Legislative Proposal Passes Parliament: Profit Distributions By Companies Are Now Restricted

Yusuf Mansur ÖzerAssociate, Ersoy Bilgehan

This article is one of many articles we have published concerning the legal implications of Covid-19. Please click here for our “Covid-19 Insights” page and other articles.

As our readers might recall, we had announced previously that the Ministry of Family, Labor, and Social Services has been working on a draft omnibus law aiming to prevent the negative impacts of Covid-19 on financial life and that certain restrictions on companies’ profit distributions were included therein. The said draft has now become law as the “Law on Diminishing the Negative Impact of the Novel Coronavirus (COVID-19) in Financial and Social Life and Amendment to Certain Laws no. 7244” (“Omnibus Law”), which is published in the Official Gazette on 17 April 2020 and entered into force on the same day.

Article 12 of the Omnibus Law provides for a temporary article to be inserted into the Turkish Commercial Code no. 6102, setting out restrictions on companies’ distribution of their net profits in 2019. Accordingly, cash profit distribution of companies cannot exceed 25% of their net profits belonging to 2019. Companies will also not be able to (1) distribute any profits or free reserves accrued from previous years and (2) authorize their boards of directors to distribute advance profits. These restrictions will be valid until 30 September 2020. The President is authorized to shorten or extend this period by three months.

As per the same article, in the event shareholders have already resolved to distribute profits by convening a general assembly and the profits have not been distributed yet, the distribution of the profits exceeding the 25% cap will need to be suspended until 30 September 2020.

Companies of which the state, provincial special administrations, municipalities, village administrations, or any other public legal entity is a shareholder and companies of which more than fifty percent of the capital is directly or indirectly owned by funds of which more than fifty percent is owned by the public will be exempt from the restrictions explained above.

The preamble of the relevant article of the Omnibus Law states that the restrictions are a result of the cautiousness policy adopted to combat the negative effects of Covid-19 on financial life and that they aim to prevent reduction of company resources with cash profit distribution and any need for additional financing.

Should you need any further information, please do not hesitate to contact our corporate team at corporate@ersoybilgehan.com.

Contributing Advisors

Zihni BilgehanSenior Partner, Ersoy Bilgehan