Capital Increase and Pre-Emptive Rights in Joint Stock Companies - Ümraniye Corporate Lawyer

Capital Increase and Pre-Emptive Rights in Joint Stock Companies - Ümraniye Corporate Lawyer Capital increase in joint stock companies may be carried out for various purposes, such as meeting the company's financing needs, strengthening its equity structure, financing new investments, supporting the company's growth strategy or enabling new investors to participate in the company. However, a capital increase is not merely a numerical increase in the company's capital. The transaction may directly affect the existing shareholders' ownership ratios and the economic balance relating to control of the company. Turkish Commercial Code No. 6102 regulates capital increases in joint stock companies in detail. Capital increases through capital subscription, capital increases from internal resources and conditional capital increases have different legal structures. In addition, whether the company is subject to the basic capital system or the registered capital system is important in determining the body authorised to decide on the capital increase and the procedure to be applied. One of the fundamental mechanisms protecting existing shareholders in a capital increase is the pre-emptive right, in other words the right to acquire new shares. Under Article 461 of the Turkish Commercial Code, each shareholder has the right to acquire newly issued shares in proportion to their existing shares in the capital. This right is an important shareholder right aimed at preventing the existing shareholder's proportion in the company from being reduced against their will as a result of the capital increase. Therefore, in assessments concerning an Ümraniye corporate lawyer, Ümraniye joint stock company lawyer, Istanbul corporate lawyer, capital increase in a joint stock company, pre-emptive right, right to acquire new shares and restriction of pre-emptive rights, the provisions of the Turkish Commercial Code, the company's articles of association, the shareholding structure and the purpose of the capital increase should be examined together. What Is a Capital Increase in a Joint Stock Company? A capital increase is the increase, in accordance with the procedure prescribed by law, of the amount of capital stated in the articles of association of a joint stock company or of its issued capital under the registered capital system. The method and legal consequences of the capital increase may differ according to the type of increase. New capital subscription, conversion of eligible internal resources of the company into capital and a conditional capital increase giving certain persons the right to acquire shares in the future are subject to different procedures. Therefore, before deciding on a capital increase, it must be determined which capital system the company is subject to and which method will be used for the increase. Why Do Joint Stock Companies Increase Their Capital? Joint stock companies may increase their capital in order to expand their activities, make new investments, strengthen their financial structure, meet working capital requirements or bring new investors into the company. In some circumstances, a capital increase is a commercial choice aimed at strengthening the company's financial structure, while in others it may arise for the purpose of complying with statutory capital requirements. Indeed, as of 1 January 2024, the minimum basic capital for joint stock companies was increased to TRY 250,000 and the minimum initial capital for non-public joint stock companies adopting the registered capital system was increased to TRY 500,000. The Ministry of Trade also provides current information concerning the compliance of existing companies with the new minimum capital amounts. What Are the Types of Capital Increase in Joint Stock Companies? Under the Turkish Commercial Code, capital increases in joint stock companies may be carried out through different methods. In a capital increase through subscription, new capital is subscribed in return for newly issued shares. In a capital increase from internal resources, the company's equity resources that may legally be converted into capital are added to the capital. In a conditional capital increase, a different system is applied that allows specified persons to acquire new shares under certain conditions. The preferred method is determined according to the company's financial structure, the purpose of the capital increase and the shareholding structure. What Is the Basic Capital System? Under the basic capital system, the company's capital is stated as a specific amount in the articles of association. Under this system, increasing the capital requires amendment of the provision of the articles of association concerning capital and, as a rule, the general assembly must adopt the capital increase resolution. After the shares representing the increased capital have been subscribed and the other procedures prescribed by law have been completed, the capital increase is registered with the trade registry. What Is the Registered Capital System? The registered capital system is a system under which the board of directors may be authorised to increase the capital up to a capital ceiling specified in the articles of association. In a non-public joint stock company, the board of directors may be authorised by the articles of association to increase the capital up to the registered capital ceiling. Under Article 460 of the Turkish Commercial Code, this authority may be granted for a maximum period of five years. The board of directors may carry out the capital increase within the limits of its authority under the law and the articles of association. This system may enable companies to act more flexibly within specified limits without having to obtain a new general assembly resolution for each capital increase. What Is the Difference Between Basic Capital and Registered Capital? Under the basic capital system, the general assembly is the principal decision-making body for a capital increase and the capital provision of the articles of association must be amended. Under the registered capital system, the board of directors authorised by the articles of association may decide to increase the capital within the specified period and registered capital ceiling. However, the authority of the board of directors is not unlimited. It must be exercised within the limits prescribed by law and the articles of association. What Is a Capital Increase Through Capital Subscription? A capital increase through capital subscription is a capital increase carried out by existing or new shareholders subscribing for the new shares representing the increased capital. Under Article 459 of the Turkish Commercial Code, all shares representing the increased capital must be subscribed either in the amended articles of association or in subscription commitments. The subscription commitment must be unconditional, unrestricted and in writing. This method may provide the company with new cash or, where the applicable requirements are fulfilled, contributions in kind. What Is a Cash Capital Increase? In a cash capital increase, cash capital is subscribed to the company in return for newly issued shares. Existing shareholders may participate in the new shares by exercising their pre-emptive rights, while new investors may also participate in the capital increase where pre-emptive rights are not exercised or are lawfully restricted or removed. In a cash capital increase, capital subscription, payment, banking documentation and trade registry procedures must be carried out in accordance with the applicable legislation. Can a Capital Increase Be Made Through Contributions in Kind? Assets satisfying the statutory conditions may be contributed to the company as capital in kind. Under Article 342 of the Turkish Commercial Code, assets that are capable of monetary valuation and transfer and are not subject to limited rights in rem, attachment or