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Information Note on Dividend Distribution in The Era of Covid-19 Pandemic

TARIK SAHIN KEREM ARSLAN

Dividend Distribution in The Context of The Covid-19 Pandemic

Due to Coronavirus Disease COVID-19 Pandemic, most companies and enterprises have aligned their business operations to cope with the negative impact and mitigate the damages incurred.

To avoid transmission and spread of the disease, a lockdown has been imposed, and activities at some of the business places have been temporarily halted until further notice. Accordingly, the real sector has been inevitably affected, and the financial outlook of the companies have deteriorated as an adverse consequence of the disease.

To diminish the negative impact on the Turkish economy in general, one of the measures adopted and put into effect is the enactment of Law No: 7244 dated 16.04.2020 on mitigating the effect of the pandemic on social and economic life in Turkey.

Pursuant to Article 12 of the said Law, a provisional article has been incorporated into Turkish Commercial Code Numbered 6102, enabling the share capital companies to protect their shareholders’ equity during Corona times. Accordingly, until 30.09.2020;

Companies are allowed to distribute only up to %25 of the 2019 net profit as a dividend to their shareholders,
No dividend shall be distributed out of the profits or free reserves generated at financial years before 2019, and,
Board of Directors shall not be empowered by the General Assembly of the Shareholders with authority to make any advance dividend payment.

The President shall have the authority to extend the foregoing measures beyond 30.09.2020 if deemed necessary.

Before enactment of the said law, if the general assembly of the shareholders of the company has been convened, and at that meeting distribution of dividend for the financial year 2019 has been agreed upon, but no payment has been effectuated yet, or partial payment has been made; then dividend payment for the amount exceeding %25 threshold figure shall only be made after 30.09.2020 unless the said deadline is extended or cut short with the discretion of the President.

In case general assembly of the company’s shareholders has been held before the enactment of the law whereby the resolution to distribute dividend out of 2019 profits above %25 threshold is adopted. Afterwards, dividend payment has been made before the law’s effective date. The decision and subsequent payment exceeding %25 are just fine and in line with the law.

The said provision of the newly enacted law is a compulsory legal rule. Therefore, any companies’ decision in defiance of the provision shall be deemed a patent breach of the law.

In this regard; any decision taken at the general assembly meeting of the companies held between the periods of 16.04.2020 and 30.09.2020,

i) on the distribution of dividends above %25 of the profits generated at 2019 financial year, or,
ii) on the distribution of dividends out of the profits and reserve funds generated before the 2019 financial year, or,
iii) on authorizing the Board of Directors with the power to make any advance dividend payment might be challenged at the competent court with proper venue according to Article 445 of Turkish Commercial Code within three months upon the General Assembly Meeting date.

The lawsuit to set aside the decision of the General Assembly might be filed;

i) by the shareholders, who have attended to the pertinent General Assembly, voted against and incorporated their reservation into the minutes of the general assembly or,
ii) by the Board of Directors.

In case the decision to distribute dividends above 25% of the profits generated in the 2019 financial year has been taken at the general assembly meeting. However, such distribution has not been made yet, or only a partial payment has been made; any decision of the Board of Directors of the company to make or complete the payment above 25% thresholds before 30.09.2020 or beyond that date upon the discretion of the Presidency, then a Court decree might be obtained to declare the decision of Board of Directors of the company as null and void pursuant to Article 391 of Turkish Commercial Code. Besides, distribution of dividends above the threshold figure in the existence of explicit provisions of the law will lead to the liability of the Company’s Board of Directors.

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