IÜHFM C. LXXV, 2017, S.2
Erdem, H. Ercüment, Important Principles Regarding Dividends in Joint Stock Companies, October 2016,(http://www.erdem-erdem.av.tr/yayinlar/hukuk-postasi/anonim-sirkette-kar-payina-iliskin-onemli-esaslar/)
Maç, Mehmet, 5 per cent first dividend distribution is not obligatory, Lebib Yalkın Magazine, March 2015, Issue 135
Karyağdı, Nazmi, All Aspects of Profit Distribution, Oluş Publishing, Istanbul, 2014
Saruhan Berk, Gözde – Sertkaya, Eda, Dividend Distribution in accordance with the Turkish Commercial Code No. 6102,(http://www.mondaq.com/turkey/x/700194/Shareholders/6102+Sayili+Trk+Ticaret+Kanunu+Uyarinca+Kar+Payi+Daitimi), May 2018
Tekinalp, Ünal, New Law of Capital Partnerships, 4th Edition Updated with Amendments and Secondary Regulations, Istanbul 2015
[1] Dr. Erdem Ateşağaoğlu, Dividend Distribution in Joint Stock Companies in Terms of Tax Law, On İki Levha Publishing, Istanbul, January 2012, p. 17
[2] Prof. Dr. H. Ercüment Erdem, Important Principles Regarding Dividends in Joint Stock Companies, October 2016, (http://www.erdem-erdem.av.tr/yayinlar/hukuk-postasi/anonim-sirkette-kar-payina-iliskin-onemli-esaslar/)
[3] Prof. Dr. Ünal Tekinalp, New Law of Capital Partnerships, 4th Edition Updated with Amendments and Secondary Regulations, Istanbul 2015, art. 14-35-c
[4] Nazmi KARYAĞDI, All Aspects of Profit Distribution, Oluş Publishing, Istanbul, 2014, p.161
[5] Dr. M. Halil Çonkar, Some Issues Regarding the Right to Dividends in Public Joint Stock Companies, IÜHFM C. LXXV, 2017, S.2, p. 663
[6] Justification of Article 519 of the Turkish Commercial Code No. 6102: The Article is taken from Article 466 of the Code No. 6762. However, since the wording of the said Article 466 caused interpretation difficulties in practice, significant changes were made both in the choice of words and in the syntax, but the ideas and provisions underlying the content were not changed.
[7] Dr M. Halil Çonkar, ibid, p. 665
[8] Mehmet Maç, 5 per cent first dividend distribution is not obligatory, Lebib Yalkın Magazine, March 2015, Issue 135
[9] Gözde Saruhan Berk – Eda Sertkaya, Dividend Distribution in accordance with the Turkish Commercial Code No. 6102,(http://www.mondaq.com/turkey/x/700194/Shareholders/6102+Sayili+Trk+Ticaret+Kanunu+Uyarinca+Kar+Payi+Daitimi), May 2018
[10] Dr Erdem Ateşağaoğlu, e.g., p. 92
