Capital Increase Through Capital Subscription
Introduction
Capital increase in privately held joint stock companies is an important transaction that allows the company to grow and meet its financing needs by strengthening its equity structure. A capital increase means an increase in the amount of the company's ordinary/registered capital and is realized with the approval of a sufficient majority of shareholders. This process is subject to the provisions[1] of the Turkish Commercial Code (“TCC”) and is subject to certain rules and conditions for non-public (i.e., privately held) joint stock companies. In this study, the methods, legal conditions and processes of capital increase in privately held joint stock companies will be discussed according to the capital systems applied. In addition, the protection and limitation of shareholders' pre-emptive rights (right to acquire new shares) in capital increases will be examined.
Methods of Capital Increase
According to the TCC, capital increase in joint stock companies can be conducted in two main ways:
Capital Increase from External Sources (Increase by Capital Subscription):
It is done by obtaining new capital subscriptions in cash or in kind from outside the company or from existing shareholders. In other words, shareholders or new investors willing to contribute capital increase the capital by bringing additional money or assets (capital in kind) to the company. This method of capital increase is called capital increase through capital subscription and the company is provided with external resources.
Capital Increase from Internal Resources (Bonus Issue):
It is made by converting the funds accumulated in the equity items of the company and permitted by the legislation to be added to the capital (such as retained earnings, emission premiums or reserves) into capital. In this case, the company issues new shares, but shareholders receive these shares free of charge in proportion to their existing shares. Internal capital increase does not provide fresh cash inflow to the company but increases the company's capital by transferring equity items to capital.
In the case of capital increase from external sources (obtaining new capital subscription), the TCC stipulates certain prerequisites. These requirements protect shareholders by aiming to ensure that the company's available capital is fully utilized and that available internal resources are utilized first and foremost.
The two basic conditions set forth in the TCC are as follows:
Payment of Existing Capital Subscriptions:
In order to be able to make an increase through a new capital subscription, the company must have fully paid for the previously subscribed capital shares. The Code provides that exceptions will be made for small underpayments. As a matter of fact, Article 456/2 of the TCC stipulates that the non-payment of amounts that may be deemed insignificant in proportion to the capital shall not constitute an obstacle to the capital increase. This provision has been introduced by the new law in order to eliminate the discussions in the doctrine during the previous law period.
Lack of Internal Resources to be Added to the Capital:
Prior to an external capital increase, the company must not have internal resources (such as undistributed profits, funds, or reserves) in the balance sheet that can be added to the capital. By introducing this condition, the TCC intends to prevent shareholders from demanding new cash from the company's shareholders when there is an opportunity to increase capital from the company's own resources. In this way, it is aimed to protect shareholders who are not in good financial condition and to prevent unnecessary external capital calls when there are existing resources within the company. The exception to Article 462 of the TCC, where this rule was drafted, is the unanimous vote of the shareholders for a capital increase through subscription, even if the company has internal resources in the balance sheet that can be added to the capital, as regulated by the Circulars of the Ministry of Trade.
Once the above conditions are satisfied, the company must duly realize the capital increase. The capital increase process differs according to the capital system adopted by the company (ordinary capital system or registered capital system). Below, the capital increase processes in privately held joint stock companies under these two systems are discussed under separate headings.
Capital Increase Under The Ordinary Capital System
The ordinary capital system refers to a system in which the company has a fixed amount of capital set in its articles of association, and each capital increase requires an amendment to the articles of association. Most privately held joint stock companies, unless they have switched to the registered capital system, are governed by the ordinary capital system. In this system, capital increases are made through a general assembly resolution and by amending the capital article in the articles of association. Therefore, the capital increase decision is legally an amendment to the articles of association.
The steps of the capital increase process in the ordinary capital system can be briefly summarized as follows:
General Assembly Decision:
The board of directors of the company prepares a declaration regarding the capital increase and submits it to the approval of the shareholders. The general assembly must adopt a resolution in accordance with the quorum requirements of the TCC and the articles of association. Unless a higher quorum is stipulated in the articles of association, the capital increase resolution may be adopted by a majority of the votes present at the general assembly where at least half of the company's capital is represented, as in the case of other amendments to the articles of association. This is the minimum requirement of the law; the articles of association may set higher quorums. With the capital increase decision taken at the general assembly, the capital article of the articles of association is amended to indicate the new capital amount.
