Ercüment Erdem Prof. Dr. H. Ercüment Erdem

Capital Reduction Within The Scope Of The Turkish Commercial Code

August 2014

General

Capital reduction is regulated under articles 473-475 of the Turkish Commercial Code No. 6102 (“TCC”). The capital of a joint stock company can be reduced in order to (i) return some of the capital to the shareholders, and (ii) recover the company’s loss.

A capital reduction may also be made concurrently with the capital increase where fully paid new shares will be issued in the amount of the reduced capital.

Capital reduction requires an amendment to the Articles of Association. Board of directors shall prepare an amendment text concerning the reduction.

Decision regarding capital reduction is reserved to the competence of the general assembly. Pursuant to Article 408/1,a TCC, the general assembly cannot delegate said power to another body.

The Board of directors shall prepare and submit to the general assembly a report stating the purpose, scope and procedure of the capital reduction. This report shall be registered and announced together with the resolution for capital reduction.

There are certain limitations regarding the amount of the capital which can be reduced. According to Article 332 TCC, basic capital representing the entire capital subscribed in the articles of association may not be less than fifty thousand Turkish Liras and the initial capital may not be less than one hundred thousand Turkish liras in joint stock companies which have adopted the authorized capital system and not open to the public. Capital shall not be reduced under the amounts stated in the above written article. Capital will be reduced either by annulling some share certificates of the shareholders or reducing the nominal value of the shares provided by the General Assembly. In either procedure the issued share certificates shall be returned to the company.

Pursuant to Article 475 the required documents shall be submitted for registration with the trade registry.

Capital Reduction in order to Return the Reduced Amount to the Shareholders

If the capital is more than the company requires, or if a certain part of the capital is not used, the general assembly may decide to reduce the capital and return the reduced amount to its shareholders.

The board of directors shall prepare a detailed report stating the purpose, scope and procedure of the capital reduction. The company auditor shall also prepare a report, which states that there are enough assets to cover the rights and receivables of the creditors. Both reports shall be submitted by the board of directors to the general assembly for approval. Following the approval of the resolution for capital reduction, the report stating the purpose and the procedure of the reduction shall be registered and announced.

Following the general assembly resolution for capital reduction, the creditors shall be invited three times at intervals of seven days by the board of directors. An announcement shall be made pursuant to the relevant article of the Articles of Association. If a joint stock company is audited in accordance with Article 397/4 TCC, the announcement shall also be published on the company’s website. The creditors shall be invited to notify their receivables and to make a security claim with said announcement within two months following the third announcement published in the Turkish Trade Registry Gazette.

In order to execute the resolution for capital reduction, the receivables that are due and payable have to be paid or secured. It should be noted that since the board of directors submitted a report stating that there are enough assets to cover the debts or claims, a creditors request to secure the receivable should be evidenced and justified.

If the claims of the creditors are not paid or secured, the creditors can claim the cancellation of the general assembly resolution for the capital reduction within two years following the publication of the resolution.

Capital Reduction to Recover a Company’s Loss

Capital reduction may be exercised to remedy losses or the balance sheet. In order to reduce the capital for such purposes, the following conditions shall be fulfilled: the loss of the company must be an actual loss and the company must have lost 2/3 of its capital, in other terms, the company should be insolvent. The company should be able to cover its debts with its assets after the reduction and this shall be determined by a board of directors’ resolution. The capital should be reduced equal to the amount of the adverse balance or the loss; said amount should not be exceeded.

Pursuant to Article 474/2 TCC, in the case of a capital reduction to recover the company’s losses, the board of directors can renounce to notify the creditors, to secure or to pay their claims. Therefore, the invitation procedure is not applicable herein. The general procedure explained above is also applicable to this type of reduction.

Quorums under TCC for Capital Reduction

Pursuant to Article 421/3 TCC, the resolution for capital reduction shall be adopted by the affirmative votes of shareholders, or their representatives, holding at least seventy five percent of the share capital. In the event that the quorums regulated under Article 421/3 cannot be reached in the first meeting, the same quorums shall apply to the following meetings.

Conclusion

The TCC regulates capital reduction, in cases where the company aims to return the reduced capital to its shareholders and to recover the company’s loss. A joint stock company can also reduce its capital concurrently with the capital increase. In both types of capital reduction, the board of directors prepares a report stating the aim, purpose and the procedure for the reduction and submits it to the general assembly. It’s important that an auditor’s report put forth that there are enough assets to cover the debts and claims of the creditors. There is a significant difference between various types of capital reduction; in cases where the company aims to recover the loss, the board of directors may refrain to invite the creditors and to pay or to secure their claims and rights.