Turkey

Introduction In the legal proceedings instituted by Lassana Diarra, who played football for several top clubs such as Chelsea, Real Madrid, and Arsenal, the European Court of Justice ('ECJ' or 'the Court') issued a landmark judgement ('the Judgement') on 4 October 2024. The ECJ examined whether FIFA's transfer and contract rules comply with EU law. In its judgement, widely referred to as the 'new Bosman judgement' by the press, the Court held that certain FIFA transfer rules are incompatible with freedom of movement and European Union ('EU' or 'Union') law.[i] Background of the Case The Player, Lassana Diarra ('Diarra' or 'the Player') (residing in France) entered into a four-year employment contract with Lokomotiv Moscow on 20 August 2013 which was terminated one year later by Lokomotiv Moscow on 22 August 2014 owing to alleged misconduct of the player. The club claimed that Diarra breached the contract without any just cause and sought compensation of 20 million Euros before the FIFA Dispute Resolution Chamber ('DRC'). Diarra counterclaimed for unpaid salary and damages for early contract termination; however, DRC determined that Diarra was responsible for paying compensation of 10.5 million Euros to Lokomotiv Moscow. This determination of DRC was appealed to the Court of Arbitration for Sport ('CAS') by the Player; however, CAS confirmed DRC's determination on 27 May 2016. Following the termination of his contract, Diarra states that he faced challenges finding a new club, as any club signing him could be held jointly liable for compensation owed to Lokomotiv pursuant to FIFA's transfer regulations. At the beginning of 2015, Diarra was offered an employment contract by a Belgian club, Sporting du Pays de Charleroi; however, this offer was conditional: (i) Diarra would be eligible to register and play in the club's first team for all competitions organised by FIFA, UEFA, and the Belgian football association ('RFBA'); and (ii) Royal Charleroi would not owe any compensation to Lokomotiv Moscow. Ultimately, FIFA and the RFBA refused to assure the avoidance of joint liability, and Lokomotiv Moscow refused to issue the international transfer certificate ('ITC'). In this manner, Diarra was blocked from transferring to Royal Charleroi. Subsequently, he was registered with another French club in July 2015. Ultimately, Diarra instituted legal action against FIFA and RFBA in Belgian courts (Hainaut Commercial Court—Charleroi division) at the end of 2015. He argued that certain rules of the FIFA Regulations on the Status and Transfer of Players ('RSTP') (2014 edition)[ii] hindered his employment and violated EU competition laws and free movement, and claimed compensation of 6 million Euros for the damages he had incurred owing to the misconduct of both associations.   In 2017, the court declared its jurisdiction over the case and found Diarra's claim to be prima facie valid, and determined to order FIFA and RFBA to jointly and severally pay Diarra a provisional sum. FIFA appealed against this determination to the Mons Court of Appeal (Belgium), which found that Diarra's claim was admissible and relevant to Belgian jurisdiction. In the dispute, Player Diarra principally argued that the rules of the RSTP (particularly Article 9 and Article 17) restrict his freedom of movement and competition rules of the EU, which violate Articles 45 and 101 of the Treaty on the Functioning of the European Union ('TFEU'). Meanwhile, FIFA and RFBA argued that the RSTP rules serve the legitimate public interests of ensuring the stability of contractual relations and the continuity of team line-ups in professional football. Eventually, the Mons Court of Appeal ('Referring Court') referred to the ECJ the questions concerning whether FIFA regulations, which require new clubs to share liability for a player's breach/termination of contract and prevent the issuance of a transfer certificate in disputed cases, violate EU laws protecting freedom of movement for workers and competition. The RSTP Rules Examined by the ECJ The Referring Court asked the ECJ whether Articles 45 and 101 TFEU can prohibit the rules adopted by a private law association to regulate, organise, and oversee global football. In this regard, the ECJ principally examined the rules of FIFA RSTP 2014 under the section entitled 'Maintenance of contractual stability between professionals and clubs', some of which can be summarised as follows: Solidary Responsibility for Compensation: Pursuant to the principal concept of RSTP, a contract between a player and a club may be terminated without any consequence (i.e., compensation, sporting sanction) only: (a) upon expiry of the term of the contract; (b) by mutual agreement; (c) in case of just cause. Principally, the party in breach is liable to pay compensation (Article 17/1 of the RSTP). When an employment contract between a club and a player is terminated without just cause, the player and the new club that hires the player after the termination are jointly responsible for paying compensation to the former club (Article 17/2 of the RSTP). The compensation is established pursuant to the principles outlined in RSTP. Sanctions for Hiring During Protected Period: If the player's employment falls into the protected period[iii] pursuant to the contract that is terminated, the new club may also face sporting sanctions (i.e., ban on registering new players for a set period) (Article 17/4 of the RSTP). The ban can be avoided if the new club proves it did not encourage the player to breach the contract. Block on ITC: Pursuant to RSTP, a player may be registered to a new association once the new association obtains the ITC issued by the previous association (Article 9 of the RSTP). The previous association is not obliged to issue the ITC if there is a contractual dispute between the former club and the professional player over the termination of the contract. Consequently, in case of a dispute between a club and a player, the latter cannot be registered within the new association and participate in football competitions for the new club. Preliminary Observations of the ECJ Before assessing the freedom of movement of workers and other legal considerations, in summary, the ECJ noted the following: Sports activities constitute an economic activity; therefore, the provisions of Union law apply to sports activities and its rules adopted by sports associations fall pursuant to TFEU. Only the rules which are adopted exclusively for non-economic reasons and address issues only related to sport itself are considered outside the scope of economic activity and Union law (i.e., rules concerning the exclusion of foreign players from national team competitions or the criteria for ranking athletes in individual competitions). Similarly, the rules and conduct of sports associations are subject to the competition provisions of the TFEU when the conditions for their application are met. The rules in question directly impact the work of players (i.e., the players' employment contracts and working conditions) and affect the players' participation in competitions, which are central to their economic activity. In competitions involving professional football clubs having an economic nature, the composition of teams is an important factor in terms of competition. Consequently, rules concerning employment contracts or player transfers directly affect the economic conditions and competition between football clubs. Accordingly, the rules in question fall within the scope of application of Articles 45 and 101 TFEU.   Freedom of Movement for Workers: Article 45 of TFEU The ECJ first examined whether certain rules of RSTP prevent the freedom of movement for workers pursuant to Article 45 TFEU.