Subscription of New Shares:
In order for a capital increase to be valid, all of the shares representing the increased capital must be subscribed by the shareholders or new investors. In the share capital system, this subscription is either made directly in the amended articles of association approved by the general assembly or through a separate subscription commitment letter. Pursuant to the TCC, this subscription commitment must be unconditional, i.e., the share subscription cannot be conditional upon any conditions. The capital increase cannot be completed until all new shares have been subscribed.
Payment and Registration:
In cash capital increases, pursuant to Articles 344 and 481 of the TCC, at least ¼ of the increased capital must be paid into the company account before registration, and the remaining portion must be paid within 24 months. Pursuant to the relevant legislation, the payment schedule of the new share prices may be regulated in the articles of association of the company, or may be determined by the general assembly or the board of directors. After the capital increase decision is made, it must be registered with the trade registry. The TCC limits the announcement and registration of the capital increase resolution to a certain period of time. Accordingly, the capital increase resolution of the general assembly must be registered with the trade registry within three months of the date of adoption. Otherwise, the resolution and the authorization obtained from the relevant authorities (e.g. the Ministry), if any, shall become null and void. With the registration, the legal validity of the capital increase is established; registration has a constitutive effect.
Ministry Permission (if required):
Pursuant to the regulations issued pursuant to Article 333 of the TCC, the permission of the Ministry of Trade is required for the incorporation of some joint stock companies or amendments to the articles of association. If the company that is going to increase its capital is subject to this authorization obligation (for example, companies operating in certain special sectors), the permission of the Ministry must also be obtained in advance for the capital increase. Although this step is not applicable for all companies, it is a legal obligation for the sectors and situations specified in the relevant communiqués.
Pre-emptive rights of existing shareholders are reserved in the ordinary capital system. Each shareholder is entitled to purchase the new shares to be issued in the capital increase in proportion to its share in the existing capital. This right ensures that the shareholders' ratios are preserved as a result of the capital increase and thus prevents unannounced changes in the distribution of control in the company[2]. As a general rule, the pre-emptive right may not be restricted or abolished; however, this right may be restricted or abolished in the presence of just cause and with an aggravated quorum. Pursuant to Article 461 of the TCC, if the general assembly wishes to completely or partially abolish the pre-emptive rights while taking a capital increase decision, the affirmative vote of the shareholders representing at least 60% of the share capital is required for this purpose. The articles of association cannot be authorized to restrict the pre-emptive right in advance; the law stipulates that this right may only be restricted within the scope of a concrete capital increase resolution and by an aggravated majority. Furthermore, the pre-emptive right may only be restricted or revoked if there are just causes. The Law lists situations such as public offerings, business or subsidiary acquisitions within the scope of merger/division transactions, and enabling company employees to become shareholders of the company as examples of just cause. It is not legally possible to restrict the pre-emptive right without meeting these conditions. If the general assembly decides to restrict pre-emptive rights, the board of directors is obliged to prepare a detailed report explaining the reasons for this restriction and to have it registered and announced in the trade registry. This mechanism was introduced to prevent the abuse of shareholders' rights.
Capital Increase Under The Registered Capital System
The registered capital system is a capital system that entitles the board of directors to unilaterally increase the capital of a joint stock company up to a predetermined registered capital ceiling set by the articles of association. This system is widely used in joint stock companies that are publicly traded and may also be adopted by privately held joint stock companies that meet certain conditions. The main advantage of the registered capital system is that it provides flexibility and speed in capital increase processes. Without waiting for the general assembly to convene each time, the board of directors may decide to increase the capital at any time, provided that the company stays within the predetermined capital ceiling. This makes it possible to react quickly to market conditions or financing needs.
There are certain conditions required by law for privately held joint stock companies to apply the registered capital system. First of all, under Article 332 of the TCC and the amendment made in 2024, the initial capital of a privately held joint stock company wishing to adopt the registered capital system must be at least TRY 500,000. This amount may be increased by the decision of the Council of Ministers (currently the President of the Republic). A company that meets this condition may transition to this system by adding provisions regarding the registered capital system to its articles of association and registering it with the trade registry. The company's registered capital ceiling shall be clearly stated in the articles of association. The registered capital ceiling refers to the maximum permitted capital amount of the company, and the board of directors may increase the capital provided that it does not exceed this ceiling.
