Non-competition clauses are those provisions that are intended to prevent that those who have access to material information about the company’s operations, management, clientele and business potential may get a benefit for themselves or third parties by taking advantage of such information and may put their personal interests before the company interests in the case of a conflict of interest.
There are non-competition clauses in Turkish Code of Commerce (“TCC”), and board members are first and foremost at the focus of those non-competition clauses in the Code. Board members in an incorporation are banned from engaging any business operation that falls within the scope of the company’s operation either for themselves or third parties unless a permission is granted to them at a general meeting. According to the dominant opinion in the doctrine, corporate executes (those to whom board members delegate representation powers) are subject to the said non-competition clauses as well because they are empowered with the powers of a board member, and accordingly, they may be appointed for the management and representation of the company.
Shareholders, on the other hand, are in fact exempt from non-competition obligation. The well-established opinion in the doctrine points out that shareholders are not “statutorily” subject to non-competition clauses.
Because shareholders are not subject to non-competition thanks to the Code, in practice, shareholder agreements are used to introduce this kind of ban against shareholders.
Notwithstanding the foregoing, there is a debate in the doctrine if non-competition clauses imposed against shareholders by virtue of a shareholders’ agreement is valid and effective. Those who argue that these clauses are null and void rely on the “single obligation principle”, where the sole obligation of the shareholders toward the company is the payment of the capital shares subscribed by them and that no other obligation may be imposed on the shareholders pursuant to Articles 329/2 and 480/1 of TCC.
Those who accept that shareholders may be subject to non-competition by virtue of the agreement point out that shareholders may make such a commitment towards each other pursuant to the freedom of contract principle.
In its decision dated 2020, the Supreme Court of Appeals underlined the fact that “the local court’s decision disregards the fact that the defendant committed a breach of the agreement and the conditions set out in Article 12 of the agreement have materialized in the present case, given the fact that the shareholder was discovered to have been engaged in business operations competing with those of the company following the incorporation of the company”. This decision is highly important as it shows that, in the opinion of Supreme Court of Appeals, the non-competition clauses in an agreement between the shareholders are valid and effective.
The said decision suggests that in a company where shareholders manage and set the strategies de facto, non-competition clauses may be agreed provided that they shall not be against the rule of good faith.
It should be stated at this point that it is not possible to introduce those non-competition clauses agreed in a shareholders’ agreement into the articles of association. Non-competition clauses that may be introduced into an articles of association for shareholders are blocked by the wording of Article 480/1 of TCC (“except for exceptions set out in the law, no obligation may be imposed on a shareholder by virtue of articles of association other than the payment of the premium exceeding the share value or the share’s nominal value”) and by the wording of Article 340 thereof (“an articles of association may deviate from the provisions hereof applicable to incorporations only if this deviation is expressly permitted in the Code.”).
As for how the non-competition clauses are worded in a shareholders’ agreement, one can see that, in practice, there are provisions in parallel with the ones prescribed by the Code for board members, stipulating that “a shareholder may not be a partner in any other company, which is in a business line that is comparable and similar to that of the company.” Also, in practice, a penal clause is accepted as the sanction against the violation of the ban.
As we discussed above, non-competition clauses may be agreed in a shareholder’s agreement pursuant to the freedom of contract principle unless they restrict the economic freedom and are against the rule of good faith. A penal clause may be agreed in the agreement so that it shall be enforced in the case of a breach of the ban but this may be considered separately on a case-by-case basis in light of the conditions applicable then.
It should be noted that a non-competition obligation agreed in the shareholders’ agreement –without forgetting that it may not be introduced to the articles of association- does not affect the corporation’s operations. Sanctions against the breach of the obligation shall be determined in line with the provisions of the agreement without giving rise to any consequence or implication at corporate level.
We will post a further article, which shall address non-competition obligations in general terms, and we will discuss certain matters such as limiting them to a time period etc.
