Contributed by Ozgun Law
Capital increases under Turkish law
The provisions that apply to capital increases differ depending on whether the company is a public company or a non-public company. The addition of new capital to increase the capital of non-public companies is regulated by Articles 391 and following of the Commercial Code. For public companies, the addition of new capital is regulated by Articles 12 and following of the Capital Markets Law, the Capital Markets Board Communiqué Serial 1/26 on the Principles Regarding the Registration of Share Certificates With the Board and the Sale of Share Certificates, and the Capital Markets Board Communiqué Serial IV/7 on the Principles of the Registered Capital System. The relevant procedures for increasing capital in public companies also depend on whether the company has adopted the registered capital system or the main capital system.
Capital increases in non-public companies
The Commercial Code is applicable to increases of capital in non-public companies. The procedures on company formation and amendments of articles of association (including capital increases) have been modified by the Ministry of Industry and Commerce Communiqué 2003/3 on the Principles on the Formation of Joint Stock and Limited Liability Companies and the Amendment of Articles of Association. Company formation and articles of association amendments of joint stock companies that are engaged in different fields of activity from those listed in Article 5 of Communiqué 2003/3 are no longer subject to approval by the Ministry of Industry and Commerce. For capital increases in these joint stock companies, the board of directors must draft a proposal for amendment of the articles of association in relation to the capital provision and submit this directly for the general assembly's approval. However, if the company's field of activity is among those listed in Article 5 of Communiqué 2003/3, approval of the amendment in relation to the capital increase must be obtained from the Ministry of Industry and Commerce.
Following approval, the general assembly must convene within six months and agree on the relevant amendment and thus also the capital increase. In the event that the company has holders of privileged shares, they must convene a general assembly of privileged shareholders in order to approve the capital increase according to Article 391 of the Commercial Code. The most fundamental provision of the share subscription agreement is that the existing shareholders waiver their pre-emptive rights for the benefit of the buyer. In relation to the capital increase, the general assembly must register its resolution with the Trade Registry within 15 days. Registration of the capital increase is then finalised. The benefit of the registration is that new shares are created and thus can be issued immediately. The company can propose the new shares to the buyer and the subscription obligation can be performed, which will conclude the transaction. Hereafter, delivery of share certificates, registration with the share book (if relevant) and payment of the capital contribution will take place.
Capital increases in public companies
Joint stock companies with more than 250 shareholders are deemed public companies and thus are subject to the same legal provisions that govern public companies (Article 11 of the Capital Markets Law).
The board of directors must draft the amendment text for the capital provision of the company's articles of association and submit this to the approval of the Capital Markets Board. After the Capital Markets Board gives its approval under Article 5 of Communiqué 2003/3, approval from the Ministry of Industry and Commerce must be obtained. Finally, the general assembly must resolve the capital increase in accordance with the Commercial Code (Article 7(III) of Capital Markets Board Communiqué Serial I/26). If there is to be an allocated sale upon limitation of preemptive rights (in other words, if a specific real or legal third party is to subscribe for the newly increased portion of the capital and the newly issued shares are to be allocated to this third party), this must also be specified in the general assembly resolution (Article 10(I) of Communiqué Serial I/26). In order to register the shares, an application must be made to the Capital Markets Board. Finally, after the results have been reported to the Capital Markets Board upon conclusion of the sale, the capital increase must be registered with the Trade Registry and published.
Capital increases in public companies applying the registered capital system
For public companies wishing to avoid the expense and impracticalities of the time-consuming procedures involved in increasing capital in public companies that apply the main capital system, the registered capital system is an alternative. Under this system, the board of directors can realise a capital increase without being subject to the procedures of the Commercial Code. Provided that the articles of association authorise the board of directors to limit, partially or completely, the existing shareholders' privilege to buy new shares by explicitly stating this in its decision, the board of directors may resolve to bring such a limitation.
Within five days, the board of directors' resolution regarding the limitation of privilege to buy the new shares must be registered with the Trade Registry and subsequently published. In addition, within five business days, subsequent to its registration, the resolution must be published in accordance with the Capital Markets Board principles in two daily national newspapers in which the notices regarding the public offering and the sale of the company's shares have already been published. Therefore, while remaining within the limits of the registered capital ceiling, the board of directors may resolve to increase the company's capital and partially or entirely limit the existing shareholders' privilege to buy the new shares without the need for a general assembly resolution.
However, in exceptional cases, such a resolution may be the subject of an annulment lawsuit, similar to a general assembly resolution (Article 381 of the Commercial Code). Further, in order to make such a resolution, the board of directors must conduct all kinds of assessment in order to preserve the welfare of the company.
The Capital Markets Board must also be notified if, as a result of the capital increase, the new shareholder in the public company will eventually hold 75% or more of the company's shares or voting rights.
Comment
Companies may often need to add capital to the basic capital amount that existed during the establishment of the business - particularly when the capital is reducing in an inflationary economic environment. In the same way, during periods of high economic growth, there is a parallel need to increase capital. Capital increases may also be necessary to expand a company's business volume or to compensate for reduced capital following bad investments and expenditures.
Adding capital to a business can be accomplished by providing a cash loan to the business or by buying additional stock in exchange for cash. For some owners, putting capital into the business might be a good financial strategy. In general, companies that have high levels of working capital will be more successful, since they can expand and improve their operations without incurring debts. Companies with negative working capital may lack the funds necessary for growth.
