DELEGATION, RESTRICTION, AND OVERSIGHT OF REPRESENTATION AUTHORITY IN JOINT STOCK COMPANIES

Representation authority in joint stock companies is a cornerstone of corporate law, shaping both internal governance and external relations. Since legal entities can act only through their organs, the scope and exercise of this authority directly determine the company’s capacity to engage in binding transactions.

With the enactment of the Turkish Commercial Code No. 6102 (“TCC”), the ultra vires doctrine was abolished. As a result, transactions carried out by duly authorized representatives may bind the company even if they fall outside the company’s stated purpose or scope of business, unless it is proven that the counterparty knew or should have known otherwise. This development strengthens transactional security for third parties but also increases the potential risks faced by companies.

In practice, the law responds to these risks by introducing mechanisms such as the delegation of authority and the appointment of limited authority representatives. These tools allow companies to regulate internal decision-making and minimize potential misuse. At the same time, the principle of unrestricted authority for statutory representatives preserves the security and reliability of transactions with third parties. The balance between internal control and external trust thus forms the core of the legal framework governing representation authority in joint stock companies.

1.    General Framework of Representation Authority

As a rule, representation authority in joint stock companies is exercised by the board of directors. Unless otherwise stipulated in the articles of association or in cases where the board consists of a single member, the company is represented by the board acting collectively, with the authority to be exercised jointly by dual signatures. The representation authority of board members arises once they are elected by the general assembly and accept their appointment.

If the articles of association so provide, the board is not obliged to exercise authority as a body; it may delegate representation to one or more executive members or even to third parties appointed as managers. However, at least one board member must always retain full representation authority. In exceptional circumstances, trustees or liquidators may also exercise representation authority.

Under TCC Art. 373/1, a notarized copy of the board resolution identifying the company’s representatives and the manner of representation must be submitted to the trade registry for registration and publication.

Additionally, without delegating its authority, the board may appoint commercial representatives, commercial agents, or other representatives, or it may assign non-executive members and employees as limited authority representatives under TCC Art. 371/7.

When exercising representation authority, the board may engage in any act or legal transaction within the company’s purpose and scope of business and act under the company’s commercial title. Transactions by the board that contravene the articles of association or general assembly resolutions remain valid vis-à-vis third parties, with the company retaining a right of recourse internally. However, transactions outside the scope of business are not binding without limit: if the company proves that the counterparty knew or should have known that the transaction fell outside the company’s business scope, it may escape liability. Importantly, although the articles of association must define the company’s business scope, its registration and publication do not, by themselves, suffice as proof that third parties knew the transaction exceeded that scope.

2.    Limitation of Representation Authority

The limitation of representation authority can be considered in two dimensions:

a)    Internal Limitation

Within the company’s internal structure, the board may impose restrictions on the use of representation authority. These may concern matters such as the subject, scope, or monetary value of transactions, reflecting the company’s planning and risk management needs. While such restrictions are effective and binding internally, any director or executive who exceeds them incurs liability towards the company. However, these internal arrangements do not affect the validity of transactions with third parties.

b)    External Limitation

As a principle, representation authority cannot be restricted against third parties, since the law prioritizes the security and reliability of commercial transactions. Exceptions to this rule are narrowly defined in TCC Art. 371/3. Representation authority may be limited (i) by requiring the joint signatures of more than one representative, or (ii) by confining authority to the activities of a particular branch or the company’s head office. For these restrictions to be enforceable against bona fide third parties, they must be duly registered and published in the trade registry. Any other type of restriction, such as limiting authority to specific types of transactions, remains ineffective against third parties, even if registered and published.

In addition, the registration of the board resolution under TCC Art. 373/1 is declaratory rather than constitutive. Representatives become authorized from the moment the authority is granted, not from registration or publication.

In summary, internal restrictions have no external effect; only statutory limitations, duly registered and published, may be invoked against third parties.

3.    Appointment of Limited Authority Representatives under TCC Art. 371/7

TCC Art. 371/7 authorizes the board of directors to appoint non-executive members or employees as commercial agents or other auxiliary persons with limited authority. Such authority may be restricted by monetary thresholds, subject matter, or by defining specific transactions that are permitted or prohibited. This mechanism is intended to provide flexibility in daily operations while ensuring that the scope of delegated powers remains under strict control.

Board members or executive directors who already hold representation authority cannot be appointed as limited representatives under this provision; their powers may only be restricted through joint signature requirements or by confining their authority to matters of a specific branch or the company’s headquarters, as explained above.

For the appointment procedure, the articles of association must authorize the use of limited representatives; otherwise, an amendment to the articles will be required. Once authorized, the board must prepare and adopt an internal directive on representation, which is then registered and published. This directive defines the framework for the powers and duties of limited representatives but does not itself effectuate appointments.

Based on the directive, the board adopts resolutions appointing specific individuals, ensures their registration and publication, and issues signature circulars. The appointment resolution needs only to identify the position of the appointee, without restating the scope of authority, which is already set out in the directive. Unless otherwise stipulated in the articles of association, both the adoption of the internal directive and subsequent appointment resolutions require the presence of a majority of the full board and the approval of a majority of those present.

Finally, the board of directors remains jointly and severally liable for any damage caused by limited authority representatives to the company or to third parties.

4.    Conclusion

Representation authority in joint stock companies is a cornerstone of corporate governance, balancing the need for effective management with the protection of third parties’ trust in commercial transactions. While internal limitations safeguard the company by imposing accountability within its organs, external limitations are narrowly confined by law to ensure transactional security.

The abolition of the ultra vires doctrine broadens the company’s binding effect in dealings with third parties but simultaneously heightens the importance of carefully structuring internal controls. TCC Art. 371/7 provides flexibility through the appointment of limited authority representatives, though subject to strict procedural and substantive requirements.

Ultimately, the effectiveness of limitation mechanisms depends on a proper understanding of the distinction between internal and external effects and the strict adherence to statutory requirements. A well-designed internal directive, combined with diligent board oversight, can prevent misuse of representation authority while preserving third parties’ confidence in the reliability of corporate transactions.