• Important Principles regarding Dividends in Joint Stock Companies
  • February 16, 2017
  • Law Firm: Erdem Erdem Law Office - Istanbul Office
  • Introduction

    Joint stock companies are established with the purpose of profiting and distributing dividends. The dividend right of shareholders is one of the most fundamental rights in joint stock companies. Turkish Commercial Code numbered 6102[1] (“TCC”) governs determination of dividends, body authorized to determine dividends, and payment procedures of dividends. As well, the provisions regarding public joint stock companies should be separately analyzed due to different regulations in relation to public companies.

    This newsletter article examines the provisions on dividends under the TCC for joint stock companies and Capital Markets Law numbered 6362 (“CML”)[2], together with secondary legislation for public companies. However, this article will not examine the provisions on advance dividends, separately, nor will it make any assessment from a tax law perspective.

    Determination of Dividends

    Pursuant to TCC, Art. 508, unless otherwise regulated under the articles of association, dividends and liquidation shares are calculated in proportion to the payments made to the company by such shareholder. The amount constituting the basis for the shareholders’ participation in the profit is the net profit for such period, which is determined pursuant to the annual balance sheet. Net profits for the year are determined as per the law and the provisions of the articles of association. Nonetheless, dividends to be distributed may not be determined before statutory and voluntary reserves are allotted (TCC, Art. 523/1). Hence, dividends may be distributed from the annual net profit for such period and only from voluntary reserves allotted for this purpose, or from those that have no purpose (TCC, Art. 509/2).

    As distinct from the former Commercial Code numbered 6762 (“former TCC”), the TCC uses the wording ‘net profit of the period,’ instead of ‘gross earnings to determine dividends.’ Therefore, as specified in the preamble of the TCC, this wording facilitates the embodiment of dividends, since it is a term used in the Turkish Accounting Standards.

    Art. 507/2 of the TCC is an exemption to the principle of equal treatment with respect to a shareholder’s participation in the profit. Accordingly, certain shares may be privileged through the articles of association. For instance, obtaining more profit from the non-privileged shares, or primarily benefiting from the profit, may be privileges granted to certain shares. In such case, the shareholder’s dividend is calculated according to privilege under the articles of association, and distribution is primarily made to privileged shares.

    Body Authorized to Distribute Dividends

    Art. 408/2 of the TCC regulates the non-delegable duties and authorities of the general assembly. This Article specifies that it is the general assembly’s non-delegable duty to resolve issues relating to financial tables, annual report of the board of directors, disposal of the annual profit, determination of the dividends and gains margins, including addition of reserves to the capital or to dividend to be distributed. Therefore, the general assembly is the only authorized body to determine and distribute dividends, and it may not delegate such duty to the board of directors.

    As distinct from the former TCC, the TCC does not comprise any provision that entitles the board of directors to make a proposal on dividend distribution. Likewise, this power is not enumerated under the non-delegable duties and powers of the board of directors (TCC Art. 375). However, some opinions in the doctrine defend that it is possible for the board to make a proposal on dividend distribution as the body that has command of the economic structure of the company.[3] It is also possible to reach this opinion through TCC, Art. 437/1, that sets out the entitled right to gather and examine information. Pursuant to the relevant provision, financial statements, consolidated financial statements, annual activity report of the board of directors, the audit reports and profit distribution proposal will be made available in the company headquarters and branches at least fifteen days before the general assembly meeting for the examination of shareholders. Therefore, the board of directors may submit to the general assembly a proposal regarding the amount of profits to be distributed. However, the general assembly is not bound by the proposal of the board of directors, and it is the body that decides on the distribution time, procedure (such as in cash or in kind - shares free of charge) and amount of the profits.

    The general assembly decides in the general assembly meeting the manner in which the profit will be used, and to the determination of the ratios of dividends and gains margins to be distributed. Since the TCC does not set forth any quorum with respect to the decision on dividend distribution, if a higher quorum is not stipulated under the articles of association, the meetings will be held with the attendance of the shareholders or their proxies that correspond at least to one-fourth of the capital (TCC, Art. 419/2). The resolutions are taken by the majority of the votes of the attendees at the meeting. Such resolution of general assembly is regarded as an innovative right[4]. Accordingly, upon the resolution of the general assembly, profits are transformed into dividends, and dividends may be distributed afterwards.

    Provisions regarding Dividend Distribution under the TCC

    In order for the general assembly to resolve dividend distribution, statutory and voluntary reserves must be allotted (TCC, Art. 523/1). Primarily, the general assembly shall allot five percent of the annual profit as statutory reserve until this sum reaches twenty percent of paid-in capital (“primary reserve”) (TCC, Art. 519/1). The articles of association of the company may set forth a higher amount for allotted reserves (i.e. ten percent of the annual profit). Upon reaching such threshold, the following amounts shall be added to the general statutory reserves: a) the portion of the premium generated by issuance of new shares that is not used for issuance expenses, amortization considerations and charity payments, b) the portion of the consideration payment as the fee of the share certificates annulled as a result of [squeeze-out] after the deduction of the new share certificate issuance fees, c) ten percent of the total amount of profits to be distributed to relevant persons sharing the profits, upon payment of a 5% dividend to the shareholders (“secondary reserve”) (TCC, Art. 519/2).

    Articles of association may set forth that a reserve may be allotted to company managers and employees to establish charitable foundations.

    Finally, even if unforeseen under the articles of association, the general assembly may resolve to allot reserves if required for the reinstatement of the assets, and be justified in terms of the development of the company and distribution of dividends, considering the interest of the shareholders.

    Is Payment of Primary Reserve Obligatory?