The procedure for capital increases under the registered capital system includes the following:
Authority and Decision of the Board of Directors:
In a company that has adopted the registered capital system, the board of directors is authorized to increase the capital up to the registered capital ceiling set by the general assembly. The board of directors may decide to increase the capital at the time and in the amount it deems necessary. However, to take this decision, the articles of association of the company must expressly grant this authority to the board of directors. The authorization of the board of directors to increase the capital in this way may be granted for a maximum period of 5 years; at the end of 5 years, the general assembly must extend the period (re-authorization by amendment to the articles of association) in order for the authorization to continue. A change in the board of directors does not remove the authorization to increase registered capital; new administrations may also use this authorization until the expiration of the term.
Limit on Authorized Capital Ceiling:
Although the TCC does not directly set an upper limit for the registered capital ceiling, the relevant Communiqué (Communiqué dated 19.10.2012) issued for privately held joint stock companies has set a limit on this issue. According to the Communiqué, the upper limit for registered capital may be at most five times the initial capital of the company. If the ceiling is to be increased in the periods following the transition to the registered capital system, the new ceiling may be set at a maximum of five times the current issued capital at the time of the general assembly meeting where the increase will be approved. This regulation aims to prevent arbitrary increases by setting the registered capital ceiling excessively high and ensures that the company grows by staying within a reasonable upper limit.
Scope of the Board of Directors' Decision:
When deciding on a capital increase, the board of directors determines the nominal value, number, type (such as registered or bearer shares), premium or privileged status of the new shares to be issued. In addition, the resolution shall specify the duration and manner of exercising pre-emptive rights. If the board of directors is going to limit or remove pre-emptive rights or issue shares at a price above the market value (premium), there must be an explicit authorization provision in the articles of association for the board of directors to take these actions. In other words, if the articles of association do not authorize the board of directors to restrict the pre-emptive rights or issue privileged shares, the board of directors cannot take decisions on these matters. In the registered capital system, the newly issued shares are also subscribed by the shareholders or investors through a subscription undertaking, which must also be unconditional.
Status of Pre-emptive Rights:
In the registered capital system, the basic principles regarding the pre-emptive right in the ordinary capital system also apply. Existing shareholders have the right to acquire new shares in proportion to their existing holdings. If the board intends to restrict this right, the articles must authorize it, and there must be legitimate grounds. The board must prepare a detailed report explaining the justification, and this report must be registered and published in the trade registry. Especially in privately held companies, such balancing provisions are of great importance to protect the interests of minority shareholders.
Registration and Publication of the Resolution:
The capital increase resolution of the board of directors must be registered with the trade registry, just like the general assembly resolution. In the registered capital system, the registration of the board of directors' resolution must be done within three months; otherwise, the board of directors' resolution may become null and void (similar time limitations apply since it is considered as a general assembly resolution). In order for the board of directors' capital increase resolution to have legal effect, it must be announced in the trade registry gazette, thereby informing creditors and shareholders.
Board of Directors' Declaration:
One of the important innovations introduced by the TCC is the obligation of the board of directors' declaration in capital increases. After the capital increase is completed, the board must issue a written declaration confirming that the transaction was carried out in compliance with legal procedures and that all required permits and approvals were obtained. If capital was contributed in kind or in cash, the declaration must affirm its proper execution. Where pre-emptive rights are restricted, the beneficiaries of the unsubscribed shares and the rationale for the allocation must be disclosed. It is a legal obligation for the transparency and accountability of the transaction to ensure that the board of directors' declaration is complete and truthful; otherwise, legal liability may arise.
Although the resolutions of the board of directors adopted in the ordinary capital system are not considered as general assembly resolutions due to their nature, they have a similar legal effect. Therefore, shareholders or stakeholders may object or file an action for annulment against the capital increase resolution of the board of directors in the manner prescribed by law[3]. Under Article 445 et seq. of the TCC, the provisions stipulated for the annulment of general assembly resolutions shall also apply by analogy to the decisions of the board of directors on registered capital increase. In this context, shareholders who oppose the capital increase resolution may file a request for annulment through commercial lawsuits within one month from the date of the resolution. To ensure the protection of the shareholders, even in the ordinary capital system, the legislator has kept the judicial review against the decisions of the board of directors open. However, the conditions for filing an annulment action and the statute of limitations are strictly applied here; if the action is not filed within one month, the decision becomes final.
