Turkey: Conditional Capital Increase


The notion regarding the quick and easy fulfillment of the need for capital, which was adopted by the Turkish Commercial Code No. 6102 ("TCC" or "Law"), resulted in the formation of new capital types and the regulation of provisions on various capital increase procedures. Two types of capital systems existed in the former code that has been abrogated with the entry into force of the new Law. These were the principal capital system adopted in the former TCC and the registered capital system adopted in the Capital Markets Law. However, the new TCC, in preserving the principal capital system, made the registered capital system a system not only beneficial to public companies but also to other companies and diversified the instruments that may be used in the capital increase concluded from the domestic funds of the companies.

The conditional capital increase, which is the subject of this article, is a new capital increase system under Turkish law and finds its roots in the Swiss Code of Obligations. The conditional capital increase is a capital increase system that may be concluded depending upon the creditor's exercise of its conversion and purchase rights in the issuance of bonds replaceable with share certificates, and in capital increases directed at employees. This system will provide convenience in that it allows for the usage of capital in a more flexible and effective manner.

The Principles of Conditional Capital Increase

The basis of this capital increase system, foreseen as a funding instrument, is formed with the purpose of procuring the participation to the capital of the creditors due to certain securities and the employees1. The principles regarding the conditional capital increase system are regulated between articles 463 to 472 of the TCC. Art. 463 TCC defines the application principle.

"Article 463 - (1) The general assembly may decide on a conditional capital increase by means of granting a right, in the company articles of association, to the creditors of the company or the group of companies, who became creditors by owning newly issued bonds or similar debt instruments, or the employees of the company or the group of companies, to own new shares through conversion or preemption rights.

(2) The share capital shall automatically increase when and to the extent the conversion or purchase right is exercised and the obligation to pay the share capital is fulfilled by swap or payment."

As understood by the article, in a conditional capital increase, the basic principles, which provide the grounds for the increase, are determined by the general assembly. The general assembly, in its decision, does not make a definite decision to increase the capital but it enables the capital increase by demonstrating the procedure for the capital increase and determining the basic provisions of the process2. In a conditional capital increase, the capital will be increased where conversion or purchase rights holders exercise said rights. Therefore, the capital increase shall take place over time through the decisions of the conversion or purchase rights holders or the employees and the exercise of such rights; it does not take place by action of the general assembly or the board of directors. Consequently, the amount of capital shall vary within the time in which the conversion and purchase rights are exercised.

In order to realize a conditional capital increase, a reference provision regarding this type of capital increase must be present. Otherwise, without the presence of a special provision containing such content, a conditional capital increase cannot be prompted by a general assembly decision. The content of this provision is specified under Art. 465 TCC in detail. The provision regarding conditional capital increase may be inserted after the establishment through an amendment to the articles of association or in the establishment of the company by inserting a provision regarding this issue.

The persons who may gain the title of shareholder in the company through conversion or purchase rights are counted as (i) the creditors of the company or the group of companies, who became creditors by owning newly issued bonds or similar debt instruments and (ii) the employees as defined under paragraph 1 of Art. 463 TCC. In addition, it has to be stipulated that conversion or purchase rights are provided not to any creditor of the company but only to creditors of the company or the group of companies who are the holders of the newly issued bonds or similar debt instruments.

The share capital shall automatically increase when and to the extent the conversion or purchase rights are exercised and the obligation to pay the share capital is fulfilled by swap or payment. (Art.463 f.2).

As it is clearly understood from the second paragraph of Art. 463 TCC, the obligation to pay the share capital via a conditional capital increase may be realized through swap in case of exercise of conversion rights and through payment in cash in case of the exercise of purchase rights. It is not possible to return new capital in-kind. The capital of the company shall be automatically increased when, and to the extent that, the conversion and purchase rights provided to the creditors or the employees are exercised through unilateral declaration of intention and the capital commitment arising due to this exercise is fulfilled by swap or payment3.

The Statutory Restrictions on Conditional Capital Increase

Article 464 TCC sets forth certain restrictions with respect to conditional capital increase.

