Introduction

Within the framework of Turkish Commercial Code numbered 6102 ("TCC"), a joint stock company is a company that is liable only with its assets due to its debts and whose capital is determined and divided into shares. Within the framework of TCC, partners of a joint stock company are limitedly liable for company debts.

In joint stock companies, it is possible to increase the capital by following the procedure explained in the legislation. As share capital increase methods; there are three basic methods of increase: increase by share capital commitment (from external sources), share capital increase from internal resources and conditional share capital increase. For the share capital increase through capital commitment (external resources), the current shareholders or third parties who are not shareholders yet, inject capital in kind or in cash to the company. In order to be able to increase share capital from external sources, the share capital must be fully paid in, however the amounts that are not considered significant relative to the total share capital amount have not been paid does not prevent the share capital increase. In any case, it would be advisable in market practice, specifically from the perspective of the trade registry, that the share capital amount should be fully paid in.

There is a limitation imposed in accordance with article 462/3 of TCC in capital increases made from external sources. The article in question is as follows:

Article 462/3 of TCC: "If there are funds in the balance sheet that are permitted by the legislation to be added to the capital, capital can not be increased by capital commitment without these funds being converted into capital. Capital can be raised both by converting these funds into capital and by committing capital at the same time and at the same rate. The increase becomes final with the registration of the general assembly or board of directors decision and the amendment of the relevant articles of the articles of association. With the registration, the current shareholders automatically acquire the bonus shares according to the ratio of their current shares to the capital. The right on bonus shares can not be removed or limited and this right can not be waived."

In this article, the nature and scope of the said limitation will be explained.

I. TCC 462/3 Rule Limiting Capital Increase from External Source

A. General Rule

Article 462/3 of TCC, as a rule, limits the capital increase from external sources without the internal funds being converted into capital.

The exception to this provision is also stated in the continuation of the same article, and in the said provision, it is allowed to increase the capital both by converting the funds in the internal sources into capital and by committing the capital at the same time and at the same rate. Therefore, in order to make a capital increase from external sources, it is not necessary to consume all of the funds in the internal sources, and it is possible to convert some of these funds into capital and increase the same amount of capital at the same time from external sources.

Majority in the Turkish doctrine says that the provision of article 462/3 of the TCC is an imperative provision. Therefore, if a capital increase decision has been made contrary to article 462/3 of the TCC, this decision is accepted as invalid as it is in violation of an imperative provision.

It is stated in the Turkish doctrine that the purpose of the said provision is to protect the shareholders. For this reason, in cases where a company has only one shareholder or the decision to increase the capital is taken unanimously at the general assembly attended by all the shareholders, a strict interpretation of the said provision may be contrary to the purpose of the provision. In our opinion, in such cases, the provision in question should not be interpreted strictly and the aforementioned limitation should not be applied in joint stock companies with such a shareholding structure.

B. Debates on the Meaning of the Word "Fund"

Items that can be used for capital increase from internal resources are mentioned in article 462/1 of TCC. These are defined separately as the reserves set aside by the articles of association or the resolution of the general assembly and not allocated for a specific purpose, the freely usable parts of the legal reserves and the funds that the legislation allows to be included in the balance sheet and added to the capital. There are various views in the doctrine regarding the definition of the word "fund" in article 462/3 of TCC, which imposes a limitation on capital increase from external sources.

According to the first view, all the elements listed in article 462/1 of TCC falls within the scope of the word "fund" in article 462/3 of TCC. When this view is accepted, it is concluded that the word "fund" will be understood in a broad sense and elements other than funds that the legislation allows to be included in the balance sheet and added to the capital should also be evaluated within this scope.

According to the second view; the word "fund" in article 462/3 of TCC means only funds permitted by the legislation to be included in the balance sheet and added to the capital. If this view is accepted, there is no obligation to convert the reserve funds which are set aside by the articles of association or general assembly decision which are not allocated for a specific purpose and freely usable parts of legal reserve funds which are specified as other elements that can be used in capital increase from internal sources in article 462/1 of TCC to make capital increase from external sources.

Although the word of the law supports the second view, the majority of the doctrine advocates the first view.

Conclusion

There is a limitation imposed in accordance with article 462/3 of TCC for the share capital increases in joint stock companies which shall be made from external sources. The issue to be considered within the scope of this provision is the meaning of the word "fund" in the text of the article. There are different views in the doctrine regarding this and the results may vary depending on which type of interpretation is accepted.

Another important point regarding this issue is that although this rule is considered to be an imperative provision, the strict application of this provision may lead to results contrary to the purpose of the provision in some cases. In practice at the time of our this article, İstanbul Trade Registry registers the share capital increase, in case such share capital increase resolution is adopted by the sole shareholder (when there is sole shareholder) or with the affirmative votes of 100% of the shareholders present at the relevant meeting, regardless of whether or not there are funds from internal sources that need to be added to the share capital, for sure, we state that such practice may change or not in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.