SPECIAL AUDIT REQUEST RIGHT IN JOINT STOCK COMPANIES

The right to request a special audit, regulated between Articles 438 and 444 of the Turkish Commercial Code, is one of the ownership rights of shareholders. If a shareholder has exercised the right to obtain information and examination but the information obtained is not sufficient, or if the shareholder has not been able to obtain any information, they may request a special audit to be conducted in a joint-stock company. A shareholder who has not had their information and examination requests met can obtain the necessary information through the special audit, in which the court is involved, and thus can exercise their ownership rights such as voting in the general assembly, initiating a liability lawsuit, or transferring their shares.

CONDITIONS FOR REQUESTING A SPECIAL AUDIT IN JOINT STOCK COMPANIES

For a shareholder to request a special audit, certain conditions must be met according to the Law.

The first condition is that the shareholder must have previously exercised the right to obtain information and examination. If a shareholder has used the right to obtain information and examination and the responses received are not sufficient and enlightening, or if no response has been given to the shareholder at all, the shareholder may resort to requesting a special audit. It is not mandatory for the shareholder who has used the right to obtain information and examination and the shareholder requesting the special audit to be the same person. The legislator has deemed it sufficient for the subject of the information and examination right used and the subject of the requested special audit to be the same.

The second condition is that the special audit must be necessary for the exercise of shareholder rights. In other words, the shareholder must have obtained information necessary to exercise their rights. Based on this necessary information, the shareholder will exercise their ownership rights such as voting in the general assembly, initiating a liability lawsuit, or transferring their shares.

The third condition is that the subject of the special audit should only consist of “specific” events. This condition also means that the subject of the special audit must always be related to company affairs and that the content and boundaries of the subject must be specified.

REQUEST FOR APPOINTMENT OF A SPECIAL AUDITOR TO BE ACCEPTED IN THE GENERAL ASSEMBLY

A shareholder who meets the three conditions mentioned above must request a special audit from the general assembly. If the general assembly approves the request for a special audit, the company or each shareholder must apply to the commercial court of first instance where the company’s headquarters is located within thirty days to request the appointment of a special auditor. The application for the appointment of a special auditor made to the court upon the approval of the general assembly is a non-contentious matter.

REJECTION OF THE REQUEST FOR APPOINTMENT OF A SPECIAL AUDITOR IN THE GENERAL ASSEMBLY

Even if a shareholder meets the three conditions mentioned above and requests a special audit from the general assembly, the general assembly may not accept this request. In case the general assembly rejects the request for a special audit, shareholders representing at least one-tenth of the capital or, in publicly held joint-stock companies, one-twentieth of the capital, or shareholders whose total nominal value of shares is at least one million Turkish Liras, may request the appointment of a special auditor from the commercial court of first instance where the company’s headquarters is located within three months (Turkish Commercial Code, Article 439/1).

Those who can apply to the court in case of rejection of the request for a special audit by the general assembly are minority shareholders and shareholders whose total nominal value of shares is at least one million Turkish Liras. Shareholders who do not meet this shareholding condition cannot file a lawsuit requesting the appointment of a special auditor.

In case the request for a special audit is rejected by the general assembly, in addition to the three conditions mentioned above, another condition must be met for the court to accept this request and appoint a special auditor. This condition is that the applicants to the court must convincingly demonstrate that the founders or company organs have caused damage to the company or shareholders by violating the law or articles of association.

Shareholders must convincingly prove that the founders or company organs have acted contrary to the law or articles of association and caused damage as a result. The fulfillment of the burden of proof is important for the decision to be made regarding the appointment of a special auditor.

APPOINTMENT OF A SPECIAL AUDITOR

If the court deems the request for a special audit justified based on the application made after the approval or rejection of the request for a special audit by the general assembly, it will determine the scope of the examination subject and appoint one or more independent experts. The special auditor appointed by the court must be an expert, independent, and must also conduct the examination within the framework of the examination subject determined by the court. For the special auditor to be “independent,” the person appointed as the special auditor must have no legal, economic, or personal connection with any shareholder, company employees, or subsidiaries.

Depending on the company’s turnover and the scope of the examination subject, the court may appoint one or more special auditors. There is no obstacle to appointing a legal entity as a special auditor.

ACTIVITY OF A SPECIAL AUDIT IN JOINT STOCK COMPANIES

During the conduct of the special audit, the special auditor has certain rights and obligations towards the joint-stock company. The rights of the special auditor are the right to obtain information and examine and the right to receive a fee. According to Article 441/2 of the Turkish Commercial Code, the special auditor is authorized to examine the company’s books, including its correspondence, as well as its cash, valuable papers and assets, within the framework of the examination subject specified by the court. However, the special auditor must use this authority within the framework of the examination subject specified by the court.

