CAPITAL INCREASE IN COMPANIES FROM SHAREHOLDER RECEIVABLES

CAPITAL INCREASE FROM SHAREHOLDER RECEIVABLES IN TURKISH COMPANIES

The capital element of companies undoubtedly constitutes one of the most important items of company assets. The capital of the company is important in terms of both commercial cooperation and the reliable image to be provided to the creditors, and companies seek to increase the capital.

Under the Turkish Commercial Code numbered 6102 (the “TCC”), capital increase is regulated in two ways: capital increase from internal sources and capital increase from external sources. In this legal article, capital increase from external sources will be analyzed within the scope of capital increase by adding the company's debts to the shareholders to the capital of the company.

Debt of Companies to its Shareholders 

Companies may, from time to time, owe money to their shareholders due to commercial relations. One of the most common examples of this is to meet the financing needs of the company by lending cash to the shareholders. Although this may be an ordinary necessity in commercial life, it is obvious that in terms of the image of the company reflected to the outside world, the addition of these debts, which are included in the liabilities of the assets, to the capital will create a positive image, as well as a positive image due to the decrease in its liabilities. On the other hand, it is observed that adding the receivables of the shareholders to the capital is also preferred as it will result in an increase in their share ratios in the company.

General Assembly and Procedures for Adding Company Debt to Capital Structure

Pursuant to Article 409 and Article 617 of the TCC and the Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Representatives of the Ministry of Customs and Trade to be Present at these Meetings (the “Regulation”), joint stock and limited liability companies are required to hold ordinary general assembly meetings within 3 (three) months following the end of the accounting period each year. Unless a higher quorum is stipulated by law or the articles of association (the AoA) of the company, the general assembly convenes with the presence of shareholders who hold quarter (¼) of the share capital (Art. 418 of TCC). If there is an amendment to the articles of association on the agenda of the general assembly, this quorum increases and is determined according to the type of the AoA. Since capital increase is not within the scope of special amendments to the AoA, unless a higher quorum is stipulated by law or the AoA, it may be resolved by the affirmative vote of the majority of the shares present at the general assembly convened with the presence of half (½) of the capital (Art. 421/1 of TCC). 

For general assemblies of joint stock companies that have a capital increase on their agenda, a ministry representative from the Ministry of Trade must be appointed and the representative must be present at the meeting (Art. 32 of the Regulation). In the current practice, it is not required to submit physical documents for the ministry representative, and the request for the representative is made online through the MERSIS system by the company official or the person authorized by the company. For limited liability companies, there is no obligation to have a ministry representative present at the meeting.


A) Registration of the General Assembly Resolution

The documents required to be submitted for the registration of the general assembly meetings where there is no amendment to the AoA must also be submitted to the trade registry office where the company is registered for the registration of the general assembly meetings where the capital increase is discussed and resolved. Particularly, it should be taken into consideration that in case of outsourced capital increases, no increase can be made through capital commitment unless the cash value of the shares is fully paid (Art. 456/1 of TCC), and if the increase is not registered within 3 (three) months following the date of the general assembly or board of directors' resolution, the general assembly or board of directors' resolution and the authorization, if any, will become invalid (Art. 456/3 of TCC).

aa) Required Documents

The documents that are important for the registration of the capital increase and that differ from other general assembly registrations are as follows (documents related to the capital increase in kind are not included) 

1. Original letter of appointment of the ministry representative (not required for limited liability companies)

2. Pursuant to Article 457 of the TCC, the statement issued by the board of directors according to the type of capital increase

3. Sworn / Independent Accountant Financial Advisor Report and Financial Advisor Activity Certificate 

4. A report of the board of directors showing the reasons for limiting or removing pre-emptive rights, the reasons for issuing new shares with or without premium and how the premium is calculated (Art. 73/1-ğ of the Trade Registry Regulation numbered 2012/4093)

5. A bank letter showing the name-surname/title of the shareholders of the company who deposited money into the bank account opened for the payment of the minimum amount of the share fees specified in the Law or the articles of association, and the amounts deposited by each shareholder and the total amount deposited (Art. 73/1-h of the Trade Registry Regulation).

6. If the shares representing the capital in the new form of the capital article of the articles of association are not included in the amendment text, the subscription undertakings bearing the signature of the undertaking holder issued in accordance with Article 459 of the TCC (Article 73/3 of the Trade Registry Regulation).

ab) Declaration of the Board of Directors and CPA  Report

In order to increase capital by adding shareholder receivables to the capital, the shareholder's receivables from the company must arise from cash borrowing. The issues such as the fact that this borrowing arises from cash borrowing and how much of the receivable is used in the capital increase should be clearly stated in the declaration of the board of directors prepared within the scope of Article 457 of the TCC and the CPA report. 

