The best corporate structure for technology firms in Turkey: Does it really exist?

By Batuhan Ecin

Of all the choices you make when embarking on your tech enterprise, one of the most important is the type of legal structure you select for your company.

Since every company’s capital structure, shareholders and industry they operate in, most of the time, are quite different, companies who want to attract outsiders for equity funding should tackle the information asymmetry problem. In business transactions, information asymmetry means that one party has more or better information compared to the other party. Since the business would be new and value of the assets of the companies operating in the technology sector are hard to assess and fund provider would more likely to take part in the decision-making process of the business to ensure the success of the idea and the invention of the entrepreneur and the increase of the value of company assets. For that very reason corporate structure comes into spotlight: the decision-making process, rights of the potential investors and possible growth opportunities. Corporate structure would act as a supplement to commercialize ideas and inventions and mitigating risks arise from information asymmetry.

For technology firms, unlimited liability companies are out of the question. Inventions and ideas may be subject to patent and/or trademark ownership and such patents and trademarks would likely to be registered to under company’s name if the investor wants to start their own business rather than licensing it to a third party. A corporate veil to protect the shareholders is also a must. Limited liability companies would be viable for entrepreneurs severely lack the funds to establish a joint stock company but in need of a corporate veil. For growth opportunities join stock companies seem to be the best option as it offers much more alternative with regards to debt and equity financing such as initial public offerings and issuing debt. Attracting external funds would also signal the market for other potential investors to further growth of the company.

What Does TCC Offer?

Turkish Commercial Code numbered 6102 dated 14.02.2011 (“TCC”) offers variety of company types to prospective business owners and as previously mentioned some of them are unlimited liability companies. Such companies are not suitable for attracting external funding as they do not offer limited liability and the organizational structure is not suited for outsiders. The main focus of this article would be limited liability companies and joint stock companies that offer limited liability to its shareholders. Furthermore numerous government agencies do no offer grants to the companies that are organized as unlimited partnerships.

As per the provisions of TCC, limited liability companies both offer various features of unlimited liability companies and joint stock companies as a typical limited liability companies. Limited liability companies and joint stock companies have some common features but they also differ from each other considerably. To establish a limited liability company a minimum share capital contribution of TRY 10,000.00 is required. However with a recent amendment to the relevant legislation, the full amount could be paid in 24 months (contrary old provision stating that at least 25% of the capital contribution shall be paid concurrent to the establishment). This amendment provides a convenience for entrepreneurs who lack sufficient funds. One shareholder is sufficient for the establishment of limited liability companies. Maximum number of shareholders for limited liability companies is fifty (50). Limiting the share transfers is possible in accordance with TCC and if it is prescribed in articles of association of the limited liability company, it can be totally prohibited. Unless stated otherwise in the articles of association, share transfers are subject to the approval of the general assembly.

Limited liability companies in Turkey have unique features compared to joint-stock companies such as squeezing out a shareholder and exit right of the shareholder. Also veto powers for general assembly decisions may be granted to shareholders. Such provisions of TCC shows that some features of the limited liability of the company reflect a personal partnership rather than a partnership based on capital. Moreover, limited liability companies do not offer an ultimate limited liability as shareholders are liable for the debts owed to public.

Joint stock companies are more suitable for establishing a corporate identity, because joint stock companies is a typical “capital” company. Share capital contribution of TRY 50,000.00 is required (TRY 100,000.00 if the company is going to use a registered-capital system), and at least 25% of the capital contribution must be paid concurrent to the establishment. One shareholder is sufficient for the establishment of joint stock companies. There is no limit for shareholders, however if the shareholder number exceeds two hundred and fifty (250), joint stock company has to go public in 2 years. Under very limited circumstances share transfers may be limited. Total prohibition of the share transfers are not possible. Going public is possible thus, there are more ways to fund companies compared to the private companies. Joint stock companies offer an ultimate limited liability for its shareholders except when the court decides to pierce the corporate veil (same applies to limited liability companies). In addition, squeezing out and right of exit is harder and rare compared to limited liability companies.

Cumulative board representation would be a great start to tackle the information asymmetry problem, since equity investors would likely to be a minority shareholder in the company thus, granting them a seat in the board of directors may be efficient as well. Right of information should be fully respected as per the provisions of TCC and the articles of association and the pre-emptive rights of the shareholders should not be restricted unless it is absolutely necessary. Share transfer should also not be excessively limited and notwithstanding the cumulative board representation, it should be ensured that the outside shareholders play an active role in the decision-making process of the company.  It should also be reminded that investors also dictate the terms for their investments through shareholder agreements.

A perfect model for technology firms does not exist. However, the TCC offers variety of options for business owners. It is up to them to design their corporate structure for their best interests. Attracting external funds may be vital for fresh technology firms, private equity firms and other funds offer great amount of capitals to technology firms operating in the areas of information technologies and biotechnology.

About the author

Batuhan Ecin
Batuhan Ecin is a Senior Associate in the IP division of Herdem Attorneys at Law. Based in Istanbul, Herdem is one of Turkey’s most established law firms. HERDEM advises on all aspects of intellectual property and a wide variety of privacy matters, including data mapping, policies, procedures, compliance, data use and transfer agreement.