One of the purposes of the special audit is to ensure that shareholders can obtain the necessary information through the special auditor when it is claimed that they cannot use their right to obtain information and examination because it would endanger the company’s secret (Turkish Commercial Code, Article 437/3). Therefore, the refusal of the management board to provide the special auditor with certain information and documents on the grounds that they are company secrets is intended to be prevented.

The special auditor conducts the examination for a fee. This fee must be clearly and explicitly stated in the court decision. As a general rule, the company is responsible for the special auditor’s fee. However, according to Article 444/2 of the Turkish Commercial Code, in cases where special circumstances justify it, the expenses may be partially or entirely imposed on the applicants.

The special auditor has a duty of care and a duty to keep secrets towards the company. The special auditor must conduct the examination in accordance with the objective care that a prudent auditor would exercise and must not disclose the company’s secrets learned during the examination even after the end of their duties. If the special auditor violates these obligations, it is possible to initiate a liability lawsuit against them.

The special auditor must conduct the examination in a useful period and without unnecessarily delaying the company’s affairs (Turkish Commercial Code, Article 411/1).

SPECIAL AUDIT REPORT IN JOINT STOCK COMPANIES

The special auditor determines the results of the examination conducted in the company through the right to obtain information and examination, obtains the opinion of the management board regarding these findings, and then submits a detailed report to the court while preserving the company’s secrets (Turkish Commercial Code, Article 442/1).

The court notifies the company of the draft report submitted by the special auditor and of ownership rights. In other words, the shareholder must have obtained information on the matters necessary for exercising their rights. Based on this necessary information, the shareholder will exercise their ownership rights such as voting in the general assembly, initiating a liability lawsuit, or transferring their shares.

The third condition is that the subject of the special audit should only consist of “certain” events. This condition also means that the subject of the special audit should always be related to the company’s affairs, and the content and limits of the subject should be specific.

REQUEST FOR APPOINTMENT OF A SPECIAL AUDITOR TO BE APPROVED IN THE GENERAL ASSEMBLY

A shareholder who meets the three conditions mentioned above must request a special audit from the general assembly. If the general assembly approves the request for a special audit, the company or each shareholder must apply to the commercial court of first instance at the place where the company’s headquarters are located within thirty days to request the appointment of a special auditor. The application for the appointment of a special auditor made to the court upon the approval of the general assembly is a non-contentious matter.

REJECTION OF THE REQUEST FOR APPOINTMENT OF A SPECIAL AUDITOR IN THE GENERAL ASSEMBLY

Even if a shareholder meets the three conditions mentioned above and requests a special audit from the general assembly, the general assembly may not approve this request. If the general assembly rejects the request for a special audit, shareholders owning at least one-tenth of the capital, in public joint-stock companies one-twentieth of the capital, or shareholders whose total nominal value of shares is at least one million Turkish Liras, can request the appointment of a special auditor from the commercial court of first instance at the place where the company’s headquarters are located within three months (Turkish Commercial Code, Article 439/1).

Those who can apply to the court in case of rejection of the request for a special audit in the general assembly are minority shareholders and shareholders whose total nominal value of shares is at least one million Turkish Liras. Shareholders who do not meet this shareholding condition cannot file a lawsuit requesting the appointment of a special auditor.

In case the general assembly rejects the request for a special audit, in addition to the three conditions mentioned above, one more condition must be met for the court to accept this request and appoint a special auditor. This condition is that the applicants must convincingly demonstrate to the court that the founders or the company organs have caused damage to the company or shareholders by violating the law or the articles of association.

Shareholders must convincingly prove that the founders or the company organs have acted in violation of the law or the articles of association and have thus caused damage to them. Fulfilling the burden of proof is important for the decision to be made regarding the appointment of a special auditor.

APPOINTMENT OF A SPECIAL AUDITOR

After the approval or rejection of the request for a special audit in the general assembly, the court will appoint one or more independent experts to carry out the special audit within the framework of the request. The special auditor appointed by the court must be an expert, independent, and must also conduct the examination within the framework specified by the court. For the special auditor to be “independent,” the person to be appointed as the special auditor must have no legal, economic, or personal connection with any shareholders, company employees, or subsidiaries.

The court may appoint one or more special auditors depending on the business volume of the company and the scope of the examination subject. There is no obstacle to the appointed special auditor being a legal entity.