Article 464 - (1) The total nominal value of the increased share capital through conditional capital increase may not exceed an amount equal to 50% of the share capital.

(2) The payment to be made shall be at least equivalent to the nominal value.

As expressed in the article, it is required that the payment made shall be at least equivalent to the nominal value of the newly acquired share. Moreover, the total nominal value of the capital increased conditionally may not exceed half of the total capital. According to the system of the TCC, since the words "principal" and "issued" are not used before the word "capital", it shall be concluded that this wording includes both the principal and issued capital4.

The Basis in the Articles of Association for Conditional Capital Increase

As explained above, a conditional capital increase may only be based on a provision in the articles of association. The content of this provision is specified in Art. 465 TCC in detail. Said provision in the articles of association has two significant features: (i) It must be a detailed explanatory text with respect to the increase; and (ii) Upon conclusion of the conditional capital increase, since this provision in the articles of association will be devoid of essence, the provision shall be removed from the articles of association in accordance with Art. 472 TCC. A new provision forming the basis of the transaction must be inserted into the articles of association any time a conditional capital increase is concluded5.

Protection of the Shareholders

Another prerequisite regarding the exercise of conversion or purchase rights recognized for the creditors or employees is the abolishment of the right of first refusal of the current shareholders and the explicit recording of this issue in the articles of association in accordance with subparagraph (d) of Art. 465/1 TCC. Since this situation would affect the capital participation rate of the current shareholders (it would decrease their participation rate) the law maker, in order to not injure the interests of the shareholders, establishes the condition that the newly issued debt instruments made up of conversion and purchase rights shall primarily be offered to the shareholders pro rata to their shares. On the other hand, the "right to be the object of the offer" recognized for the shareholders may be abolished or restricted in the presence of just causes6. In case the purchase right is recognized for the employees, it is not required to recognize the right to be the object of the offer for them. However, in this case, the rights of the shareholders, whose right of first refusal is restricted, shall be protected within Art. 466/3 TCC.

Protection of Conversion and Purchase Rights Holders

The lawmaker places importance on the protection of persons entitled to conversion and purchase rights in conditional capital increase in accordance with Art. 467 TCC. In compliance with the first paragraph of Art. 467 TCC, creditors or employees entitled to acquire registered shares through conversion or purchase rights may not be prevented from exercising these rights based on the claim that the transfer of such shares is restricted, unless such a restriction is explicitly stipulated under the articles of association or in the offering circular.

Another arrangement protecting rights holders is stipulated in the second paragraph of the same article. In accordance with said paragraph it is set forth that conversion or purchase rights recognized for creditors or the employees may not be subject to any losses due to capital increase, the granting of new conversion or purchase rights or by any other means. However, along with said regulation the 2nd paragraph also stipulates that if the conversion fee is decreased, the rights holders have been provided with adequate consideration or the shareholders incur losses in the same manner, an action contrary to the protection defined in the previous sentence may be carried out.


The Turkish Commercial Code No. 6102 sets forth provisions regarding new capital types and various capital increase procedures in order to fulfill the need for capital urgently and readily, and to render a dynamic commercial life. The conditionalcapital increase is a capital increase method mostly applied by public companies whose shares are publicly traded. Besides this, the implementation of the conditional capital increase has been made possible for non-public companies or small and medium sized companies. In particular, the conditional capital increase may be implemented through the exchange of the credits of the employees or certain creditors during the restructuring of the companies with their right to be a shareholder in the company. This condition, which is a new provision under Turkish law, corresponds to the idea that the structure of companies may change quickly, in line with the dynamism of business life.


1 KENDİGELEN Abuzer, Yeni Türk Ticaret Kanunu Değişiklikler, Yenilikler ve İlk Tespitler, XII Levha Yay., 2011, p.320.

2 TEKİNALP Ünal, Sermaye Ortaklıklarının Yeni Hukuku, Değiştirilmiş ve Düzenlemelerle Güncelleştirilmiş 3. Bası, Vedat Kitapçılık 2013, p.113.

3 KENDİGELEN, p.320.

4 TEKİNALP, p.115.

5 TEKİNALP, p.113.

6 KENDİGELEN, p. 322.

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