For the addition of receivables that do not arise from cash borrowing to the capital, the CPA report is not sufficient, and within the scope of Article 343 of the TCC, a value determination must be made in accordance with the expert to be appointed by the commercial court of first instance where the company's head office is located. This is clearly stated in the circular of the Ministry of Customs and Trade dated January 02, 2014 and numbered 50035491.449.023:

“In order for the shareholder's receivables from the company to be subject to capital increase with the report of a certified public accountant or the report of the auditor in companies subject to audit, this receivable must only arise from the debt given to the company in cash and it must be clearly stated in the submitted report that the receivable arises from cash borrowing, and the determination to be made in terms of the receivables of the shareholders other than this must be made by the report to be prepared by the experts appointed by the commercial court of first instance in the place where the company headquarters is located in accordance with Article 343 of the TCC No. 6102. Pursuant to Article 343 of TCC No. 6102, it is required to be made with the report to be prepared by the experts appointed by the commercial court of first instance in the place where the company headquarters is located.”

With the circular of the Ministry of Customs and Trade dated 27/09/2013 and numbered 50035491.449-7326 on In-Kind Capitalization of Receivables to the Company , it is mentioned that it is possible to determine the receivable with a financial advisor report instead of an expert report regarding the valuation, and then it is stated that all other matters are subject to general provisions. 

“In this respect, to ensure that the shareholders' placing their receivables from the company as capital in kind and the capital increases to be made in this way are finalized in a healthy manner

1. In the event that the shareholder puts his/her receivables from the company as capital in kind in the establishment of another company or in the capital increase of another company, in determining the existence of the shareholder's receivables from the company, a report prepared by the experts appointed by the commercial court of first instance in the place where the company headquarters is located pursuant to Article 343 of the Law should be submitted,

2. In the event that the shareholder puts his/her receivable from the company as capital in kind in the capital increase of the company in which he/she is a shareholder, in the determination of the existence of the receivable, the report to be prepared by the experts appointed by the commercial court of first instance in the place where the company headquarters is located in accordance with Article 343 of the Law may be submitted, as well as the report of a certified public accountant or certified public accountant, or the report of the auditor in companies subject to audit,

is being evaluated.”

Capital increase from external sources is defined as the introduction of new assets to the company from outside by shareholders or non-shareholders. According to an opinion in the doctrine , the main reasons for this type of capital increase may be to ensure the growth of the company by investing in the company, to increase the capital to take over another company, or to meet the capital need to pay off the high number of mature debts.

Although there are opinions that capital increase through borrowing to the shareholders of the company is considered as capital increase from internal sources, in our opinion, capital increase through borrowing to the shareholders of the company is capital increase from external sources. This is because capital increase from internal sources is stipulated in a listed way in Article 462 of the Turkish Commercial Code No. 6102.

According to the view that the capital increase through borrowing from shareholders is a capital increase from internal resources, there is no increase in the value of the company's assets; in fact, the liabilities are shifted and the right to receivables is transformed into a right to capital. In our opinion, under the assumption that the capital increase through loans to the shareholders of the company is a capital increase from internal resources, in order for the shareholder who has a receivable from the company to receive his/her receivable, it would be necessary to distribute dividends, or the company would have to go into liquidation. 

According to the view that capital increase through borrowing from the company's shareholders is a capital increase from external sources; although it may seem that no value is added to the company due to the transfer of the receivable from the company from the company's debts to the equity, there is a decrease in the company's debts, that is, the elimination of the shareholder's receivable. As a matter of fact, it is stated that this is a capital increase through rights issue. 

The methods for capital increase from internal resources are exhaustively listed under Article 462 of TCC. In our opinion, increasing capital through borrowing from the company’s shareholders constitutes an external source of capital increase, as this method is neither expressly included in the provision nor does it lead to a reduction in the company’s debts.

ac) Pre-emptive Right

The right of the shareholders of the company to acquire the new shares arising from the capital increase is referred to as the “pre-emptive right”, and this issue is regulated under Article 461 of the TCC. It seems open to criticism that such an important issue is regulated in such a narrow scope. 

After the capital increase is approved by the general assembly, before the registration of the capital increase, the company's board of directors shall determine the principles for the exercise of the right to purchase new shares (pre-emptive right) with a resolution, and in this resolution, the shareholders shall be given at least fifteen days (Art. 461/3 of TCC). Prior to the registration of the capital increase, this resolution of the board of directors regarding the determination of the principles for the exercise of the pre-emptive right must be registered and announced (Art. 72/3 and Art. 74/1 of the Trade Registry Regulation). The registration and announcement of the resolution must be requested from the trade registry directorate where the company's head office is located. It should be noted that failure to comply with this requirement may result in the annulment of the general assembly. In addition, registration and announcement of the call for the use of pre-emptive rights is not required for general assembly meetings where all shareholders are present and the resolution is adopted unanimously.

There is no consensus both in the practice of the Supreme Court and in the doctrine as to whether the issue of capital increase through shareholder receivables constitutes a just cause for the limitation of the pre-emptive right in itself. 

