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Conversion of Limited Liability Company into Joint-Stock Company Under Turkish Commercial Code

TARIK SAHIN MEHMET ALI BEGDES

Table of Contents

Within the context of the Turkish Commercial Code (“TCC”) numbered 6102, the type of the companies that could be established has been stated in detail pursuant to numerous clauses principle, that is to say, it is not legally allowed to establish any company which has not been regulated at TCC.

A business person who would like to operate and conduct an activity by establishing a company should opt for one of the choices stipulated in Article 124 of the TCC: collective, commanding, joint-stock, limited liability, and cooperatives. Among the companies stated above, founders usually prefer to incorporate in the form of limited liability company due to the advantages that the company provides during the incorporation process.

Based on the statistic published by “Turkish Chamber of Commerce DG Responsible for Access to Information” regularly, in 2019, the total number of the companies established in Turkey is 77.311 and 10.271 among them has been incorporated in the form of a joint-stock company. In contrast, that number hits 65.968 for the limited liability companies.^[1]

Despite the relative advantages of the limited liability companies during the incorporation process, it is quite common nowadays that the shareholders of the limited liability companies decide to convert their companies into joint-stock companies due to the legal, taxation and wise institutional advantages extended by joint-stock companies over limited liability companies.

In light of the previous, we will dig further into the change of type in a limited liability company and conversion into a joint-stock company.

General Overview

Companies established to carry out activities per their main line of business stipulated at their Articles of Association might become a smaller or larger entity by the passage of time. The need of shareholders and the company itself might naturally evolve in the meantime.

Accordingly, the company and the shareholders might seek different protection mechanisms from a legal and taxation point of view. At this juncture, instead of dissolution or resorting to other legal remedies, the shareholders quite often opt for conversion into another type of company, e.g. limited Liability Company, into a joint-stock company.

What Are The Advantages of Joint-Stock Companies?

There are several advantages of a joint-stock company (JSC) over a limited liability company (LLC) which can easily be understood by taking a close look at the pertinent Articles of Turkish Commercial Code, in terms of the number of shareholders, minimum capital requirement, responsibilities of shareholders, option for public offering, and simplicity in share transfer.

Regarding the number of shareholders, TCC Article 574 limits the number of shareholders limited liability companies by 50, whereas there is no such imposed restriction for joint-stock companies. In this regard, different than limited liability companies, the joint-stock companies are entitled to initial public offering and might accept as many shareholders as they deem proper, provided that other conditions precedents set forth at capital market law are met.

The shareholders of the limited liability companies are responsible for the public debts in proportion to their shares in the company which have not been satisfied from the assets of the company;^[2] however the responsibility of the shareholders at joint-stock companies is limited to only making the payment of the committed capital, and there is not any liability to be incurred for the third party receivables or public debts. In short, shareholders of the joint-stock companies benefit from the corporate veil regarding company debts.

One of the major advantages of a joint-stock company over a limited liability company is the simplicity in the share transfer process. In the absence of an issued share certificate, the share transfer is consummated by executing a share transfer agreement and making an annotation to the shared ledger. If a share certificate exists, the share transfer is completed just by endorsing and physically delivering the certificate.

On the other hand, the process of a share transfer at limited liability company necessities much more bureaucratic procedure compared to a joint-stock company, that is to say, the signatures of on the written share transfer agreement shall be notarized at Notary public of Turkey, and a Resolution on approving the share transfer shall be adopted at the general assembly meeting of the limited liability company. The said Resolution, along with the notary approved share transfer agreement, shall be submitted to the trade registry unit of Turkey for registration. Finally, the share transfer at limited liability company shall be announced at Trade Registry Gazette of Turkey.

What is The Legal Status of The Converted Company?

The converted company which has undergone type change and the new type company is indeed the same legal entity with the same tax number from the legal point of view. Besides, the rights and interests of the shareholders and their respective shares shall remain intact.

What is The Procedure to be Followed For Company Type Change Under The Turkish Commercial Code?

First and foremost, a “Change of Type Report” containing the recent balance sheet and confirming that the company’s capital destined to change the type has been paid in full shall be prepared and presented by a certified public accountant. In case there is a time gap of more than six months between the issuance of balance sheet and change of type report or there has been a substantial change in the assets of the company since the issuance date of the latest balance sheet, an Interim balance sheet shall be drafted for change of company type purposes.^[3]

After preparing the Report and balance sheet, the board of directors of the limited liability company shall draft the so-called “Change of Type Plan.” In this Plan, the Articles of Association of the company, existing and new business name, the company’s incorporation centre, and the number of the shares of the shareholders and peculiarities of such shares shall be addressed in detail.

In parallel with the change of type plan, the company’s board of directors shall also draft a detailed report explaining the aim and consequences of the company type change. All the required documents referred so far shall be submitted to the attention and review of the Shareholders at the company centre no later than one month before the general assembly meeting.

Finally, with the affirmative vote of a qualified majority of the shareholders at the general assembly meeting, the change of the type from a limited liability company into a joint-stock company is registered at the trade registry and announced at the Turkish Trade Registry Gazette.

References

[1] Union of Chambers and Commodity Exchanges of Turkey, Information Access Directorate, “Statistics of Established/Closed Companies,” access: 10.01.2020, <https://www.tobb.org.tr/BilgiErisimMudurlugu/Sayfalar/KurulanKapananSirketistatistikleri.php>
[2] Article 35/1 of the Act on Procedures for Collection of Public Debts Numbered 6183.
[3] TCC Article 184/2.

Article Keywords: Conversion, Conversion of Limited Liability Company into Joint-Stock Company, Conversion of Limited Liability Company into Joint-Stock Company Under Turkish Commercial Code, Conversion of Limited Liability Company into Joint-Stock Company Under TCC.

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