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COVID-19: Limitations on Dividend Distributions

Legal Alerts
Covid-19
Corporate
General

Recent Development

Within the scope of governmental measures taken due to the COVID-19 pandemic, dividend distributions are limited according to the Law on Reducing the Effects of the Novel Coronavirus (COVID-19) Pandemic on Economic and Social Life and the Law on the Amendment of Certain Laws No. 7244  (“Law“) published in the Official Gazette No. 31102 and dated April 17, 2020.

What’s New?

On March 31, 2020, the Ministry of Trade announced that companies, except for state-owned enterprises, must preserve their equities. In this context, companies cannot distribute any dividend that is more than 25% of their net profit as an agenda item of their general assembly meetings for the 2019 financial year. The Ministry of Treasury and Finance also announced that they are coordinating this process with the Ministry of Trade.

Pursuant to Article 12 of the Law, the Ministry of Trade’s announcement was legalized with the addition of a provisional article to the Turkish Commercial Code.

Accordingly, except for companies in which the state, special provincial administration, municipality, village or other public legal entity is a shareholder holding more than 50% of the shares of those companies, or companies in which a public fund owns 50% of the company, and the state owns 50% of the public fund, until September 30, 2020:

  • a company cannot distribute dividends that are more than 25% of their net profit for the 2019 financial year;
  • a company cannot distribute retained earnings and free reserve funds;
  • a company’s general assembly cannot grant its board of directors the authority to distribute advance dividends; and
  • even if the general assembly adopted a dividend distribution resolution for the 2019 financial year before the enforcement of the Law, but the payment was not yet made or only partially made, companies must postpone dividend payments for more than 25% of their net profit for the 2019 financial year.

The President is authorized to extend and reduce the mentioned period for three months. In addition, the Ministry of Trade is authorized to determine the exceptions on the provisional article added to the Turkish Commercial Code, and the principles and procedures for the application of the limitation by consulting with the Ministry of Treasury and Finance.

The preamble of this amendment was clarified to avoid any decrease in companies’ resources that resulted from cash dividend distributions; protect companies’ current equities; and avoid any additional finance needs within the context of the prudence policy.

Conclusion

From our point of view, companies should consider the below points within the scope of the relevant limitation:

  • The limitation does not harm a board member’s general responsibility of acting prudently and cautiously to protect a company’s equity, as per the Turkish Commercial Code. Accordingly, if there is profit available for distribution under the 2019 year-end financial statements, an interim balance sheet should be issued before the date of the general assembly meeting and the current equity and cash flow status of the company should be determined. In this regard, it should be evaluated whether a net profit distribution of 25% will have a negative impact on the company.
  • As dividend distribution resolutions are not subject to registration, independently of the Trade Registry practices, it is the board of directors and shareholders’ responsibility to adopt resolutions complying with the Law.
  • If the general assembly adopted a dividend distribution resolution for the 2019 financial year before the Law passed, but the payment was not yet made or only partially made, companies should adopt a new resolution to postpone the payments regarding any dividend more than 25% of their net profit for the 2019 financial year until September 30, 2020.
  • Accordingly, companies should closely follow the potential secondary legislation on the exceptions, and procedures and principles for the application of limitation to be determined by the Ministry of Trade.

Please stay up to date with further developments through the Esin Attorney Partnership Coronavirus Helpdesk.