[iv] The ECJ notes that the provisions of the RSTP that hold both the player and the new club liable for compensation in the event of termination of the contract without just cause, and that determine the compensation amount, discourage other EU clubs from signing a player like Diarra, as the existence of these rules and the combination of them lead to facing significant legal, unpredictable, and potentially very high financial risks alongside the major sporting risks. Further, the rules that prevent the issuance of ITCs during a dispute also hinder the players' ability to work in another EU state, restricting their freedom of movement. In its judgement, the ECJ also emphasised the importance of workers' rights, stating that professional players should be granted the same legal protections pursuant to EU law as any other employee. The ECJ ultimately recognises the regularity and integrity of competitions as a legitimate objective in the manner of public interest. However, the concerns concerning the principle of proportionality were emphasised. The ECJ noted that certain rules of the RSTP are overly restrictive. For example, in cases where a player terminates their contract without just cause, the criteria established by FIFA for determining the compensation payable to the former club impose a disproportionate burden, as they take into account the player's salary in the new contract or the former club's expenses on the player. Additionally, the automatic joint liability on the new club for an unspecific compensation, without considering the specific circumstances of each case, was deemed highly problematic. Furthermore, the assumption that the new club encouraged the player's early termination, leading to sporting sanctions, was also found to be disproportionate. Additionally, the rule that the former federation may withhold the issuance of an ITC in cases where there is a dispute between the former club and the player concerning the early termination of a contract was explicitly considered by the ECJ to violate the principle of proportionality. This general rule fails to consider the specific circumstances of individual cases, particularly the material facts surrounding the breach, the behaviour of the player and the former club, and the role—if any—of the new club. This ban on the player's registration and participation in competitions is, therefore, inherently excessive. The ECJ stated that these rules could hinder players' freedom of movement by limiting their flexibility to change jobs during their careers. In conclusion, the ECJ found that FIFA's rules are restrictive to the extent that they could effectively end players' careers and that these rules are in violation of the EU's fundamental principle of freedom of movement. The ECJ also noted that the final assessment of the proportionality of these regulations should be left to national courts; however, it stated that FIFA should review its disproportionate rules that restrict players' freedom of movement. Competition: Article 101 of TFEU In the judgement, the ECJ addressed Article 101[v] of the TFEU in the context of the free movement of workers and restrictive agreements on competition. The ECJ examined whether FIFA's rules on the termination of contracts and transfers of professional football players adversely affected competition in intra-European trade. The ECJ first noted that Article 101 of the TFEU also applies to sports federations like FIFA and the determinations made by these federations. It observed that FIFA's ability to make economically binding determinations for its members, including national football federations and professional football clubs, allows such federations to be considered 'associations of undertakings'. Consequently, it is evident that the rules concerning player transfers and termination of contracts fall within the scope of Article 101 of the TFEU. The ECJ found that FIFA's requirement for players to meet certain conditions to work for another club, imposing significant financial obligations on new clubs, and subjecting the new club to sporting sanctions, restricts competition. In the Judgement, it is stated that, in the context of economic activities arising from the conduct of football and sport, it is legitimate for an association like FIFA to subject the organisation and conduct of international competitions to common rules aimed at ensuring uniformity and coordination. It was also noted as legitimate, in particular, for the conditions pursuant to which professional football clubs form teams to participate in these competitions, as well as the conditions pursuant to which players participate in these competitions, to be determined through common rules and for sanction provisions to be introduced to ensure compliance with these rules. However, the Court expressed that the unique characteristics of football and the economic market conditions, including the organisation and commercialisation of inter-club competitions, do not justify completely prohibiting or heavily restricting the possibility of hiring players unilaterally for cross-border competition. The ECJ noted that these rules, under the guise of 'preventing aggressive recruitment practices', actually represent non-compete (non-poaching) agreements between clubs, resulting in the artificial segmentation of national and local markets for the benefit of all clubs. The ECJ also pointed out that 'classic mechanisms of contract law, such as the right of a club to claim compensation in the event of contract termination by one of the players, even at the instigation of another club in violation of contract stipulations, are sufficient to ensure, on the one hand, the player's continued presence in that club by the contract provisions, and on the other hand, to allow the hiring of the player between clubs at the end of the contract or if a financial agreement is made between the clubs'. Considering the content of the transfer rules and the economic and legal context in which they exist, the ECJ concluded that, by their nature, these rules significantly restrict the ability of clubs to compete for access to top-level players and seek to prevent competition across the EU.   Conclusion In conclusion, the ECJ found that the rules concerning compensation liability, sporting sanctions, and the avoidance of issuing the international transfer certificate as a result of termination of player contracts without just cause violated both workers' freedom of movement and EU competition rules. The finding that these rules are contrary to Articles 45 and 101 of the TFEU has resonated amongst organisations, firstly FIFA, FIFPRO[vi], and the ECA.[vii] Indeed, on 14 October 2024, FIFA announced on its website its plan to initiate a global dialogue on Article 17 of the RSTP and stated that formal invitations would be sent to football stakeholders to comment on and propose ideas on this matter.[viii] Following the Judgement of the ECJ, it is expected that FIFA will be making essential changes to the rules governing the football transfer system. This article was authored by Erdem & Erdem Senior Associate Ece Özsü Alpagut [i] For the decision see, https://eur-lex.europa.eu/legal-content/FR/TXT/HTML/?uri=CELEX:62022CJ0650 [ii] Since 2014, several changes have been made to the RSTP. The 2014 edition was subjected to the case initiated by Diarra. [iii] RSTP defines the protected period as follows: a period of three entire seasons or three years, whichever comes first, following the entry into force of a contract, where such contract is concluded prior to the 28th birthday of the professional, or two entire seasons or two years, whichever comes first, following the entry into force of a contract, where such contract is concluded after the 28th birthday of the professional. [iv] Article 45 TFEU prohibits measures, whether based on nationality or not, that disadvantage EU citizens seeking to work in a member state other than their own, by preventing or deterring them from leaving their home country. [v] Article 101 of the TFEU prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and prevent, restrict, or distort competition within the internal market. [vi] For the press release of FIFPRO please see https://fifpro.org/en/supporting-players/obtaining-justice/governance-and-representation/fifpro-statement-decision-of-european-court-of-justice [vii] For the press release of ECA please see, https://www.ecaeurope.com/news-media-releases/eca-statement-on-the-court-of-justice-of-the-european-union-cjeu-judgement-concerning-lassana-diarra/ [viii] For the press release of FIFA please see. https://inside.fifa.com/legal/football-regulatory/news/fifa-to-open-global-dialogue-on-article-17-of-the-regulations-on-the-status-and-transfer-of-players

