Impact of the Pandemic on Companies Future of Partnership Agreements in Turkey

Attorney M. Tarık Güleryüz & Attorney Barış Ülker // Bloomberg Businessweek

15.10.2020

Impact of the Pandemic on Companies: Future of Partnership Agreements in Turkey

The Covid-19 pandemic, which has had a significantly bigger impact on the economy compared to its predecessors such as the Black Death, cholera, and the Spanish flu; had major consequences for companies and partnership agreements, two of the main agents of the commercial world. In this context, the term of partnership agreement is used to describe any contract bearing the element of “affectio societatis”, which can be described as the common will of several legal persons or legal entities to merge into one entity.

Two or more people consolidating their labour and capital for a common financial goal is legally known as a “partnership agreement”. All forms of partnership relations that conform to this definition therefore fundamentally stand on a partnership agreement. Equity companies -such as joint stock companies and limited companies- as well as general partnerships, are built upon a partnership agreement.

Other forms of general partnerships that are commonly known as consortia, joint ventures or revenue sharing agreements are also all included in this general definition. The main distinction between general partnerships and companies arise from the code they are regulated in, as well as whether they have a separate legal entity. General partnerships, which do not even need to be registered or announced to be incorporated, can be applicable in a variety of real world situations ranging from two friends jointly buying a lottery ticket to large scale infrastructure projects undertaken by consortia made up of many different companies.

Less companies are being formed

Data shows that the pandemic has been painting a bleak picture for the future of partnerships: The Union of Chambers and Commodity Exchanges of Turkey has noted that, in April 2020, the number of companies formed suffered a 66.01% reduction, while the number of new cooperatives and new enterprises formed by real people also decreased respectively by %56.38 and %67.46 in comparison to the prior month because of the Covid-19 pandemic.

Compared to the same month of 2019, the number of companies formed, the number of cooperatives formed, and the number of new enterprises formed by real people decreased respectively by %57.97, %32.29 and %51.42. This downward trend has not changed in May either. While these statistics do not include general partnerships, it would not be a stretch to say that they were also affected by the ongoing economic recession.

How were partnerships impacted by the recession?

Apart from the data regarding the number of partnerships formed, dissolved, or went bankrupt; the financial disaster brought by the pandemic has had an inevitable effect on partnerships, their activities, the economy in general and also on other sorts of contractual relationships.

Furthermore, the pandemic brought some legal restrictions regarding equity companies. Most notably, a “limitation on payment of dividends” was adopted. As per the Temporary Article 13 added to the Turkish Commercial Code, equity companies may only pay dividends on up to %25 of their 2019 profit and may not pay dividends on previous years’ profits or from reserves until 30 December 2020.

In practice, this regulation has been the cause of several problems, as well as extensive legal debate. Minority shareholders and board members have no doubt been the groups most affected by the limitation on dividend payments. Board members have also been concerned of being held responsible because of the uncertainty surrounding the assignment of the shareholders’ meeting agenda and enforcement of decisions. On the other hand, majority shareholders are less concerned about the regulation. Hence, this provisional limitation and its application may cause a dispute between shareholders, which in turn may end up causing the decision on dividend payments to be brought to a Court, and therefore board members may be held responsible.

Fraud and corruption are becoming more prevalent

Another crucial outcome regarding equity companies are cases of fraud and corruption and accompanying risks. Many international agencies have noted that the global economic crisis caused by the pandemic has resulted in a growing number of fraud and corruption cases within partnerships. In its 27 March 2020 report, Europol pointed to the increase in fraud, theft, and cyber-crimes; and warned local authorities. On a similar note, Association of Certified Fraud Examiners held a study between the dates April-May 2020 with very similar outcomes. Unfortunately, the study found that there was a 68 percent increase in fraud levels in the first five months of the year. Naturally, post-pandemic Turkey will no doubt face a steep increase in the number of litigative actions regarding responsibility of board members and white-collar crimes, as well as in regulatory breaches and number of investigations.

Possible issues that may be faced by general partnerships

General partnerships, defined by their flexible structure (consortiums, joint ventures etc.), may face different problems for the partnership itself, and separately for every partner. First, partners, who form the “person” aspect of the partnership and often contribute capital, may face problems regarding their responsibilities arising from the partnership agreement. Partners may face situations where it is impossible for them to perform their obligations [Turkish Code of Obligations - TCO Art. 136] as well as situations where it becomes excessively difficult for them to perform their obligations [TCO Art. 138]. Either way, a partner’s failure to perform his/her obligations to the partnership may cause the failure of the partnership to perform its obligations to a third party. The structure of a general partnership, as flexible as it is, may cause complicated situations in a possible dispute. Unless explicitly decided otherwise, the assets controlled by the partnership are jointly owned by the partners, and every decision needs to be taken unanimously. Therefore, any dispute has the potential to make it impossible for the partnership to make any decisions regarding its assets, creating an insoluble situation commonly known as a “deadlock”. Naturally, this results in an increase in the number of situations that end up in litigation.

Problems that may arise in debt relationships

Another phenomenon that can be observed in periods of crisis also manifests itself in partnership agreements. This situation is applicable to all kinds of partnerships. The agreement may cease to be economically viable and efficient, and violating the agreement may simply end up as a more profitable option for one of the parties. Most notably, when the debtor fails to pay their debt on due date, they default. While the interest the debtor must pay on such an obligation is 9 percent from the default date, actual interest rate is much higher. The litigation process and questions on raising and managing funds are some of the other reasons a debtor may knowingly choose not to pay their debt on time. In times of financial crisis, this phenomenon can be observed in all kind of debt relations including capital commitments and other forms of obligations arising from a partnership agreement.

Structural problems should be addressed

To sum up, in a world where the markets that allocate the resources are simply an interconnected web of contracts, this web is usually built upon partnership agreements. Taking into account that the Central Bank of the Republic of Turkey is also a joint stock company, it would not be a stretch to say that these agreements form the keystone of finance and economy.

Partnerships tend to form the epicentre of economic crises suffered by states, which in turn effects every aspect of daily life. While the statistical data usually offers a clear perspective on the effects of the pandemic on partnership agreements, focusing only on the data regarding the number of newly formed partnerships would be far from sufficient to understand the real scale of the impact. A good deal of problems arising from the pandemic will turn into “legal disputes”. While it is too early to comment on the results of the disputes that ended up being litigated, it is clear that the final solution to the problems discussed here is the “judiciary”. Therefore, it is now more important than ever to address the “well-known infamous structural problems” plaguing the judicial system as soon as possible.