Our information Note on the effects of the COVID-19 pandemic on dividend distributions of corporations has been published.

1. INTRODUCTION

In its letter dated 1 April 2020 and previously submitted to all chambers and commodity exchanges, the Turkish Union of Chambers and Commodity Exchanges (“TOBB”) had referred to the letter of the Ministry of Trade submitted to it on 31 March 2020 and announced that the Ministry of Trade highlighted the importance for corporations to preserve their equity capital during the COVID-19 pandemic and requested that dividend distributions should be restricted.  

The Ministry of Trade’s advisory restriction has now been legalised with the entry into force of Law No. 7244 on the Amendment of the Law on the Mitigation of the Effects of the Novel Coronavirus (COVID-19) Pandemic on Economic and Social Life and Certain Laws[1] (the “Law”).

2. MEASURES SET OUT IN THE LETTER

Pursuant to article 13(5) of the Regulation on the Principles and Procedures of General Assemblies of Joint Stock Companies and the Representative of the Ministry of Trade to be Present at such General Assemblies (the “Regulation”), the Ministry of Trade is authorised to add items to the agenda discussed during general assemblies of corporations. As such, in its abovementioned letter, the Ministry of Trade requested that the following items should be included in the list of issues to be discussed with respect to dividend distributions during general assemblies to be convened for the 2019 financial year:

• the suspension of dividend distributions in relation to the profit of past years[2];


• the distribution amount not to exceed 25% of the net profit of 2019; and


• not to authorise the board of directors to distribute advance dividends.

On the basis of the Ministry of Trade’s authority derived from article 13(5) of the Regulation, corporations were required to include such items on dividend distributions in the agenda of their general assemblies with respect to the 2019 financial year.

Questions as to whether such measures were advisory or mandatory in nature, i.e. whether such measures should merely be discussed during general assemblies or directly adopted as a resolution, have now been clarified with the introduction of the Law.

3. MEASURES SET OUT IN THE LAW

Pursuant to article 11 of the Law, provisional article 13 setting out restrictions on dividend distribution has been included in the Turkish Commercial Code No. 6102[3] (the “TCC”).

According to such provisional article 13, until 30 September 2020, corporations:

• will only be allowed to distribute up to 25% of their net profit of the 2019 financial year;


• will not be allowed to distribute profits and reserve funds of previous years; and


• will not be allowed to authorise their board of directors to distribute advance dividends in their general assemblies.

The new measures will not be applicable to companies whose majority shareholding is directly or indirectly held by the State, other public entities or funds which are State-owned or controlled.

The President will have the authority to extend or shorten the duration of these measures scheduled to stay in force until 30 September 2020 for 3 months.

The second paragraph of provisional article 13 contains provisions for companies that have already adopted general assembly resolutions for dividend distribution prior to the entry into force of the Law but have not yet carried out such distributions. Accordingly, such companies are now obliged to defer the payment of dividends exceeding 25% of their net profits of the 2019 financial year until the end of the 2020 financial year.

4. CONCLUSION

The intention behind this measure is to limit dividend distributions in order to preserve equity and prevent any possible financial duress or bankruptcy scenarios that may distort the economic balance during the COVID-19 pandemic. As such, dividend distributions in violation of the Law will be deemed invalid and their registration with the respective trade registry will not be allowed.