In its judgement of 11 June 2024, published in the Official Gazette dated 3 October 2023 and numbered 32681, the Constitutional Court ('CC') ruled, within the scope of individual application no. 2019/7376, that the applicant's right to a fair trial was violated owing to the evidential misassessment in reinstatement proceedings. [i] The factual background of the application examined in this article comprises a mutual termination agreement entered into between the employee and the employer. Mutual termination agreements, frequently applied pursuant to the Labour Law No. 4857, often raise questions concerning whether the employee's will was vitiated. In such disputes, the manner in which evidence is assessed has critical importance for the right to a fair trial. In this context, the CC's judgement is noteworthy. This article summarises the individual application subject to the CC's judgement and the judicial process, followed by an analysis of the CC's reasoning. Factual Background The applicant, Yılmaz Korkmaz, was employed as a commercial affairs officer at Türk Telekom A.Ş. Following the termination of his employment through a mutual termination agreement on 2 August 2017, he claimed that his will had been vitiated, that he had been pressured into signing the agreement with the threat of receiving no payments if he refused, and that the agreement was consequently invalid. He subsequently instituted reinstatement proceedings. The proceedings were conducted before the Ankara 32nd Labour Court. During the proceedings, the Applicant requested the hearing of witnesses, whose testimonies supported his claims of being subjected to pressure during the termination process and being warned that he would not receive his entitlements unless he signed the mutual termination agreement. On 8 March 2018, the first instance court ruled in favour of the Applicant, holding that the termination of the employment contract was invalid and ordering the Applicant's reinstatement. The court emphasised that in cases of termination through mutual agreement, the principle of interpretation in favour of the employee should prevail and the specific circumstances of the case must be carefully evaluated. The employer, Türk Telekom A.Ş., appealed the judgement. They argued that the first instance court had failed to conduct a sufficient inquiry and had incorrectly founded its judgement solely on the applicant's allegations and witness testimonies. The Ankara Regional Court of Appeal, 6th Civil Chamber ('Court of Appeal'), reversed the judgement, holding that there was no concrete evidence, other than the Applicant's abstract allegations, to support the claim that his will was vitiated. It further emphasised that the termination offer had been initiated by the applicant, who had retired shortly thereafter, and that the claims of duress were unsubstantiated. Additionally, the Court of Appeal noted that the applicant had received compensation exceeding severance and unused leave entitlements, including an additional four months' salary, which constituted sufficient benefit and a valid mutual termination. Following this final judgement, the Applicant brought the case before the Constitutional Court, alleging that the Court of Appeal had failed to consider the witness testimonies on file and that the finding of insufficient evidence was founded upon an incomplete examination, thereby violating his right to a fair trial.   Evaluation by the Constitutional Court The Constitutional Court emphasised that the right to a fair trial, protected pursuant to Article 36 of the Constitution, seeks to ensure procedural fairness rather than material justice. Whilst the assessment of evidence by lower courts generally falls outside the CC's jurisdiction pursuant to Article 148 of the Constitution, an intervention may be warranted in cases of manifest arbitrariness or serious error in discretion. The CC reiterated that its review focuses not on how the evidence was assessed but on whether such assessment was arbitrary or devoid of reasonable basis to the extent that it undermines the fairness of the proceedings. Consequently, the CC does not review the outcome of the trial but whether the constitutional guarantees concerning the trial process were respected. In the present case, the Constitutional Court found that the applicant had duly requested the hearing of witnesses, whose testimonies supported his claims. Nevertheless, the Court of Appeal had disregarded these statements entirely, proceeding as if no witnesses had been heard. However, the witness statements had in fact been included in the file through the first instance court's request for testimony. The CC determined that ignoring this crucial fact rendered the procedural safeguards of the right to a fair trial ineffective. Accordingly, the CC held that the Applicant's right to a fair trial had been violated and ordered a retrial to remedy the consequences of the violation. The court to which the case would be referred must re-evaluate the matter in a manner that eliminates the deficiency that constituted the ground for the violation. Conclusion In light of the above, the Constitutional Court concluded that the failure to consider witness evidence amounted to a violation of the right to a fair trial, despite the existence of a mutual termination agreement that appeared to fulfil formal conditions. This case illustrates the critical importance of a complete and proper evaluation of evidence in ensuring procedural justice.   This article was authored by Erdem & Erdem Senior Associate Ece Özsü Alpagut [i] Constitutional Court of Türkiye. (2023, October 3). Decision no. 2019/7376. Official Gazette, No. 32681. https://kararlarbilgibankasi.anayasa.gov.tr/BB/2019/7376

The recognition, enforcement, and setting aside of foreign court judgements and arbitral awards in Türkiye constitute processes in which the public policy doctrine emerges as one of the most critical criteria for judicial review, both in theory and in practice. Court of Cassation judgements determine the trajectory of case law concerning the scope and application of the public policy concept. In this article, the practical implications and developments are explained through Court of Cassation judgements rendered in recent years.[1] Mere Inconsistency Between a Foreign Arbitral Award and a Criminal Court Judgement Does Not, In Itself, Constitute a Ground for Refusing Recognition In its judgement of 8 November 2023, the General Assembly of the Court of Cassation ('the General Assembly') reviewed the application for enforcement and recognition of foreign arbitral awards rendered under the International Chamber of Commerce Arbitration Rules. The arbitral proceedings in question were conducted in two stages, and ultimately two arbitral awards were rendered, dated 13 December 2012 and 19 June 2013, respectively. In the recognition proceedings, separate allegations of public policy violation were raised in relation to each arbitral award. The first instance court held that the arbitral award dated 13 December 2012 conflicted with a final judgement rendered by the Turkish criminal courts; and in respect of the arbitral award dated 19 June 2013, it found that, whilst the valuation report underlying the award had been prepared by the claimant and its initial submission had been rejected, it was subsequently submitted to the case file pursuant to the arbitral tribunal's order and confidentiality determination, in a manner excluding commercial secrets; the identity of the report's authors was kept confidential; and the report was evaluated without being disclosed to the respondent. Based upon these grounds, the court concluded that the principles of equality of arms, the right to present evidence, and the publicity of proceedings had been violated, and accordingly dismissed the enforcement applications concerning both arbitral awards on the basis of public policy. The case was brought before the Court of Cassation, which held that there was no inconsistency between the arbitral