In the decision of the 11th  Civil Chamber of the Supreme Court dated 17.12.2018 and numbered 2017/2573 F., 2018/7994 D;

“The court, according to the scope of the whole file, it was decided to increase the capital of the company by 900.000 TL in accordance with the resolution taken in the general assembly dated 30.04.2013, all of this capital was bearer and written C group and free of charge shares, the plaintiffs did not participate in the increase despite the call, ... J.S.C. 900.000 TL capital increase by adding its current account receivable to the capital increase, this receivable has the nature of a real receivable, all of the shares issued with the separate capital increase were given to the shareholder who put in separate capital, the other shareholders did not have pre-emptive rights within the meaning of Article 461 of ..., whereas the controlling shareholder ... J.S.C. made a capital increase that will increase the share ratio in the company due to the capital in kind, whether this situation is contrary to the rule of honesty, the lawsuit filed for the annulment of Articles 4 and 6 taken at the general assembly meeting dated 30.04.2013 ... 2nd Commercial Court of First Instance file numbered 2014/1150 and the request was rejected in this case...”

Although the court refers to the fact that the plaintiffs did not participate in the increase despite the call, it also mentions the commitment of the receivables from the company as capital in kind and that the other shareholders do not have pre-emptive rights. From the relevant statements, it is understood that the stipulation in the capital increase resolution that the commitments will be covered from the receivables from the company leads to the de facto restriction of the pre-emptive right, but this situation is considered as ordinary by the Supreme Court.  

On the contrary, in the decision of the 11th  Civil Chamber of the Supreme Court dated 24.09.2018 and numbered 2016/10776 F., 2018/5577 D; 

“Although the court decided to dismiss the lawsuit on the grounds that the capital increase was due to financial necessity and that there was no violation of the rules of good faith, the capital increase decision in the form of “Increasing the capital of the company from 5.000.000 TL to ....000.000 TL, meeting the increased capital from the account of debts to shareholders”, even if it is financially beneficial to the company, Article 463/1 of ... No. 6102 states that each shareholder has the right to purchase the newly issued shares according to the ratio of their existing shares to the capital. Stating in the general assembly resolution that the increased capital will be covered from the account of debts to shareholders constitutes a violation of Article 463/1 of ... since the resolution will eliminate the pre-emptive rights of the shareholders in the capital increase. In this case, while the court should have decided to cancel the decision numbered ... taken in the general assembly of shareholders subject to the lawsuit, it was not correct to reject the lawsuit as written, and with the acceptance of the plaintiff's request for correction of the decision, it was necessary to decide to revoke the decision of the court with the aforementioned reasoning by removing the approval decision of our Chamber dated 01.06.2016 case number 2015/10929, 2016/6020 Decision.”

The TCC has declared stating that the increased capital will be covered from the account of payables to shareholders eliminates pre-emptive rights and violates Article 461/1 of the TCC.  

As a matter of fact, the dominant opinion in the doctrine  is that the restriction of the pre-emptive right is an open situation. Each shareholder has the right to participate in the increased capital in proportion to his/her share. It may waive this right, or the general assembly may limit this right with a 60% vote of the share capital (Art. 461/2 of TCC). Article 461/2 of the TCC does not enumerate the cases where the pre-emptive right may be limited, and in particular, public offerings, acquisitions of enterprises, parts of enterprises, subsidiaries, and the participation of workers in the company are accepted as justified reasons.  However, in this case, it should also be taken into consideration that the transaction may be subject to an annulment action. In other words, the capital increase through this method is not used to violate the right of shareholders who are not creditors of the company to acquire new shares.

Article 461/2 of the TCC, explicitly recognizes that pre-emptive rights may be restricted when justified grounds exist. These grounds are not exhaustively enumerated in the provision but are instead illustrated through examples. Considering the clause that deems scenarios such as public offerings, acquisitions of enterprises, business units, or subsidiaries, and the participation of employees in the company as justified grounds, it is evident that such reasons are shaped by legal policies, the interests of the company, growth strategies, and social considerations or necessities. 

In practice, within the scope of this provision, the financial operations of a company and the conversion of debts into equity may also be regarded as justified grounds. However, it is essential to ensure that no individual benefits unfairly or suffers unjustly as a result of the restriction or removal of pre-emptive rights. Otherwise, such actions may be subject to annulment proceedings. Therefore, increasing capital through the transfer of debts owed to shareholders cannot be utilized in a manner that infringes upon the rights of shareholders who are not creditors of the company to subscribe to new shares.

Conclusion 

Increasing the capital of a joint stock company by meeting the company's debts to shareholders is one of the ways of outsourced capital increase and is frequently encountered in practice.  The fact that capital increases from internal resources are exhaustively enumerated under Article 462 of the TCC No. 6102, and that increasing capital through borrowing from shareholders results in a reduction of the company’s debts and the extinguishment of the shareholders’ receivables, essentially makes such an increase a paid capital increase. For this reason, we are of the opinion that capital increases through borrowing from shareholders should be classified as capital increases from external sources.

However, the limited treatment of this issue within the systematic framework of the Turkish Commercial Code, being only briefly mentioned under Article 457 concerning the report to be prepared by the board of directors, is open to criticism. We believe that establishing more detailed procedures and principles on this matter would provide valuable guidance for practical implementation and address potential ambiguities in the current regulatory framework.



Bibliography

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