    The provision that specifies “payment of a 5% dividend to shareholders” under TCC, Art. 519/2(c) is controversial as to whether it levies on companies the obligation to distribute to shareholders 5% of the annual profit. The controversy stems from TCC, Art. 519/2(c), which includes different wording from the former TCC. Pursuant to Art. 466/2 of the former TCC, it was required to add to the primary reserves, “ten percent of the total amount of profits to be distributed to relevant persons sharing profits, upon allotment of a 5% dividend to shareholders.” Hence, under the former TCC, the obligation could be fulfilled by allotment of 5% of the profits to shareholders. On the other hand, TCC, Art. 519/1(c) amends the wording, and instead uses the phrase, “after payment of a 5% dividend to shareholders.” The preamble of the TCC[5] specifies that the change was made due to the difficulty in interpretation of the wording of the former TCC, but the opinion forming the basis of the Article remains unchanged. The dominant opinion in the doctrine defends that the Article imposes an obligation to pay a 5% dividend to shareholders through TCC, Art. 519[6]; however, there are opposing opinions on the matter.[7] Given that joint stock companies exist to profit and distribute such profit, distribution of the primary reserves are in line with the fundamental philosophy of joint stock companies. Otherwise, the majority may deprive the minority from this minimum dividend amount, which contradicts the basic benefit (receiving dividend) anticipated by the shareholders in becoming a shareholder of a joint stock company.

    Provisions Regarding Dividend Distribution in Public Joint Stock Companies

    Distribution Procedures

    The principles regarding dividend distribution under public joint stock companies are regulated under CML, Art. 19-20 and Dividend Communiqué[8] (II-19.1). Public joint stock companies distribute their profits in accordance with the profit distribution policies determined by their general assemblies and pursuant to the relevant legislation (CML, Art. 19/1). The Capital Markets Board (“CMB”) may intervene in such policies.

    The provisions under the CML are different from the former Capital Markets Law numbered 2499 (“former CML”). For instance, the CML abolished the obligation to demonstrate a primary reserve. As stated in the preamble of the CML[9], “The article regulates that public companies may distribute dividends in accordance with the profit distribution policies determined by their general assemblies. Therefore, it is ensured that the companies act in line with their financial structures and investment plans, by not restricting them with respect to any ratio or minimum amount regarding dividends.

    Joint stock companies distribute dividends equally to all shares as of the distribution date, regardless of the issuance and acquisition dates of such shares. This principle will not be applicable if there are any privileged shares with respect to dividends. Dividends may be paid in equal or different installments, provided that such payment method is resolved in the general assembly meeting wherein the distribution of dividends is decided.

    The Dividend Communiqué also enables the company to give privileged shareholders, holders of redeemed shares, members of the board of directors, employees of the company, and persons other than shareholders a share of the profits through a provision to be included the articles of association of the company. However, dividends may not be distributed to such persons before the dividends are determined for shareholders in the articles of association and statutory reserves are allotted. If the ratio of dividends to be distributed to such persons is not determined by the articles of association, this ratio may not exceed one-fourth of the dividends distributed to the shareholders, except for those arising from privileges (Dividend Communiqué m. 5/4).

    Regulation with respect to Companies whose Shares are not Publicly Traded

    The Dividend Communiqué consists of special provisions regulating the dividend distribution of companies whose shares are not publicly traded. The dividend distribution ratio for companies whose shares are not publicly traded may not exceed twenty percent of the net distributable profits (including donations) for that period which is determined by the Dividend Communiqué.

    Distinct from other public companies, companies whose shares are not publicly traded must distribute dividends in full and in cash. Therefore, companies whose shares are not publicly traded cannot benefit from the opportunity to distribute dividends in installments.

    Again, companies whose shares are not publicly traded are not obliged to distribute dividends under certain circumstances. This may arise when the calculated dividend is less than five percent of the capital, according to last annual financial statements that are submitted to general assembly, or if the net distributable profit for such period is less than 100,000 Turkish Liras according to such financial statements (Dividend Communiqué, Art. 7/3). If the company decides not to distribute dividends, this shall be announced to public using the reasons thereof.


    Dividend rights and distribution of dividends in joint stock companies is regulated in detail under the TCC. One of the significant provisions under the TCC in this regard is TCC, Art. 519/2(c) which, in our opinion, foresees the obligatory distribution of primary reserves. Nevertheless, amendments to this Article by the TCC did not resolve the disagreements concerning this Article. The provisions on dividends under the CML consist of more innovative changes. Pursuant to the CML, public joint stock companies are not obliged to distribute minimum dividends, and companies are flexible on determining their dividend distribution policies.

    [1] Official Gazette. 14 February 2011, No. 27846. It has entered into force on July 1, 2012.

    [2] Official Gazette. 30 December 2012, No. 28513. It has entered into force on publication.

    [3] Hasan Pulasli, Sirketler Hukuku Serhi (Commentary on Companies Law), Cilt II, Birinci Baski, 2011, p. 1284.

    [4] Pulasli, p. 1285.

    [5] Preamble of Article 519 of the TCC.

    [6] Tekinalp/Çamoǧlu, Açiklamali, Notlu ve Karsilastirmali 6102 sayili Yeni Türk Ticaret Kanunu ve Ticari Mevzuat (Annotated and Comparative new Turkish Commercial Code numbered 6102 and Commercial Legislation), Güncellestirilmis 14. Basi, Istanbul 2012, p. 249.

    [7] Veliye Yanli, Anonim Sirketlerde Kâr Daǧitimi (Dividend Distribution in Public Companies) , Banka ve Ticaret Hukuku Dergisi, Mart 2014, p. 20.

    [8] Official Gazette 23 January 2014, No. 28891. It has entered into force on 1 February2014.

    [9] Preamble of Article 19 of the CML.