award dated 13 December 2012 and the criminal court judgement, considering the reasoning of the acquittal, as the criminal court had concluded that there was insufficient, conclusive, and convincing evidence to support a conviction and that the elements of the alleged offence had not been established. As for the arbitral award dated 19 June 2013, the Court of Cassation found that the non-valuation-related parts of the report had been excluded and that no concrete evidence had been presented to prove that the respondent's lack of access to the report constituted a procedural irregularity under the applicable arbitral rules; accordingly, it concluded that there had been no public policy violation and reversed the first instance judgement. Following the reversal, the respondent filed an application for revision of the judgement, and upon reviewing this application, the Court of Cassation found that the partial submission of the report in contravention of the procedural rules agreed upon by the parties, the concealment of the identities of its authors, the lack of disclosure of the valuation models and methodologies applied, the absence of any opportunity for cross-examination of those individuals, and the fact that these limitations were not founded upon any legally valid or reasonable justification, amounted to a violation of the right to defence and constituted a violation of public policy. However, the Court of Cassation also held that the first instance court had erred procedurally and legally by rendering a single judgement rather than separate rulings with respect to each arbitral award, and accordingly reversed the judgement on grounds differing from its initial reasoning. Upon this second reversal based on different grounds, the first instance court resisted its previous judgement, and this judgement was appealed, bringing the matter before the General Assembly.   With regard to the arbitral award dated 19 June 2013, the General Assembly noted that this award had been excluded from the scope of review and held that the claimant had no legitimate interest in appealing this part of the judgement, thereby dismissing the appeal. As for the arbitral award dated 13 December 2012, the Court of Cassation ruled that the acquittal judgement rendered by the criminal court concerning the same factual circumstances did not constitute a ground to refuse the enforcement and recognition of the arbitral award, since the criminal court merely stated that the acts in question did not constitute a criminal offence, but did not make a clear and definitive assessment as to whether those acts were unlawful. Moreover, the arbitral award was rendered on the basis of an infringement of contractual obligations between the parties, which is distinct from criminal liability; consequently, there was no direct inconsistency between the arbitral award and the criminal court's judgement. The General Assembly concluded that the first instance court's judgement dismissing the enforcement and recognition of the arbitral award dated 13 December 2012 was incorrect, and reversed the lower court's ruling in respect of that award. It also found that the court's failure to render separate rulings for each arbitral award constituted a procedural   error   .[2] Enforcement of a Foreign Bankruptcy Judgment Rendered Against a Non-Merchant Individual is Against Public Policy   In its judgement of 9 May 2023, the Court of Cassation assessed the public policy implications of an application for enforcement and recognition of a foreign court judgement concerning bankruptcy law. In the present case, enforcement and recognition in Türkiye was sought for a bankruptcy judgement rendered by a Dutch court against the claimant. However, the first instance court dismissed the application on the grounds that the claimant was not a merchant under Turkish law. Referring to Article 43 of the Enforcement and Bankruptcy Law ('EBL'), the court held that only persons who are merchants or are subject to bankruptcy under special laws may be declared bankrupt in Türkiye, and that this limitation pertains to public policy. The Regional Court of Appeal also dismissed the appeal on the merits, emphasising that the foreign judgement was manifestly contrary to Turkish public policy owing to the claimant's non-merchant status. The Court of Cassation upheld the lower court's judgement, finding the reasoning lawful and procedurally correct. Consequently, the Court concluded that, for the enforcement of foreign bankruptcy judgements, it is lawful to consider whether the individual qualifies as a merchant under Turkish law and to evaluate the limitation set forth in Article 43 of the EBL within the scope of public policy.[3] An Award Rendered in the Presence of a Duly Notified but Absent Arbitrator Does Not Constitute a Ground for Refusal of Recognition In its judgement of 12 September 2023, the Court of Cassation examined whether the three-member arbitral tribunal had acted in accordance with procedural requirements when rendering its award. In the present case, one of the three arbitrators appointed by the parties failed to attend the deliberations owing to health and work-related reasons, despite having been duly notified of the meeting date; nevertheless, the remaining two arbitrators proceeded to issue the award. The first instance court held that the award rendered by two arbitrators was invalid pursuant to Article 295/2 of the Code of Civil Procedure ('CCP'). The court further noted, consistent with Court of Cassation precedents, that an award rendered by two arbitrators without the participation of the third in the deliberations of a three-member tribunal is deemed invalid. Accordingly, even though this procedural irregularity had not been raised by the parties, the court found that it had to be taken into consideration ex officio under the setting aside grounds set out in Article 439 of the CCP, and concluded that the award was contrary to public policy pursuant to Article 439/2(g).   However, the Court of Cassation did not uphold this approach and stated in its judgement that, pursuant to Article 295(2) of the CCP, an award rendered by the two arbitrators with concurring votes remains valid even if the third arbitrator who was duly invited to the deliberation did not attend, and that such a circumstance does not constitute a public policy violation. This judgement indicates that procedural irregularities arising during the arbitral proceedings should not automatically be regarded as violation of public policy.[4] The Application of Compound Interest in an Arbitral Award Does Not Constitute a Public Policy Violation   In its judgement of 16 June 2022, the Court of Cassation reviewed an application for recognition in Türkiye of a foreign arbitral award rendered in London. The respondent argued that there was no valid arbitration clause between the parties, that the appointment of the arbitrator was procedurally flawed, and that the compound interest awarded by the arbitrator was contrary to public policy. The first instance court held that the arbitration clause, which was formed through references made to the charter party, was valid under the New York Convention, and that the application of compound interest alone did not amount to a public policy violation, thereby granting recognition. The Regional Court of Appeal upheld the judgement, and the Court of Cassation, upon appeal, found the lower court judgements to be in accordance with the law. The judgement provides a detailed assessment of the validity of arbitration clauses incorporated by reference, the exceptions applicable to procedural defects in the arbitrator appointment process, and the limits of public policy objections to compound interest. It affirms that references to the main contract may suffice to establish arbitration intent and that the principle of revision au fond should be preserved in the context of compound interest evaluations.