Overview Of Company Type Changes

Type change refers to the alteration of a commercial company's legal form without liquidation. In other words, in cases such as a joint-stock company transforming into a limited liability company, or a cooperative converting into a capital company, the legal personality of the company does not cease, only its legal shell changes. In this respect, type change is a form of corporate restructuring, and it is a transaction frequently preferred for economic reasons.

In the former Turkish Commercial Code No. 6762, this institution was regulated with only one article. However, due to problems and uncertainties that emerged in practice, the Turkish Commercial Code No. 6102 ("TCC") has regulated the matter of type change in detail. It clearly specifies which types of companies can transform into one another, which documents must be prepared, and which principles should be observed during the process. In this regard, the new regulation has increased transparency and predictability.

Scope of Type Change

Article 181 of the TCC specifies, in a limited manner, the forms of type change that can be carried out. According to this provision, capital companies (joint-stock, limited, partnership limited by shares) may transform into another capital company or a cooperative. Since type change is regarded only as a transformation of form, liquidation-free type change has been facilitated, thereby protecting the economic identity and continuity of the company.

The exhaustive list of permissible transformations under the TCC is as follows:

1. A capital company (joint-stock/limited/partnership limited by shares):
   a. Into another type of capital company;
   b. Into a cooperative;
2. A general partnership:
   a. Into a capital company;
   b. Into a cooperative;
   c. Into a limited partnership;
3. A limited partnership:
   a. Into a capital company;
   b. Into a cooperative;
   c. Into a general partnership;
4. A cooperative:
   a. Into a capital company.

Any change of type transactions and decisions outside of these enumerated cases shall be deemed invalid. In addition, pursuant to Article 194 of the TCC, a commercial enterprise may merge with a commercial company by being acquired by it.

Elements of Change of Company Type

According to the TCC, the fundamental elements of a change of company type are listed as follows:

• Companies may change their type within the limits prescribed by TCC.
• In a type change, the legal entity of the company does not cease to exist; however, its legal structure changes, and the company continues its legal and economic identity.
• In addition to economic continuity, the shareholders' rights and shares are protected; shares with privileges are either exchanged with shares of equal value or compensated accordingly.
• All people involved in the type change process are liable for damage caused to the company, shareholders, or creditors due to their faults.

Principles of Change of Company Type

• Liability of Shareholders: The liability of shareholders for the company's debts depends on when the debt arises. For debts incurred before the type change, the liability regime of the former type applies, while for debts arising after the change, the rules of the new type are applicable. This provision is important for the protection of creditors. For instance, when a general partnership is converted into a limited liability company, the shareholders' liability becomes limited for debts arising after the conversion.
• Equivalence Principle: The principle of "equal value" is observed in the type change. According to this principle, the economic value of the shareholders' rights and shares in the new company must remain equal to the previous ones. Non-voting shares may be exchanged for either non-voting or voting shares. The rights of privileged shareholders must be preserved; if that is not possible, they must be compensated. The same applies to usufruct certificates, where equal rights or equivalent payment must be ensured. This prevents any loss of rights for shareholders.
• Protection of Creditors: Even though the debtor does not change in a type conversion, creditors may still be negatively affected in certain cases. Therefore, the liability of shareholders who were responsible before the type change continues after the conversion.
• Protection of Employees: As previously stated, the legal relationships of the company do not change upon conversion. Therefore, employment contracts or service agreements signed with employees remain valid and unchanged following the type change.

Process of Changing Company Type

Under the TCC, the type change process is regulated similarly to the establishment of a new company. Initially, the management body prepares a type change plan. This plan includes the current and new trade names of the company, registered office address, the new company's articles of association, and the post-conversion shareholding structure.

Following this, a type change report is drafted. This report explains the purpose and consequences of the conversion, the share exchange ratio, and the new obligations of shareholders. The prepared documents are then submitted for shareholders' review. Financial statements for the last three years and, if necessary, an interim balance sheet are made available for inspection. This process ensures transparency and aims to protect both shareholders and third parties. After the general assembly approves the plan prepared by the management, the decision is registered with the trade registry and announced. The announcement is deemed constitutive in terms of the validity of the process.

According to Article 184/2 of the TCC, if more than six months have passed since the last balance sheet or there have been significant changes in the company's assets, an interim balance sheet must be prepared. This requirement aims to reflect the current status of the company and protect the rights of creditors.

Legal Consequences of Change of Company Type

The most significant legal result of a type change is the continuation of the company's legal personality. In other words, a new company is not established; the existing company continues its operations under a new legal form. The company is considered the legal and economic successor of the previous entity. All rights and obligations related to the company's assets are transferred to the new type. However, this transfer is not considered a universal succession since the same legal entity continues to exist. Therefore, the change of type is not regarded as a liquidation process.

Conclusion

Changing company type is a mechanism that provides flexibility to companies. A company may convert its type to expand its operations, limit shareholder liability, or attract new investors. For example, a general partnership established as a family business may convert into a joint-stock company to ensure professional management and limited liability. This allows the company to adapt to market needs while maintaining legal continuity.

Although the numerous required plans, reports, and financial statements may be seen as bureaucratic, they actually ensure transparency, inform shareholders, and protect the public. This is highly important for legal certainty.

The change of company type is comprehensively regulated under the TCC and has become a significant tool for corporate restructuring. The continuation of legal personality, protection of rights, safeguarding of creditors, and transparency principles form the foundation of this institution. Through this mechanism, companies can adapt to new needs without interrupting legal continuity.