Introduction
Article 456 and following provisions of the Turkish Commercial Code numbered 6102 ("TCC") regulates the capital increase in joint stock companies. Accordingly, pursuant to the TCC, capital increases may be made in three different ways: capital increase through capital commitment, capital increase from internal resources and conditional capital increase.
Even though, capital increase through capital commitment, or in other words, cash capital increase, is the most common capital increase option for joint stock companies, it can be said that there will be an increase in practice since capital increase from internal resources and conditional capital increase are regulated for the first time under the TCC.
In capital increase through capital commitment, it is regulated that new share certificates shall be issued in return for money or economic values other than money to be added to the company capital. In this case, pursuant to Article 461 of the TCC, each shareholder has the right to purchase the newly issued shares according to the ratio of the existing shares. In this way, it is ensured that the shareholding ratio among the shareholders is not changed in the capital increase, and the limited situations in which the pre-emptive right may be restricted are regulated in the TCC.
Article 463 of the TCC regulates conditional capital increases. Accordingly, it is regulated that the general assembly may decide on a conditional capital increase by granting the right to acquire new shares by exercising the right to amend the articles of association or purchase rights to the creditors or employees of the company or group companies, due to newly issued bonds or similar debt instruments.
This article is prepared on the capital increase from internal resources in joint stock companies.
i. Resources Stated on the TCC
Pursuant to Article 462 of the TCC, capital increase from internal resources is regulated. It should be stated that it is possible to decide capital increase from internal resources in the authorized capital and registered capital systems. It is only possible to increase capital from internal resources can be made under restricted conditions in accordance with the TCC. Resources for the capital increase are specifies in Article 462/1 of the TCC as follows:
"The capital may be increased from internal resources by converting the reserve funds set aside by the articles of association or the general assembly resolution and not dedicated to a specific purpose, the freely available portion of the legal reserve funds and the funds permitted by the legislation to be included in the balance sheet and added to the capital into capital."
Pursuant to the below Article, increasing capital may be made from the stated capital reserve and funds. Accordingly, legal reserves are set aside until five percent of the annual profit reaches twenty percent of the paid-in capital. In order to increase capital in the company, a specified source should be the reserve funds set aside by the articles of association or general assembly resolution and not allocated for a specific purpose, and the freely available portion of the legal reserve funds should be used. Although the content of "funds permitted by legislation to be included in the balance sheet and added to the capital" is not clearly stated on the TCC, but also, revaluation, share premiums (emission premiums), proceeds from the sale of subsidiaries and immovable property, foreign currency translation differences, share certificate cancellation profits and inflation fund can be given as examples.
ii. Declaration on the Resources
Article 462/2 of the TCC stipulates that the amount that covers the increased portion of the capital from internal resources "actually exists within the company" should be stated by the approved annual balance sheet and a clear and written declaration by the board of directors. Accordingly, it is stated in the preamble of the Article that this regulation has been stated to ensure transaction security. In this context, pursuant to Article 467 of the TCC, the board of directors of the company shall guarantee "the sources from which the capital increase made from internal resources", "the reality of these sources" and "existence within the assets of the company".
In addition, the Trade Registry Regulation stipulates that in order to ensure and increase the security of the transaction in case of a capital increase from internal resources, in addition to the declaration of the board of directors, an additional document should be submitted during the registration application. Accordingly, Article 73 of the Trade Registry Regulation stipulates that if the capital increase is made only from internal resources or from internal resources together with the capital commitment, a certified public accountant or public accountant's report or, in companies subject to audit, the auditor's report regarding these determinations should be submitted in order to "determine whether the capital has been paid in full", "determine the capital is not uncovered or not", "determine the equity of the company", and "determine that the amount covered from internal resources actually exists within the company".
iii. Presence of Funds in the Balance Sheet
Article 462/3 of the TCC regulates a restriction on capital increases through capital commitment in order to protect the shareholders of the companies. Accordingly, if there are funds in the balance sheet that are permitted by the legislation to be added to the capital, it is not possible to increase the capital through capital commitment without converting these funds into capital. In the preamble of the Article, it is stated that this regulation is a mandatory rule that cannot be eliminated and has no exceptions.
