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Capital Increase at Joint-Stock Companies Under Turkish Law

Turkish Law Allows Joint-Stock Companies to Increase Their Capital

Capital companies usually prefer increasing their capital to strengthen their capital structure and meet their needs for additional funds after expanding their business.

Capital increase in the joint-stock companies has been regulated at the Article 456 of the Turkish Commercial Code and following provisions.

Who is The Competent Authorıty Which Will Make The Decision Of Capital Increase?

In principle, the authority to decide on the capital increase is vested upon the General Assembly of the shareholders at joint-stock companies.

However, the Board of Directors of joint-stock companies is also entitled to make such decision in some circumstances provided that; Board of Directors is empowered with such authority at the Articles of Association of the Company at the very outset with the incorporation of the company or through amendment brought to the Articles of Association of the Company. The caveat is such power of the Board of Directors is valid only for up to five years starting from official authorization.

What Are The Types of Capital Increase?

Capital increase at joint-stock companies can be consummated either through internal resources or under capital commitment. Pursuant to Article 462 of Turkish Commercial Code;

I) reserved funds appropriated and devoted for a specific purpose at the General Assembly or Articles of Association of the Company,
II) freely used a portion of the legal reserved funds and,
III) other funds that could be added to the balance sheet and capital by way of specific laws might be converted into capital and be used at a capital increase from internal resources.

It is also possible to increase the capital at joint-stock companies through capital commitment in accordance with the Turkish Commercial Code.

What is Capital Increase Through Capital Commitment?

The condition precedent to exercise the capital increase:

Turkish Commercial Code has set out certain conditions for capital increase through capital commitment at Article 456 of Turkish commercial code; specifically, Article 456/1 reads as, except for capital increase through internal resources, to make a capital increase, all the share prices shall be paid in full before such capital increase.

However, suppose the unpaid portion of the share price is relatively small and negligible compared to the increased amount. In that case,n the capital is still doable at the discretion of the trade registry commissioner.

Another condition precedent before the capital increase, which is set out in article 462/3, is that if there still exists certain funds within the company that could be added to the balance sheet and capital, then capital increase through capital commitment can’t be realized until such funds are fully consumed through capital increase from internal resources.

Suppose all the share prices are paid in full. In that case, it is possible to consummate capital expansion at joint-stock companies under commitment by existing shareholders or third parties outside of the company.

What is Capital Increase Procedure Based on Capital Type?

There are two types of committed capita: capital in cash and kin, respectively. The prevailing provisions of the Turkish Commercial Code concerning the incorporation of joint-stock companies are equally applied in the capital expansion. Accordingly:

• In case of commitment of cash capital, 25% of the committed amount shall be paid in advance before the registration. The due amount shall be paid within 24 months following the registration of the capital increase at the Trade Registry.
• Intellectual property rights and assets which are alienable and assignable and at the same time free of any in rem right, lien, and other injunctive reliefs can be used as capital in kind in the capital increase process. The monetary amount of the Intellectual property rights and assets are evaluated by the expert witnesses assigned by the commercial court, which has jurisdiction and proper venue.

What Is The Procedure For Capital Increase Based on Capital Systems of Joint-Stock Companies?

At principal capital system; according to Regulation on Procedures and Principles Applied at General Assembly Meeting of Joint Stock Companies and with the participation of the representative of the Ministry, the pertinent provision of the Articles of Association of the Company about “capital” is amended.

In the amendment text, the amount of the capital expansion, the source of the increase, either cash or payment in kind, the amount to pay before the registration and the period to complete the due amount shall be set out. As a caveat, the minutes of the General Assembly Meeting where the capital is increased shall be registered at the Trade Registry within three months; otherwise, the capital increase is deemed null and void.

On the other hand, at the registered capital system and for the closed joint-stock companies, the authority to increase the capital up to the ceiling set forth at the Articles of Association might be conferred upon the Company’s Board of Directors. The Board might exercise such right within the five years starting from the mandate granted at the company’s General Assembly meeting.

What is Capital Increase Due to Loss?

In the circumstances where at least half of the total amount of the capital and legal reserves of the company in aggregate proves to be unrequited, the Board of Directors is obliged to come forward with some enhancement proposals for the attention of the General Assembly the Company.

To prevent deterioration in financial conditions or minimize the impacts, the Board of Directors of the Company might propose alternately curing measures to the attention of the General Assembly, including but not limited to completion of capital, capital expansion, shutting down of some units, sale of the subsidiaries and change in marketing strategy.

The General Assembly has unfettered discretion on the adoption of the proper measures and accordingly,

I) might accept the proposed measures “as is” without any change,
II) adopt with an amendment or,
III) adopt a brand new proposal other than the one proposed by the Board of Directors.

In the circumstances where 2/3 of the total amount of the capital and legal reserves of the company in aggregate proves to be unrequited, to avoid automatic liquidation, the General Assembly shall render one of the following,

I) satisfaction with the 1/3 of the capital and accordingly capital decrease,
II) completion of the capital or,
III) capital increase.

In practice, completion of capital means some or all cures the shortcoming of the balance sheets of the shareholders. Each shareholder is obliged to participate to the completion in proportion with its capital share and cannot seek the return or reimbursement for the contributed amount under any condition to avoid any doubt and different from capital commitment or extension of credit to the company, it is fair to say that the obligation to complete the capital is in the form of a grant.

The joint-stock companies might opt for a decrease in the capital in proportion with the loss first and afterwards increase the capital to the point they deem fit.

Finally, different from the previous alternative, joint-stock companies might directly opt for capital increase without exercising the path of capital decrease first.

However, the downside of this scenario is that in the immediate capital expansion, the company shall pay half of the increased amount before the registration, whereas in other scenarios, the obligation to make the payment of the capital before the registry is only 25%.

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