Conditional capital increase is a newly introduced concept by
the New Turkish Commercial Code numbered 6102 (the "New
TCC") which enables holders of certain debt instruments such
as convertible bonds or other similar deeds or its employees to
exchange debt claims with shares of the Company. According to
Article 463 of the New TCC, those who can benefit from this system
must either be holders of convertible bonds or similar debt
instruments (qualified creditors) and/or employees of the
company or qualified creditors of group of companies or their
Conditional capital increase is contingent upon proper written
notice of the beneficiary to the implementing company regardless of
the resolution of the competent corporate organ of the company, in
other words, the holders of the right may exercise their right of
exchange by their unilateral declaration of their intention.
However, the New TCC provides a limitation on the amount of the
conditional capital increase in order to protect the capital
structure of the company; in essence the aggregate nominal amount
of the increased capital may not exceed half of the issued share
This article aims to set forth the frame of this new method
along with its implementation procedure.
By this new system, corporate financing is accepted through the
convertible bonds which will also comfort the investors/creditors
that they will entitle to have legal rights to exchange their bonds
with the shares of the company or its group of companies.
Furthermore, any restriction on the transfer of shares of the
company cannot be applied to the holders of these instruments, so
long as there is an explicit statement incorporated in the AoA that
such restrictions will be valid even in the case of the conditional
Issuing convertible bonds would highly likely be preferred by
most of the start-up companies since these will have lower interest
rates and provides short term financing costs on the issuing
company. By virtue of this system, investors will have the chance
to be granted convertible debt instruments, since it affords legal
protection and sets forth the rights of the interested parties
Investors may also prefer convertible debts with a lower
interest since they will potentially benefit from the gain deriving
All over the world, many companies use employee stock option
plans to attract and retain the best appropriate employees for
positions of substantial responsibility in order to promote the
success of the Company's business and to provide additional
incentive to the employees. Stock Option Plans gives employees the
right to buy a specific number of the company's shares, whether
depending on a certain milestones, at a fixed price within a
certain period of time. Those persons who are granted stock options
hope to profit by exercising their options at a higher price than
when the options were granted.
Pursuant to Turkish Commercial Code numbered 6762 which was
enacted in 1957 (the "Former TCC") it was not possible
for the companies to acquire their own shares and also conditional
capital increase was not a recognised concept. Thus, in the Former
TCC the general way for the companies, in particular multinational
ones, was to allocate the shares subject to stock option plans to
certain shareholders to be transferred to right holder of the stock
option plans pursuant to the arrangements made in accordance with
the Turkish Code of Obligations.
However, by virtue of the newly introduced conditional capital
increase system, the employees will be entitled to exercise their
stock option rights with the comfort of a legal protection upon
presenting their unilateral written demand.
PROTECTION OF THE EXISTING SHAREHOLDERS' RIGHTS
According to Article 466 of the New TCC, the shareholders having
the right of first refusal will be granted a priority to purchase
such convertible debt instruments and avoid being subject to
This right of the existing shareholders may be restricted in
case of just cause. However, such restriction cannot be used with a
view to dilute the shares owned by specific group of shareholders
which will be against the principle of equal treatment.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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