[5] Whether a Penalty Clause Is Excessive Cannot Be Reviewed Under Public Policy Grounds   In its judgement of 20 June 2022, the Court of Cassation reviewed an application to set aside an arbitral award rendered by the Istanbul Arbitration Centre. The dispute concerned a contractual penalty stipulated in a settlement protocol executed between the parties, arising from an infringement of the non-solicitation obligation. The claimants sought to set aside the award on the grounds that the penalty clause was excessive, no expert examination had been conducted, witness statements had not been considered, and the non-solicitation obligation violated competition law, thereby constituting an infringement of public policy. However, the Court of Cassation upheld the judgement of the Regional Court of Appeal, which had found that the arbitration clause had been validly concluded between the parties, the arbitrator had acted within the scope of the clause and had not exceeded their authority, the proceedings were conducted in accordance with the expedited arbitration rules of the Istanbul Arbitration Centre as agreed by the parties, and that the principles of party equality and the right to be heard had been respected. The appellate court had further held that the absence of an expert report fell within the discretion of the arbitrator and that the non-solicitation obligation based on a non-compete clause did not violate public policy. The Court emphasised, in particular, that whether a contractual penalty is excessive cannot be examined through the lens of public policy, as such an assessment would amount to a review of the merits. It was also stated that the non-solicitation obligation was limited in duration, constituted a matter of private law, and did not infringe upon the freedom to work. Finally, the Court concluded that the exclusive jurisdiction of the Competition Authority does not preclude arbitration in private law disputes. In doing so, the Court reaffirmed the limits of public policy objections in relation to penalty clauses and reiterated the principle that the merits of arbitral awards may not be examined by the courts.[6]   Law No. 805 Does Not Constitute a Ground for Refusal of Enforcement in Contracts Concluded Between Foreign Parties In its judgement of 12 December 2023, the 6th Civil Chamber of the Court of Cassation reviewed objections raised against the recognition of an arbitral award. The respondent argued that the contract, being drafted in a foreign language, violated Law No. 805; that the mandatory pre-arbitration conciliation procedure had not been conducted; that the facility subject to the contract posed risks to public health; and that the right to a fair trial and the right of defence had been infringed. On these grounds, the respondent asserted that the arbitral award was contrary to public policy, both procedurally (violation of fair trial guarantees, limitation of the right to defence, failure to comply with pre-arbitration conciliation obligations) and substantively (existence of a facility allegedly posing risks to public and occupational health and safety). The first instance court granted recognition, holding that the contract had been concluded between foreign companies and did not constitute an infringement of public policy. The court further noted that the allegations concerning public health risks fell within the scope of a review of the merits, and such matters could not serve as grounds for refusing enforcement. The Regional Court of Appeal upheld the judgement, emphasising that Law No. 805 is only applicable where both parties to the contract are Turkish nationals, and consequently the use of a foreign language in the contract and proceedings did not infringe public policy. The court also found that the parties had the opportunity to present their claims and defences, including counterclaims, during the arbitration proceedings, and that the principles of equality of arms and the right to a fair trial had not been violated. The Court of Cassation affirmed the judgement, finding the lower courts' reasoning accurate and lawful. It held that the right of defence had not been restricted, no public policy violation had occurred, and the arbitral award had been rendered in accordance with both procedure and law. The Court of Cassation particularly underlined that the submission of evidence, the opportunity to file counterclaims, and the exercise of procedural rights within the arbitration process precluded allegations of unfair trial. It concluded that objections concerning public health and environmental safety were related to the merits of the arbitral award and thus could not be evaluated within the scope of public policy violation.[7] Conflicting Arbitral Awards Rendered in Relation to the Same Dispute Constitute a Violation of Public Policy In its judgement of 15 June 2022, the Court of Cassation reviewed an application to set aside arbitral awards rendered under the Rules of the Istanbul Chamber of Commerce Arbitration Centre. The parties were involved in two separate arbitration proceedings arising from the same contract but in different capacities: in Case No. 2019/7, the claimant was the party transferring the portfolio, whilst in Case No. 2019/9, the claimant was the transferee company. Each case was adjudicated by a different sole arbitrator, and conflicting assessments were made as to whether the contractual obligations of the same company had been duly performed. The Regional Court of Appeal dismissed the applications to set aside on the grounds that there was no complete identity of parties and claims in the two arbitral proceedings, that the arbitrators had discretion in evaluating the evidence, and that the divergence between the awards did not constitute a ground for setting aside. However, the Court of Cassation held that, whilst courts are precluded from examining the merits of arbitral awards, conflicting awards based on the same factual circumstances may result in contradictory outcomes, which undermine the principles of legal certainty, transparency, and consistency, thereby constituting a public policy violation. According to the Court, whilst the award in Case No. 2019/7 found that the claimant had failed to fully perform its obligations, the award in Case No. 2019/9 concluded that the same party was not entitled to restitution of the contract price because it had fulfilled its obligations. Owing to this inconsistency, the Court found that the lower courts should have enquired into whether the award in Case No. 2019/7 had become final and should have assessed the potential res judicata effect. Rendering a judgement without conducting such an enquiry was found to be procedurally improper and contrary to public policy. Consequently, the Court of Cassation reversed the judgement, finding that the inconsistency between the arbitral awards concerning the same set of facts constituted a violation of public policy.[8]   Conclusion In recent years, the Court of Cassation has adopted a narrow interpretation of the public policy concept and has refrained from engaging in a review on the merits in setting aside and recognition proceedings brought against arbitral awards. The overall approach of the Court of Cassation is aligned with an arbitration-friendly stance. This reflects a positive judicial attitude towards the development of arbitration in Türkiye. Authored by Mehveş Erdem Kamiloğlu, Erdem & Erdem Managing Associate. [1] Kamiloğlu, Mehveş Erdem. 2021. "Public Policy as Grounds for Refusal of Recognition." Erdem & Erdem. Access Date: June 1, 2025 (https://www.erdem-erdem.av.tr/en/insights/public-policy-as-grounds-for-refusal-of-recognition). [2] General Assembly of the Court of Cassation dated 08.11.2023, Case No: 2022/660, Decision No: 2023/1066. [3] Court of Cassation 6th Civil Chamber dated 09.05.2023, Case No: 2023/1965, Decision No: 2023/1732. [4] Court of Cassation 6th Civil Chamber dated 12.12.2023, Case No: 2023/2416, Decision No: 2023/2676. [5] Court of Cassation, 11th Civil Chamber dated 16.06.2022, Case No: 2020/7985, Decision No: 2022/4932. [6] Court of Cassation 11th Civil Chamber dated 20.06.2022, Case No: 2021/3492, Decision No: 2022/5025. [7] Court of Cassation 6th Civil Chamber dated 12.12.2023, Case No: 2023/3007, Decision No: 2023/4212. [8] Court of Cassation 11th Civil Chamber dated 15.06.2022, Case No: 2022/2105, Decision No: 2022/4906.