Pre-emptive Right and its Protection
The pre-emptive right (right to acquire new shares) in capital increases is a legally guaranteed right granted to existing shareholders in order to protect their shareholding in the company's capital. In privately held joint stock companies, pre-emptive rights are critical for the majority and minority shareholders to maintain their relative balance of power over the company. The TCC regulates the pre-emptive right as a fundamental principle and introduces detailed provisions regarding the exercise of this right.
The main principle is that the pre-emptive right may not be abolished or completely restricted by a general assembly resolution or by the articles of association. This right cannot be disabled by a general provision in the articles of association of the company; however, it may be restricted by an exceptional and one-time decision depending on the characteristics of the capital increase. In both the ordinary capital system and the registered capital system, there must be a justified reason for the restriction of the pre-emptive right and the aggravated quorum stipulated by law must be met.
In capital increases made by the general assembly, the pre-emptive right may be restricted or abolished with at least 60% of the capital, provided that just causes are presented. This ratio is intended as a mechanism to protect minority shareholders; it is not possible to set a quorum lower than 60% in the articles of association. Restriction of pre-emptive rights without just cause is strictly prohibited. The concept of just cause is listed in Article 461 of the TCC in an illustrative manner. For example, the public offering of the company's shares to the public (public offering), issuance of shares in exchange for the acquisition of another company or enterprise, or enabling the company's employees to become shareholders of the company are accepted as just cause.
In the registered capital system, although the decision to restrict pre-emptive rights is actually taken by the board of directors, the authority of the board of directors in this regard is only in question if it is explicitly regulated in the articles of association. If the board of directors wishes to restrict pre-emptive rights, it must document the situation by preparing a report stating its reasons and register this report with the trade registry. In practice, this report prepared by the board of directors is usually included as an annex to the capital increase resolution and explains to the shareholders in detail why the right to purchase new shares is restricted.
This obligation to act in accordance with the principles of transparency, honesty, and equal treatment is intended to protect the rights of shareholders in both systems and is particularly important in terms of informing shareholders in private companies.
In conclusion, the pre-emptive right is an indispensable shareholder priority right in joint stock companies. The exercise, limitation, or removal of this right during the capital increase process is regulated in detail by law and subject to certain conditions. This legal framework on pre-emptive rights in private companies ensures that the balance of power within the company is maintained and trust between shareholders is maintained.
Conclusion
Capital increase is a frequently used method in privately held joint stock companies in line with the company's growth strategies and financing requirements. As analyzed in this study, capital increases are subject to different procedures under the ordinary capital system and the registered capital system. In the ordinary capital system, the requirement of approval of the capital increase by the general assembly and amendment of the articles of association provides democratic participation in the process but may also bring a certain slowness. In the registered capital system, on the other hand, capital increases can be carried out more flexibly and quickly thanks to the authority granted to the board of directors within certain limits. Companies may choose one of these two systems depending on their size and capital needs or may benefit from the advantages of the registered capital system to the extent permitted by law.
In both systems, the mandatory provisions of the TCC ensure that the capital increase is carried out in a healthy manner. In particular, the conditions that the existing capital must be paid up and internal resources must be utilized first, which are required in capital increases from external sources, are of great importance in terms of financial discipline and protection of shareholders' rights. In addition, the regulations on the protection of pre-emptive rights ensure a fair transaction by preventing the dilution of the existing shareholders' shareholding in the company against their will in capital increases.
As a result, when the capital increase process in privately held joint stock companies is carried out within the framework of the rules stipulated by the legislator, it serves both to strengthen the capital structure of the company and to protect the rights of shareholders. When implemented correctly and in compliance with legal obligations, capital increases are an effective tool for companies to achieve their long-term growth targets.
- Turkish Commercial Code No. 6102 and Related Legislation Provisions.
- Tekinalp, Ünal, The New Law of Capital Companies, 4th updated edition, 2013, p. 214
- Karahan, Sami, Company Law, 2012, relevant sections.
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