In the event of financial distress in joint-stock companies, it is crucial to recognize how the losses affect the capital. Financial insolvency can lead to ramifications such as the impairment of capital due to losses to a certain degree, which means capital erosion or the inability of company assets to cover debts and liabilities. When considering that joint-stock companies have a distinct legal personality separate from their shareholders and are only liable to their creditors with the company's assets in accordance with the principle of limited liability, the consequences will have an adverse impact on many stakeholders, including shareholders of the company as well as its creditors.

Hence, in order to protect the capital of companies, the Turkish Commercial Code No. 6102 ("TCC") includes numerous regulations concerning the capital preservation of the company. One of the measures aimed at protecting the capital is addressed through Article 376 of the TCC, which outlines the measures to be taken in cases of capital loss and insolvency while Article 139 regulates the possibility for a company that has lost its capital or is insolvent to merge only with another company that possesses a positive value capable of offsetting the deterioration in its financial condition.


The term "insolvent" in its broadest sense, is defined as "the situation where the assets of a commercial enterprise are unable to cover its debts." However, in practice, the term "insolvent" can be mistaken with other concepts such as "inability to pay" or "bankruptcy." In Turkish Law, the term "bankruptcy" is defined as "the inability to fulfill due and payable debts due to inadequacy of payment instruments, and this condition persisting continuously."

In this context, in the conditions of inability to pay or bankruptcy, regardless of the assets of the joint-stock company, the due and payable debts of the company are not covered due to a non-temporary lack of payment instruments whereas in insolvency, the entirety of the company's assess (payment instruments, receivables and other assets), "whether due or not, is insufficient" to cover all of the company's debts.

According to the regulations of the TCC, capital loss is defined as the "situation in which at least the half of the sum of the capital and legal reserves, based on the company's latest annual balance sheet, becomes insufficient due to losses." When the capital losses are in between ½ and 23it has been stipulated that the Board of Directors is obligated to convene the General Assembly immediately and present the considered appropriate corrective measures to the General Assembly. Nevertheless, the legislator has not specifically regulated the appropriate corrective measures and has left this matter to the discretion of the Board of Directors.

If the company's capital loss exceeds 2/3, the company will be insolvent, and in this case, the company's Board of Directors is required to convene the General Assembly immediately and General Assembly must adopt either the resolution to suffice with 1/3 of the capital or the decision to complete the capital or else the company's dissolution will occur spontaneously.


In difficult economic circumstances, the merger process of insolvent companies is a strategic step taken by companies facing financial distress, aiming to preserve their assets and values, sustain their operations and undergo restructuring. Article 139 of the TCC introduces a significant regulation regarding the reserve funds that need to be considered in such merger transactions. Remedial merger transactions follow the same standard merger procedures and processes in a way that they are fundamentally merger processes. However, due to their remedial nature, they have distinct prerequisites that differ from those of regular merger transactions and these distinct prerequisites are named in Article 139 stating that:

"A company that has lost half of the sum of its capital and legal reserves due to losses or is in an insolvent state may merge with another company that possesses freely disposable equity sufficient to cover the capital loss or insolvency, if necessary."

In accordance with the provision, it is regulated that (i) the company participating in the merger which has lost half of its capital or is insolvent (ii), the other participating company must have freely disposable equity in an amount sufficient to cover the insolvency state of the other company. Additionally, in the following articles it has been regulated that it is required to submit the documents that proves the fulfillment of this condition to the trade registry office of the location where the acquiring company's headquarters are situated

The requirement to set aside legal reserves is one of the important steps to preserve financial stability and sustain operations during the merger process of insolvent enterprises. The TCC's Article 139 foresees the requirement that joint-stock businesses create legal reserves. Once established, these reserves can be a vital resource for addressing the risks and financial issues related to the merger process.

According to the Article 139 of TCC, joint-stock companies are obliged to set aside legal reserves of at least %5 of their paid in capital. The legal reserve can be utilized in the merger process of insolvent companies to ensure the continuity of operations, cover mandatory expenses, and address situations like offsetting period losses.

Creating legal reserves while insolvent enterprises are being merged can help businesses become more financially resilient and better equipped to face unseen obstacles. This turns into a key component for the merger processes success and the companies' long-term viability.


In the remedial merger practice, companies within the corporate group are frequently preferred, enabling companies with decreased capital or in an insolvent state to improve their financial structure through this merger and thereby attain a chance to escape bankruptcy. For financially stable businesses, the investment is increased, and in this situation, the relevant company can profit from the business operations, technological expertise, know-how, and facilities of the firm. As a result, this also benefits the businesses that are thought to be in good financial standing.

In addition to the benefits that the remedial merger process offers to both sides of the transaction, the process also entails certain risks for financially stable companies, such as potential harm to the creditors of the company and the disappearance of their collection capabilities. In this case, the risks can be reduced by making the remedial merger process a potential investment tool for businesses by including specific mechanisms that are tailored to the specifics of the case, anticipating exit payments for shareholders whose financial position would be adversely affected and adding clauses to prevent embarrassment.

Mergers & Acquisitions
The mergers and acquisitions department of Kilinç Law & Consulting; provides legal consulting services to domestic and foreign clients, private and public companies...

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