The main purpose of this regulation is to prevent the decrease in the shareholding rates of other shareholders in the company due to their inability to participate in the capital increase, despite the existence of funds in the balance sheet of the company, which are permitted by the legislation to be added to the capital, by some shareholders preferring cash capital increase and ensuring that the amount of the increase is high. The preamble also states that the legal consequence of violating this regulation is invalidity.
In this context, in the decisions of the Supreme Court below, despite the presence of funds in the balance sheet in accordance with this regulation, it was decided the capital increase was unlawful and the decision of the court of first instance was approved:
"...Although it is possible to increase the capital from internal resources, the increase through capital commitment without any statement is in violation of Article 462/3 of the TCC, therefore, the conditions for the annulment of decision numbered 6 are occurred..."1
"...not to determine the needs of the cash capital increase in the general assembly meeting, the intent to harm the minority shareholders is clear in terms of amount and payment period, despite the mandatory provision of Article 462/3 of the TCC, it is unlawful to make an increase from external resources without adding all of the internal resources to the capital..."2
It should be underlined that the Article restricts the increase through capital commitment only in the event that there are funds in the balance sheet that are permitted by the legislation to be added to the capital. In fact, the Article does not explicitly restrict reserve funds and statutory reserve funds that have been set aside by the articles of association or general assembly resolution and that are not dedicated to a specific purpose. However, it should be noted that there are opinions in the doctrine that these funds also include funds such as revaluation funds, reserve funds and legal reserve funds.
In order to meet the urgent cash needs of the company, the TCC allows for both a cash capital increase and capital increase from the funds permitted by the legislation to be added to the capital on the balance sheet at the same time and at the same rate. However, it should be reminded that this possibility should not be used to harm the shareholders of the company. It should also be noted that this restriction applies only to joint stock companies and not to limited liability companies.
Finally, it should also be noted that, in practice, this rule is extended to joint stock companies with a single shareholder and to general assembly resolutions attended by all shareholders.
iv. Principles and Procedure Regarding the Capital Increase
a. Exception Regarding Non-Payment of Share Price: First of all, it should be noted that the basic rule of capital increase, which is the rule of not increasing the capital unless the cash price of the shares is fully paid, shall not be applied in case of capital increase from internal resources pursuant to Article 456/1 of the TCC.
b. Authorized Body for the Increase: Pursuant to Article 456/2 of the TCC, capital increases shall be decided by the general assembly in the authorized capital system and by the board of directors in the registered capital system. This rule applies to all types of capital increases.
c. Registration Period: Pursuant to Article 456/3 of the TCC, the resolution of the general assembly (or the resolution of the board of directors in the registered capital system) regarding the capital increase should be registered within three months from the date of the resolution, otherwise the resolution of the general assembly (or the resolution of the board of directors) and the permission, if any, shall become invalid. This rule applies to all types of capital increases.
d. Quorum: Pursuant to Article 421 of the TCC, unless otherwise provided in the articles of association of the company, the general assembly resolution on capital increase (since it is considered as an amendment to the articles of association) shall be adopted by a majority of the votes present at the general assembly meeting where at least half of the company's capital is represented. If the meeting quorum in the first meeting is not obtained, a second meeting may be held within one month at the latest. The meeting quorum for the second meeting is the representation of at least one third of the company capital at the meeting. These quorum ratios may be aggravated by the articles of association.
e. Ministry Representative: Pursuant to Article 32 of the Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Representatives of the Ministry of Customs and Trade to be present at these Meetings, except for joint stock companies with a sole shareholder, a ministry representative should attend at the general assembly meetings in case of a capital increase.
f. Finalization of the Resolution: Pursuant to Article 462/3 of the TCC, the capital increase shall become final upon the registration of the general assembly resolution and the amended version of the articles of association at the Trade Registry Office.
g. Acquisition of the Shares: Pursuant to Article 462/3 of the TCC, upon the registration, the existing shareholders shall automatically acquire the bonus shares according to the ratio of their existing shares to capital.
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Footnotes
1. 11. HD., E. 2020/1559 K. 2021/2513 T. 17.3.2021
2. 11. HD., E. 2019/88 K. 2019/7008 T. 11.11.2019
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.