Share capital augmentation in privately held joint stock companies constitutes a significant transaction enabling the company to expand and satisfy its financing requirements by strengthening its equity structure. Share capital augmentation denotes an increase in the amount of the company's ordinary/registered capital and is effected with the approval of a sufficient majority of shareholders. This process is governed by the provisions[i] of the Turkish Commercial Code ('TCC') and is subject to specific rules and conditions for non-public (i.e., privately held) joint stock companies. This article examines the methods, legal conditions, and processes of share capital augmentation in privately held joint stock companies according to the capital systems applied. Additionally, the protection and limitation of shareholders' pre-emptive rights (right to acquire new shares) in capital augmentations will be analysed. Methods of Capital Increase Share Capital Augmentation from External Sources (Increase by Capital Subscription): This is effected by obtaining new capital subscriptions in cash or in kind from outside the company or from existing shareholders. In other words, shareholders or new investors willing to contribute capital augment the capital by contributing additional funds or assets (capital in kind) to the company. This method of share capital augmentation is termed capital augmentation through subscription commitments and the company is provided with external resources. Share Capital Augmentation from Internal Resources (Bonus Issue): This is effected by converting the funds accumulated in the equity items of the company and permitted by the legislation to be added to the capital (such as retained earnings, share premium or reserves) into capital. In this case, the company issues new shares, but shareholders receive these shares gratuitously in proportion to their existing shareholdings. Internal capital augmentation does not provide fresh cash inflow to the company, but increases the company's capital by transferring equity items to capital. In the case of share capital augmentation from external sources (obtaining new subscription commitments), the TCC stipulates certain prerequisites. These requirements protect shareholders by seeking to ensure that the company's available capital is fully utilised and that available internal resources are utilised first and foremost. The two fundamental conditions set forth in the TCC are as follows: Payment of Existing Capital Subscriptions: In order to effect an augmentation through a new subscription commitment, the company must have fully paid for the previously subscribed capital shares. The Code provides that exceptions will be made for minor underpayments. Indeed, Article 456/2 of the TCC stipulates that the non-payment of amounts that may be deemed insignificant in proportion to the capital shall not constitute an obstacle to the capital augmentation. This provision has been introduced by the new law in order to eliminate the academic debate during the previous law period. Absence of Internal Resources to be Added to the Capital: Prior to an external capital augmentation, the company must not have internal resources (such as undistributed profits, funds, or reserves) on the balance sheet that can be added to the capital. By introducing this condition, the TCC seeks to prevent the company from demanding new cash from shareholders when there is an opportunity to augment capital from the company's own resources. In this way, it aims to protect shareholders who are not in sound financial condition and to prevent unnecessary external capital calls when there are existing resources within the company. The exception to Article 462 of the TCC, where this rule was drafted, is the unanimous vote of the shareholders for a capital augmentation through subscription, even if the company has internal resources on the balance sheet that can be added to the capital, as regulated by the Circulars of the Ministry of Trade. Once the above conditions are satisfied, the capital augmentation must be duly effected. The capital augmentation process differs according to the capital system adopted by the company (ordinary capital system or registered capital system). Below, the capital augmentation processes in privately held joint stock companies under these two systems are examined under separate headings.   Capital Increase Under The Ordinary Capital System The ordinary capital system denotes a system in which the company has a fixed amount of capital set in its articles of association and each capital augmentation requires an amendment to the articles of association. Most privately held joint stock companies, unless they have transitioned to the registered capital system, are governed by the ordinary capital system. In this system, capital augmentations are effected through a general assembly resolution and by amending the capital article in the articles of association. Consequently, the capital augmentation decision constitutes legally an amendment to the articles of association. The steps of the capital increase process in the ordinary capital system can be briefly summarized as follows: General Assembly Resolution: The board of directors of the company prepares a declaration concerning the capital augmentation and submits it for the approval of the shareholders. The general assembly must adopt a resolution in accordance with the quorum requirements of the TCC and the articles of association. Unless a higher quorum is stipulated in the articles of association, the capital augmentation resolution may be adopted by a majority of the votes present at the general assembly where at least half of the company's capital is represented, as in the case of other amendments to the articles of association. This constitutes the minimum requirement of the law; the articles of association may set higher quorums. With the capital augmentation resolution adopted at the general assembly, the capital article of the articles of association is amended to indicate the new capital amount. Subscription of New Shares: In order for a capital augmentation to be valid, all of the shares representing the augmented capital must be subscribed by the shareholders or new investors. In the share capital system, this subscription is either made directly in the amended articles of association approved by the general assembly or through a separate subscription commitment letter. Pursuant to the TCC, this subscription commitment must be unconditional, i.e., the share subscription cannot be made subject to any conditions. The capital augmentation cannot be completed until all new shares have been subscribed. Payment and Registration: In cash capital augmentations, pursuant to Articles 344 and 481 of the TCC, at least one-quarter of the augmented capital must be paid into the company account before registration, and the remaining portion must be paid within 24 months. Pursuant to the relevant legislation, the payment schedule of the new share prices may be regulated in the articles of association of the company, or may be determined by the general assembly or the board of directors. After the capital augmentation resolution is adopted, this resolution must be registered with the trade registry. The TCC limits the announcement and registration of the capital augmentation resolution to a specified period of time. Accordingly, the capital augmentation resolution of the general assembly must be registered with the trade registry within three months from the date of adoption. Otherwise, the resolution and the authorisation obtained from the relevant authorities (e.g., the Ministry), if any, shall become null and void. With the registration, the legal validity of the capital augmentation is established; registration has a constitutive effect. Ministry Permission (if required): Pursuant to the regulations issued pursuant to Article 333 of the TCC, the permission of the Ministry of Trade is required for the incorporation of some joint stock companies or amendments to the articles of association. If the company that is going to augment its capital is subject to this authorisation obligation (for example, companies operating in certain specialised sectors), the permission of the Ministry must also be obtained in advance for the capital augmentation. Whilst this step is not applicable for all companies, it constitutes a legal obligation for the sectors and situations specified in the relevant communiqués. Pre-emptive rights of existing shareholders are preserved in the ordinary capital system. Each shareholder has the right to purchase the new shares to be issued in the capital augmentation in proportion to its share in the existing capital. This right ensures that the shareholders' proportions are preserved as a result of the capital augmentation and thus prevents unanticipated changes in the distribution of control in the company.