Procedure for Capital Increase in Joint Stock Companies

PROCEDURE FOR CAPITAL INCREASE IN JOINT STOCK COMPANIES

A capital increase is an important legal and financial transaction resorted to in order to strengthen a company's financial structure, make new investments or offset inflationary effects. A capital increase may be effected from internal or external resources and is divided, as a rule, into the "principal capital system" and the "registered capital system".

TYPES:

Capital Increase from Internal Resources (Art. 462 of the Turkish Commercial Code)

This is the conversion into capital of resources within the company (free funds appearing on the balance sheet such as reserves, undistributed profits or revaluation funds), without any new resources entering the company from outside. The point requiring attention is set out in paragraph 3 of the article: where there are funds on the balance sheet capable of being added to capital, a cash capital increase (from external resources) may not be made without first converting those funds into capital; it is, however, possible both to add those funds to capital and to carry out a cash increase at the same time. New shares come into existence upon registration of the increase and, since the capital is increased from resources within the company, shareholders automatically acquire bonus shares in proportion to their existing holdings; this right may not be restricted in any way.

Increase from External Resources (by Way of Capital Undertaking) (Art. 459)

This takes place where shareholders or third parties undertake to contribute new capital to the company. However, under Article 456/1, save for increases from internal resources and amounts insignificant in relation to the capital, capital may not be increased unless the cash consideration for existing shares has been paid in full.

Conditional Capital Increase (Art. 463)

The general assembly may resolve upon a conditional increase of capital by conferring on creditors of the company or of group companies, or on employees, the right to acquire new shares through the exercise of conversion or option rights provided for in the articles of association, by reason of newly issued bonds or similar debt instruments. However, the capital conditionally increased may not exceed one half of the existing capital (total nominal value), and the payment made must be at least equal to the nominal value of the share.

The capital increases automatically at the moment and to the extent that the conversion or option right is exercised and the capital obligation is discharged by set-off or payment.

SYSTEMS:

The Principal Capital System (Art. 421/1)

Under Article 421/1, absent any provision to the contrary imposing stricter requirements, a resolution is adopted at a general assembly meeting at which at least half of the company's capital is represented (quorum for the meeting), by the unconditional and unreserved undertaking of a majority of the votes present (quorum for the decision).

The Registered Capital System (Art. 460)

In a joint stock company that is not publicly held (the provisions of the Capital Markets Law concerning publicly held joint stock companies are reserved), where the authority to increase capital up to the registered capital ceiling specified in the articles of association (determined by the general assembly) has been conferred on the board of directors by the original or amended articles of association, the board of directors may carry out the capital increase within the framework of the provisions of this Law and within the limits of the authority provided for in the articles of association. This authority to resolve upon a capital increase may be conferred on the board of directors for a maximum of five years.

CONCLUSION

In the registered capital system, shareholders may bring an annulment action against board resolutions within one month of the date of announcement; in the principal capital system, attention must be paid to the meeting and decision quorums required for a capital increase resolution, to shareholders' right to acquire newly issued shares in proportion to their existing holdings (pre-emption rights), and to the restriction or removal of that right for just cause (public offering, acquisition of a business), which requires the affirmative vote of shareholders representing at least 60 per cent of the capital.