ACTIVITIES OF SPECIAL AUDIT IN JOINT STOCK COMPANIES

During the conduct of the special audit, the special auditor has certain rights and obligations towards the joint-stock company. The rights of the special auditor include the right to obtain information and examination and the right to receive remuneration. According to Article 441/2 of the Turkish Commercial Code, the special auditor is authorized to examine the company’s books, including correspondence, writings, cash, valuable papers and assets, within the scope of the examination subject specified by the court. However, the special auditor must use this authority within the framework of the examination subject specified by the court.

One of the purposes of the special audit is to enable shareholders to obtain information that cannot be obtained by exercising their right to obtain information and examination due to the assertion that it would endanger the company’s secret (Article 437/3 of the Turkish Commercial Code). Therefore, it is intended to prevent the management board from avoiding providing certain information and documents to the special auditor on the grounds that they are company secrets.

The special auditor conducts the examination for a fee. This fee must be clearly and explicitly stated in the court’s decision. As a rule, the company is responsible for the special auditor’s fee. However, according to Article 444/2 of the Turkish Commercial Code, in cases where special circumstances justify it, the expenses may be partially or fully borne by the applicants.

The special auditor has the obligation to exercise due care and confidentiality. The special auditor must perform the examination in accordance with the objective care that a prudent auditor should show and must not disclose the company’s secrets even after the end of their duty. If the special auditor violates these obligations, it is possible to file a liability lawsuit against them.

The special auditor must carry out the examination activity within a useful period and without unnecessarily delaying the company’s affairs (Article 411/1 of the Turkish Commercial Code).

SPECIAL AUDIT REPORT IN JOINT STOCK COMPANIES

The special auditor, through the right to obtain information and examination, determines the results of the examination conducted in the company, obtains the opinion of the board of directors on these determinations, and then submits a detailed report to the court while protecting the company’s secrets (Article 442/1 of the Turkish Commercial Code).

The court serves the draft report submitted by the special auditor to the company, and the court decides whether the report should be disclosed to the shareholders or not due to the potential harm to the company’s secrets or other important interests (Article 442/2 of the Turkish Commercial Code). With the service of the report, only the company’s secrets or other important interests are harmed, and the possibility of intervening in the report by the company is provided.

With the objection made, the court must evaluate whether the information or document subject to objection is a company secret and, if it is, whether it is necessary to be included in the report for the purpose and subject of the special audit. If it is not necessary for the information or document subject to objection to be included in the report, the court will return the report to the special auditor and decide that an editing process should be carried out on the draft report regarding the company’s secrets and other important interests.

The draft report, which has undergone the editing process, is presented to the company and the applicants by the court for their evaluations and additional questions to be asked to finalize the report (Article 442/3 of the Turkish Commercial Code). The special auditor’s report should be prepared in a detailed and reasoned manner in simple language.

The court serves the final special audit report submitted by the special auditor to the company. The board of directors of the company is obliged to present the report and its evaluations to the first ordinary general assembly (Article 443/1 of the Turkish Commercial Code). The special audit report is discussed at the general assembly, but if there is no item on the agenda regarding the report, no decision can be made regarding the report. To make a decision regarding the report, an item regarding the special audit report must be included in the agenda of the general assembly.

The court may decide that the findings and evaluations contained in the special audit report should be notified to third parties or published if necessary to protect the rights of the company or shareholders, or if the general assembly fails to make a decision due to the company’s management or for other reasons (Article 443/2 of the Turkish Commercial Code).

The legal effects of the special audit report are to be discussed at the first ordinary general assembly meeting following the submission of the report to the board of directors (Article 443/3 of the Turkish Commercial Code). However, the special audit report is not binding on the company organs. This report provides information to the shareholders of the company. Shareholders can take legal action against the company or its founders and management, individually or collectively, within two years from the date of the general assembly meeting where the special audit report is discussed (Article 443/4 of the Turkish Commercial Code).

CONCLUSION

In joint-stock companies, shareholders who meet certain conditions can request the appointment of a special auditor in cases where there is a suspicion that the company’s affairs are not managed properly. The appointment of a special auditor is requested through the general assembly and is approved or rejected by the general assembly.

If the request is rejected, shareholders who meet certain shareholding conditions can apply to the commercial court to request the appointment of a special auditor. The court appoints one or more independent experts to conduct the special audit, and the special auditor prepares a detailed report that is submitted to the court, the company, and eventually to the general assembly. While the special audit report is not binding on the company organs, it provides valuable information to shareholders and can be used as a basis for legal action against the company or its management.

If you have any question about special audit in join stock companies, it would be beneficial for you to seek the assistance of a İzmir Turkish lawyer experienced in the field of corporate law in order to reach remedies available to you.

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Att. Şevval Şükran KURNAZ

Att. Bahadır Gökhan KAYA

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