Capital Increase Through Capital Subscription

August 2014 Selen Öztürk
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The domestic or external increase of the amount stipulated in a company’s articles of association is referred to as the “capital increase”. Due to the fact that this amount is stipulated in the articles of association, in principle, the capital increase is considered as an amendment to the articles of association. However, the nature of the capital increase may differ due to the capital system adopted by the company. The capital increase through capital subscription in non-public joint stock companies and especially, capital increase in companies that adopted a registered capital system shall be examined in this newsletter article.

General

Capital increase may be examined under two main branches; namely capital increase concluded through capital subscription and capital increase through internal funds. The increase through capital subscription requires the shareholders who made a commitment in order to subscribe to the capital increase, to bring capital in kind or capital in cash to the company. The TCC stipulates two conditions for the capital increase through external funds. Accordingly, the first condition is that the share prices shall be fully paid. However, in accordance with the second sentence of Turkish Commercial Code (“TCC”) Art. 456, “If the unpaid amount is insignificant in proportion to the share capital, it shall not prevent the capital increase”. This provision is added to the new TCC in order to prevent doctrinal conflicts. Moreover, the second condition foreseen in the TCC stipulates that the funds allowed to be added to the capital by the legislation, shall not be on the balance sheet. This is a new provision regulated in the TCC that aims to protect shareholders who do not have enough financial power by prohibiting the high amount of capital increase concluded from external funds, even though there are enough domestic funds to conclude a domestic capital increase. Therefore it is a mandatory rule and there are no exceptions to it[1].

Common Provisions regarding the Capital Increase through Capital Subscription

As in the establishment, the capital increase shall be made through cash subscription and payment, through commitment in kind or through conversion of the debts of the company into capital.

Each shareholder has the right to purchase the newly issued shares in accordance with his capital-share ratio. If just causes exist, pre-emption rights may be restricted by the affirmative votes of shareholders representing at least sixty per cent of the share capital. Except for the regulation concerning quorum, the principals regarding the exercise and the restriction of pre-emption rights are also valid for the board of directors’ resolution on the registered capital system.

Moreover, according to the Ministry Communique issued in line with TCC Art. 333, if the company in question requires the consent of the Ministry of Customs and Trade, such consent must be taken.

Another provision adopted by the TCC is the declaration of the board of directors. Accordingly, the board of directors should prepare and sign an explicit, complete and correct declaration in compliance with the principal of honest accountability. If there is capital in cash or an in kind contribution, the content of the declaration shall include that this procedure is dully fulfilled, legal and administrative obligations are abided by, the reasons for the abolishment of pre-emption rights in case of a removal and the names of the shareholders having pre-emption rights, including their justifications, in detail. This declaration shall be signed by all members of the board of directors. Any inadequacy in the declaration may provoke the annulation or even nullity of the resolution, as it is considered a violation of transparency and the principle of accountability.[2]

The general assembly or the board of directors’ resolution regarding the capital increase shall be registered within three months following the resolution date. Otherwise, the resolution and the consent (if obtained) shall be deemed invalid. Additionally, this registration will have a constitutive affect.

Principal Capital System

In a principal capital system, a capital increase is concluded through the adoption of a general assembly resolution and this constitutes an amendment to the articles of association. Thus, if a higher quorum is not set forth in the articles of association, like any other amendment to the articles of association, the resolution must be adopted by the simple majority of the general assembly in which at least half of the shares are represented. The amendment must be approved by the board of directors. The approval resolution must be adopted by the simple majority of the board of directors, unless otherwise stated in the articles of association.[3]

In the principal capital system, all of the shares representing the increased capital shall be subscribed in the amended version of the articles of association or in the letter concerning participation commitment. The commitment for participation must be unconditional.

Registered Capital System

In General

In a registered capital system, the board of directors is entitled to increase the capital up to the authorized capital amount stated in the articles of association. This system allows for a more flexible capital structure and quicker capital increases; it therefore addresses the needs for financing. In non-public joint stock companies with registered capital systems, the minimum initial capital cannot be less than one hundred thousand (100,000) Turkish Liras. This amount may be increased by the Council of Ministers.

The board of directors independently decides when and how much the capital will be increased within the framework of the authority it has been given. However, in order for the board of directors to issue preferential shares or shares with a higher value than their nominal values or to restrict pre-emption rights, an explicit provision in the articles of association is required. The board of directors shall indicate the amount of increase, nominal values of the newly issued shares, their quantity, type, whether the shares are preferential or premium, the time period in which the pre-emption right will be exercised and the method of exercise and whether or not the pre-emption rights are restricted. In the registered capital system, the shares are subscribed with a commitment for participation. The board of directors has to be expressly authorized by the articles of association in order to issue premium shares or shares with a higher value than their nominal values or to restrict pre-emption rights.

Another important point is that the members of the board of directors or shareholders may file an annulment action against this resolution. A reference is made to TCC Art. 445 with respect to the annulment of the resolution of the board of directors in a registered capital system which regulates the annulment of general assembly resolutions, since as a rule, the resolution regarding the increase of capital is adopted by the general assembly. The right to bring an action shall lapse after 1 month following the resolution to increase capital and TCC Art. 48-451 will be taken into consideration in this action by analogy[4].

Restrictions

There is no restriction with respect to the authorized capital cap under the TCC. Thus the only limit for the board of directors is the authorized capital stipulated in the articles of association. However, Article 5/5 of the Communiqué Pertaining to the Registered Capital System for Non-Public Joint Stock Companies, dated 19.10.2014, adopts the following restriction: “Authorized capital shall not exceed five times of the initial share capital. … Following the adoption of the registered capital system by way of amendment or at the time of establishment, the authorized capital shall not exceed five times of the issued capital at the time of the general assembly concerning the amendment of the articles of association.” Thus the limit for the authorized capital is determined as five times of the share capital.

No restrictions concerning the method of payment or the type of capital to be subscribed are stipulated for the registered capital system. However, such a restriction may be stipulated in the articles of association.

Finally, the authority to increase the capital granted to the board of directors is limited to five years by the TCC. Thus, in order to authorize the board of directors for another term, the articles of association shall be amended and the new term shall be determined. Change of the members of the board of directors shall not remove the authority granted and the board of directors shall maintain such authority until the end of the term determined. According to Swiss doctrine, the authority commences from the registration of the resolution but not from the adoption of the resolution by the general assembly. As the TCC does not have any regulation in this regard, the same solution may be adopted for Turkish law[5].

Conclusion

As is seen, non-public joint stock companies may adopt a principal capital system in which the general assembly decides to increase the capital or a registered capital system in which capital increase is adopted by the board of directors’ resolution. Nevertheless, in order to adopt the registered capital system, a provision as such must be stipulated in the articles of association. In addition, the increase of the capital up to the authorized capital amount shall not qualify as an amendment of the articles of association, since the registered capital cap is already stipulated in the articles of association. Joint stock companies may adopt any of these systems according to their need for capital and size.

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