Shareholders of non-public joint stock companies are inclined to use certain methods such as bank credits, public offering and share capital increase in order to inject funds into the company to enable the company to continue its activities. Issuance of premium shares together with a share capital increase is one of such options.
Principles and procedures on share capital increases with issuance of premium shares for the non-public joint stock companies (the "JSC") are regulated under Turkish Commercial Code No. 6102 ("TCC"). With this article, we aim to explain the process of share capital increase with issuance of premium shares in JSCs that are subject to ordinary (basic) share capital system1 rather than the registered share capital system2.
II. Issuance of Premium Shares
Premium shares can be defined as shares which are issued at a value higher than their nominal value. The JSCs are allowed to issue premium shares during incorporation or following the incorporation through share capital increase process.
In order to increase the share capital and issue premium shares, general assembly of the shareholders must convene with the attendance of the representative to be appointed by the Ministry of Customs and Trade and the representative of the independent auditor, if any.
In the event that the pre-emptive rights will be removed or limited, the board of directors of the JSC will have to prepare a report containing the reasons to issue premium shares and calculation method of the premium. Additionally, in case the JSC has privileged shares and the general assembly resolution hinders the rights of the shareholders with privileged shares, consent of such shareholders will have to be obtained through a special meeting of the privileged shareholders.
Furthermore, persons who are participating in the share capital increase with issuance of premium shares are required to undertake the entire premium amount, together with the increased share capital. It is also important to note that (i) the total premium amount and (ii) at least 25% (twenty five percent) of the share capital increase amount have to be paid before registration of the share capital increase.
The TCC also stipulates that 5% of the net profit has to be set aside as legal reserve until it reaches 20% of paid portion of the share capital. Following the issuance of premium shares, regardless of the foregoing threshold, the premium amount will have to be added into the legal reserves if it is not used for the expenses of newly issued shares, amortization and charitable contributions. In this respect, the premium amount can be used only to recover losses, to ensure that the JSC continues its operations when it is in financial distress or, to take precautions to prevent unemployment or to ease its consequences. However, in the event the legal reserve exceeds 50% (fifty percent) of the total share capital, the JSC will be able to freely use the premium amount in a way it deems appropriate.
Lastly, the general assembly resolution regarding share capital increase will have to be registered with the relevant trade registry within 3 (three) months following the resolution date and announced in the Trade Registry Gazette as per Article 456 of the TCC.
JSCs often have the need to increase their share capital in order to keep operating as going concerns, with issuance of premium shares alongside a share capital increase, an important financial resource is being created for the JSCs; which can be used in cases of emergency in accordance with the provisions of the TCC.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2020. A link to the full Legal Insight Quarterly may be found here
1 Esas sermaye sistemi in Turkish.
2 Kayitli sermaye sistemi in Turkish.
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.