[ii] As a general rule, the pre-emptive right may not be restricted or abolished; however, this right may be restricted or abolished in the presence of just cause and with an enhanced quorum. Pursuant to Article 461 of the TCC, if the general assembly wishes to completely or partially abolish the pre-emptive rights whilst adopting a capital augmentation resolution, the affirmative vote of the shareholders representing at least 60% of the share capital is required for this purpose. The articles of association cannot authorise restriction of the pre-emptive right in advance; the law stipulates that this right may only be restricted within the scope of a specific capital augmentation resolution and by an enhanced majority. Furthermore, the pre-emptive right may only be restricted or revoked if there are just causes. The Law lists situations such as public offerings, business or subsidiary acquisitions within the scope of merger/division transactions, and enabling company employees to become shareholders of the company as examples of just cause. It is not legally possible to restrict the pre-emptive right without satisfying these conditions. If the general assembly decides to restrict pre-emptive rights, the board of directors is obliged to prepare a detailed report explaining the reasons for this restriction and to have it registered and announced in the trade registry. This mechanism was introduced to prevent the abuse of shareholders' rights.   Capital Increase Under The Registered Capital System The registered capital system is a capital system that entitles the board of directors to unilaterally augment the capital of a joint stock company up to a predetermined registered capital ceiling set by the articles of association. This system is widely utilised in joint stock companies that are publicly traded and may also be adopted by privately held joint stock companies that satisfy certain conditions. The principal advantage of the registered capital system is that it provides flexibility and speed in capital augmentation processes. Without waiting for the general assembly to convene each time, the board of directors may resolve to augment the capital at any time, provided that the company remains within the predetermined capital ceiling. This enables the company to react swiftly to market conditions or financing needs. There are specific conditions required by law for privately held joint stock companies to apply the registered capital system. Firstly, pursuant to Article 332 of the TCC and the amendment made in 2024, the initial capital of a privately held joint stock company wishing to adopt the registered capital system must be at least TRY 500,000. This amount may be increased by the decision of the Council of Ministers (currently the President of the Republic). A company that satisfies this condition may transition to this system by adding provisions concerning the registered capital system to its articles of association and registering it with the trade registry. The company's registered capital ceiling shall be clearly stated in the articles of association. The registered capital ceiling denotes the maximum permitted capital amount of the company, and the board of directors may augment the capital provided that it does not exceed this ceiling. The procedure for capital increases under the registered capital system includes the following: Authority and Resolution of the Board of Directors: In a company that has adopted the registered capital system, the board of directors is authorised to augment the capital up to the registered capital ceiling set by the general assembly. The board of directors may resolve to augment the capital at the time and in the amount it deems necessary. However, in order to adopt this resolution, the articles of association of the company must expressly grant this authority to the board of directors. The authorisation of the board of directors to augment the capital in this manner may be granted for a maximum period of five years; at the end of five years, the general assembly must extend the period (re-authorisation by amendment to the articles of association) in order for the authorisation to continue. A change in the board of directors does not remove the authorisation to augment registered capital; new administrations may also exercise this authorisation until the expiration of the term. Limit on Authorised Capital Ceiling: Whilst the TCC does not directly set an upper limit for the registered capital ceiling, the relevant Communiqué (Communiqué dated 19 October 2012) issued for privately held joint stock companies has established a limit on this issue. According to the Communiqué, the upper limit for registered capital may be at most five times the initial capital of the company. If the ceiling is to be increased in the periods following the transition to the registered capital system, the new ceiling may be set at a maximum of five times the current issued capital at the time of the general assembly meeting where the augmentation will be approved. This regulation seeks to prevent arbitrary increases by setting the registered capital ceiling excessively high and ensures that the company grows by remaining within a reasonable upper limit. Scope of the Board of Directors' Resolution: When resolving upon a capital augmentation, the board of directors determines the nominal value, number, type (such as registered or bearer shares), premium, or privileged status of the new shares to be issued. In addition, the resolution shall specify the duration and manner of exercise of pre-emptive rights. If the board of directors is going to limit or remove pre-emptive rights or issue shares at a price above the market value (premium), there must be an explicit authorisation provision in the articles of association for the board of directors to adopt these measures. In other words, if the articles of association do not authorise the board of directors to restrict the pre-emptive rights or issue privileged shares, the board of directors cannot adopt resolutions on these matters. In the registered capital system, the newly issued shares are also subscribed by the shareholders or investors through a subscription undertaking, which must also be unconditional. Status of Pre-emptive Rights: In the registered capital system, the fundamental principles concerning the pre-emptive right in the ordinary capital system also apply. Existing shareholders have the right to acquire new shares in proportion to their existing holdings. If the board intends to restrict this right, the articles must authorise it, and there must be legitimate grounds. The board must prepare a detailed report explaining the justification, and this report must be registered and published in the trade registry. Particularly in privately held companies, such balancing provisions are of considerable importance to protect the interests of minority shareholders. Registration and Publication of the Resolution: The capital augmentation resolution of the board of directors must be registered with the trade registry, just as the general assembly resolution must be. In the registered capital system, the registration of the board of directors' resolution must be effected within