The Capital Companies usually prefer increasing their capital to strengthen their capital structure, to meet their needs for additional funds after expansion of their business.

Capital increase in the Joint Stock Companies has been regulated at the Article 456 of Turkish Commercial Cod and following provisions.

The Competent Authorıty Which Will Make The Decision Of Capital Increase

In principle, the authority to make the decision on capital increase is vested upon General Assembly of the shareholders at Joint Stock Companies. However, the Board of Directors of Joint Stock Companies is also entitled to make such decision in some circumstances provided that; Board of Directors is empowered with such authority at the Articles of Association of the Company at the very outset with the incorporation of the Company or through amendment brought to the Articles of Association of the Company. The caveat is such power of Board of Directors is valid only up to 5 years starting from official authorization.

Types Of Capital Increase

Capital increase at Joint Stock Companies can be consummated either through internal resources or by virtue of capital commitment. Pursuant to Article 462 of Turkish Commercial Code; i)reserved fund appropriated and devoted for a specific purpose at the General Assembly or Articles of Association of the Company, ii) freely used portion of the legal reserved funds and iii)other funds that could be added to the balance sheet and capital by way of specific laws might be converted into capital and be used at capital increase from internal resources.

It is also possible to increase the capital at joint stock companies through capital commitment in accordance with Turkish Commercial Code.


The condition precedent to exercise the capital increase:

Turkish Commercial Code has set out certain conditions for capital increase through capital commitment at Article 456 of Turkish commercial code, specifically Article 456/1 reads as, except for capital increase through internal resources, in order to make an increase in capital, all the share prices shall be paid in full before such capital increase. However, if the unpaid portion of the share price is relatively small and negligible comparing to increased amount, then the capital is still doable at the discretion of the trade registry commissioner. Another condition precedent before the capital increase which is set out at article 462/3 is that if there still exists certain funds within the Company that could be added to the balance sheet and capital, then capital increase through capital commitment can't be realized until such funds are fully consumed through capital increase from internal resources.

In case all the share prices are paid in full, it is possible to consummate capital increase at joint Stock Companies by virtue of commitment by existing shareholders or third parties outside of the Company.

Capital Increase Procedure Based on Capital Type

There are two types of committed capital which are capital in cash and capital in kind respectively, and the prevailing provisions of Turkish Commercial Code with regard to incorporation of Joint Stock Companies are equally applied in capital increase. Accordingly:

- In case of commitment of cash capital, %25 of the committed amount shall be paid in advance before the registration and the due amount shall be paid within 24 months following the registration of the capital increase at the Trade Registry.

- Intellectual property rights and assets which are alienable and assignable and at the same time free of any in rem right, lien and other injunctive reliefs can be used as capital in kind in capital increase process. The monetary amount of the Intellectual property rights and assets are evaluated by the expert witnesses assigned by the commercial court which has jurisdiction and proper venue.

The Procedure For Capital Increase Based on Capital Systems of Joint Stock Companies

At principal capital system; pursuant to Regulation on Procedures and Principles Applied at General Assembly Meeting of Joint Stock Companies and with the participation of the representative of the Ministry, the pertinent provision of the Articles of Association of the Company with regard to "capital" is amended. At the amendment text, the amount of the capital increase, the source of the increase either cash or payment in kind, the amount to paid before the registration and the time period to complete the due amount shall be set out. As a caveat, the minutes of General Assembly Meeting where the capital is increased shall be registered at the Trade Registry within three months, otherwise the capital increase is deemed null and void.

On the other hand, at the registered capital system and for the closed Joint Stock Companies; the authority to increase the capital up to the ceiling set forth at the Articles of Association might be conferred upon the Board of Directors of the Company and the Board might exercise such right within the five years starting from the mandate granted at the General Assembly meeting of the Company.

Capital Increase Due to Loss

In the circumstances where at least half of total amount of the capital and legal reserves of the company in aggregate proves to be unrequited, the Bord of Directors is obliged to come forward with some enhancement proposals for the attention of the General Assembly of the Company. In order to prevent deterioration in financial conditions or minimize the impacts, the Board of Directors of the Company might propose curing measures in an alternate manner to the attention of the General Assembly, including but not limited to completion of capital, capital increase, shutting down of some units, sale of the subsidiaries and change in marketing strategy. The General Assembly has unfettered discretion on the adoption of the proper measures and accordingly, i)might accept the proposed measures "as is" without any change, ii)adopt with amendment or iii) adopt a brand new proposal other than the one proposed by the Board of Directors.

In the circumstances where 2/3 of total amount of the capital and legal reserves of the Company in aggregate proves to be unrequited, to avoid automatic liquidation, the General Assembly shall render one of the following, i)satisfaction with the 1/3 of the capital and accordingly capital decrease, ii) completion of the capital or iii)increase in capital.

In practice, completion of capital means the shortcoming of the balance sheet is cured by some or all of the shareholders. Each shareholder is obliged to participate to the completion in proportion with its capital share and cannot seek the return or reimbursement for the contributed amount under any condition. To avoid any doubt and different than capital commitment or extension of credit to the Company, it is fair to say that the obligation for completion of the capital is in the form of a grant.

The Joint Stock Companies might opt for decrease in the capital in proportion with the loss first and afterwards increase the capital to the point as they deem fit.

Finally, different than the previous alternative, The Joint Stock Companies might directly opt for capital increase without exercising the path of capital decrease first, however, the downside of this scenario is that in direct capital increase, the Company shall pay half of the increased amount before the registration, whereas in other scenarios, the obligation to make the payment of the capital before registry is only %25.

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.