three months; otherwise, the board of directors' resolution may become null and void (similar time limitations apply since it is deemed to be a general assembly resolution). In order for the board of directors' capital augmentation resolution to have legal effect, it must be announced in the trade registry gazette, thereby informing creditors and shareholders. Board of Directors' Declaration: One of the significant innovations introduced by the TCC is the obligation of the board of directors' declaration in capital augmentations. After the capital augmentation is completed, the board must issue a written declaration confirming that the transaction was carried out in compliance with legal procedures and that all required permits and approvals were obtained. If capital was contributed in kind or in cash, the declaration must affirm its proper execution. Where pre-emptive rights are restricted, the beneficiaries of the unsubscribed shares and the rationale for the allocation must be disclosed. It constitutes a legal obligation for the transparency and accountability of the transaction to ensure that the board of directors' declaration is complete and truthful; otherwise, legal liability may arise. Whilst the resolutions of the board of directors adopted in the registered capital system are not deemed to be general assembly resolutions owing to their nature, they have a similar legal effect. Consequently, shareholders or stakeholders may object or bring an action for annulment against the capital augmentation resolution of the board of directors in the manner prescribed by law.[iii] Pursuant to Article 445 et seq. of the TCC, the provisions stipulated for the annulment of general assembly resolutions shall also apply by analogy to the resolutions of the board of directors on registered capital augmentation. In this context, shareholders who oppose the capital augmentation resolution may bring an action for annulment through commercial proceedings within one month from the date of the resolution. In order to ensure the protection of the shareholders, even in the registered capital system, the legislator has maintained judicial review against the resolutions of the board of directors. However, the conditions for bringing an annulment action and the limitation period are strictly applied; if the action is not brought within one month, the resolution becomes final.   Pre-emptive Right and its Protection The pre-emptive right (right to acquire new shares) in capital augmentations is a legally guaranteed right granted to existing shareholders in order to protect their shareholding in the company's capital. In privately held joint stock companies, pre-emptive rights are critical for the majority and minority shareholders to maintain their relative balance of power over the company. The TCC regulates the pre-emptive right as a fundamental principle and introduces detailed provisions concerning the exercise of this right. The principal rule is that the pre-emptive right may not be abolished or completely restricted by a general assembly resolution or by the articles of association. This right cannot be disabled by a general provision in the articles of association of the company; however, it may be restricted by an exceptional and one-off resolution depending on the characteristics of the capital augmentation. In both the ordinary capital system and the registered capital system, there must be a justified reason for the restriction of the pre-emptive right and the enhanced quorum stipulated by law must be satisfied. In capital augmentations effected by the general assembly, the pre-emptive right may be restricted or abolished with at least 60% of the capital, provided that just causes are presented. This threshold is intended as a mechanism to protect minority shareholders; it is not possible to set a quorum lower than 60% in the articles of association. Restriction of pre-emptive rights without just cause is strictly prohibited. The concept of just cause is listed in Article 461 of the TCC in an illustrative manner. For instance, the public offering of the company's shares (public offering), issuance of shares in exchange for the acquisition of another company or enterprise, or enabling the company's employees to become shareholders of the company are recognised as just cause. In the registered capital system, whilst the resolution to restrict pre-emptive rights is actually adopted by the board of directors, the authority of the board of directors in this regard only arises if it is explicitly regulated in the articles of association. If the board of directors wishes to restrict pre-emptive rights, it must document the situation by preparing a report stating its reasons and register this report with the trade registry. In practice, this report prepared by the board of directors is usually included as an annex to the capital augmentation resolution and explains to the shareholders in detail why the right to purchase new shares is restricted. This obligation to act in accordance with the principles of transparency, honesty, and equal treatment is intended to protect the rights of shareholders in both systems and is particularly important in terms of informing shareholders in private companies. In conclusion, the pre-emptive right constitutes an indispensable shareholder priority right in joint stock companies. The exercise, limitation, or removal of this right during the capital augmentation process is regulated in detail by law and subject to specific conditions. This legal framework on pre-emptive rights in private companies ensures that the balance of power within the company is maintained and trust amongst shareholders is preserved.   Conclusion Share capital augmentation is a frequently utilised method in privately held joint stock companies in line with the company's growth strategies and financing requirements. As analysed in this article, capital augmentations are subject to different procedures under the ordinary capital system and the registered capital system. In the ordinary capital system, the requirement of approval of the capital augmentation by the general assembly and amendment of the articles of association provides democratic participation in the process, but may also result in a certain degree of delay. In the registered capital system, on the other hand, capital augmentations can be effected more flexibly and swiftly owing to the authority granted to the board of directors within specified limits. Companies may choose one of these two systems depending on their size and capital needs, or may benefit from the advantages of the registered capital system to the extent permitted by law. In both systems, the mandatory provisions of the TCC ensure that the capital augmentation is carried out in a sound manner. In particular, the conditions that the existing capital must be paid up and internal resources must be utilised first, which are required in capital augmentations from external sources, are of considerable importance in terms of financial discipline and protection of shareholders' rights. Additionally, the regulations on the protection of pre-emptive rights ensure a fair transaction by preventing the dilution of the existing shareholders' shareholding in the company against their will in capital augmentations. Consequently, when the capital augmentation process in privately held joint stock companies is carried out within the framework of the rules stipulated by the legislator, it serves both to strengthen the capital structure of the company and to protect the rights of shareholders. When implemented correctly and in compliance with legal obligations, capital augmentations constitute an effective tool for companies to achieve their long-term growth objectives.   This article was authored by Erdem & Erdem Partner, Head of Corporate and M&A, Tuna Çolgar. [i] Turkish Commercial Code No. 6102 and Related Legislation Provisions. [ii] Tekinalp, Ünal, The New Law of Capital Companies, 4th updated edition, 2013, p. 214 [iii] Karahan, Sami, Company Law, 2012, relevant sections.