injunction may be contributed as capital in kind. The statutory valuation procedures apply when determining the value of contributions in kind. The Ministry of Trade also explains these requirements concerning the nature and valuation of contributions in kind. Therefore, in capital increases through contributions in kind, not only the economic value of the asset but also whether it is legally eligible to be contributed as capital must be examined. What Is a Capital Increase from Internal Resources? In a capital increase from internal resources, no new assets are contributed to the company from outside. Instead, resources within the company's equity that may legally be converted into capital are added to the capital. Under Article 462 of the Turkish Commercial Code, reserves allocated under the articles of association or by a general assembly resolution but not designated for a specific purpose, freely usable portions of statutory reserves and funds that legislation permits to be added to capital may be converted into capital. In this case, the company's total equity does not directly increase; rather, the distribution of items within equity changes. What Happens to Shareholders in a Capital Increase from Internal Resources? New shares arising from a capital increase from internal resources are distributed to existing shareholders within the framework of their statutory rights. It is important to preserve the proportional position of existing shareholders under this method. Accordingly, the economic consequences for shareholders differ between an increase based on new external capital subscriptions and an increase made from internal resources. What Is a Conditional Capital Increase? A conditional capital increase is a special method of capital increase that may be used particularly to grant creditors of certain debt instruments of the company or group companies, or employees, the right to acquire new shares subject to specified conditions. Under this method, the capital increases to the extent that entitled persons exercise the rights granted to them to acquire or convert into shares. A conditional capital increase is subject to rules different from the traditional capital subscription mechanism. Who Decides on a Capital Increase? The body authorised to decide on a capital increase may differ according to the capital system to which the company is subject. Under the basic capital system, the general assembly generally decides on the capital increase. In non-public joint stock companies that have adopted the registered capital system, the board of directors may decide to increase the capital up to the registered capital ceiling where the necessary authority is provided in the articles of association. Does a Capital Increase Require an Amendment to the Articles of Association? Under the basic capital system, changing the amount of capital requires amendment of the capital provision in the articles of association. Under the registered capital system, the board of directors may increase the issued capital within the authority granted to it and, after completion of the increase, register the new version of the capital provision showing the issued capital. Additional approval or authorisation procedures may apply depending on the special legislation governing the company. Do Some Joint Stock Companies Require Ministry Approval? Yes. Certain joint stock companies are subject to Ministry of Trade approval for their incorporation and amendments to their articles of association due to their field of activity or type of company. In addition, approval or consent from the Capital Markets Board may arise for certain companies subject to capital markets legislation. Therefore, before a capital increase, it should be determined whether the company is subject to a special authorisation regime. Must the Existing Capital Be Paid Before a Capital Increase? The payment status of existing capital in a capital increase is assessed within the capital maintenance rules prescribed by the Turkish Commercial Code. Depending on the type of capital increase, the payment status of existing capital and any exceptions prescribed by law must be separately taken into account. Therefore, the company's capital payment records and financial statements should be reviewed when preparing a capital increase. What Is a Pre-Emptive Right? A pre-emptive right, also referred to as the right to acquire new shares, is the existing shareholder's priority right to acquire newly issued shares during a capital increase in proportion to their existing share in the capital. Article 461 of the Turkish Commercial Code expressly regulates this right. Each shareholder has the right to acquire newly issued shares in proportion to their existing shares in the capital. The pre-emptive right is particularly important as a protection mechanism preventing an existing shareholder's proportional interest in the company from being reduced against their will as a result of a capital increase. Who Has a Pre-Emptive Right? As a rule, persons who are shareholders of the company before the capital increase have pre-emptive rights. The right is connected with the shareholder's existing proportion in the capital. Accordingly, the extent to which a shareholder is entitled to acquire newly issued shares is determined according to the ratio of their existing shares to the company's capital. How Is a Pre-Emptive Right Calculated? A pre-emptive right is based on the existing shareholder's proportion in the capital. For example, if a shareholder owns 20 percent of the capital, they are generally entitled to acquire 20 percent of the newly issued shares in the capital increase. If the shareholder exercises this right, they may preserve their proportional position in the company following the capital increase. Why Is the Pre-Emptive Right Important? If newly issued shares in a capital increase are allocated only to certain persons, the existing shareholders' proportions in the company may decrease. This decrease may affect not only their economic ownership ratio but also their voting power at the general assembly, dividend expectations and influence over the company. The pre-emptive right is therefore one of the fundamental mechanisms protecting shareholders in joint stock companies. Is a Shareholder Required to Exercise Their Pre-Emptive Right? No. A pre-emptive right is not an obligation but a right granted to the shareholder. As a rule, the shareholder may decide whether to exercise the right to acquire new shares. If the right is not exercised, the shareholder's proportional interest in the company may decrease following the capital increase. Can a Pre-Emptive Right Be Transferred? Yes. Article 461 of the Turkish Commercial Code expressly provides that a pre-emptive right may be transferred. Accordingly, a shareholder may transfer their right to acquire new shares to another person subject to the applicable conditions. However, the structure of the particular capital increase and other legal restrictions relating to the shares should also be assessed. How Much Time Must Be Given to Exercise a Pre-Emptive Right? Under Article 461 of the Turkish Commercial Code, the board of directors determines the principles for exercising the right to acquire new shares by resolution and grants shareholders a period of at least 15 days to exercise the right. The resolution must be registered and announced. Accordingly, shareholders cannot be given such a short period that they are effectively prevented from exercising their pre-emptive rights. Who Determines the Conditions for Exercising Pre-Emptive Rights? The principles concerning the exercise of pre-emptive rights are determined by the board of directors. The board of directors decides the conditions under which new shares may be acquired, the exercise period and the necessary matters relating to implementation of the capital increase. During this process, shareholders must not be unjustifiably prevented from exercising their statutory rights to acquire new shares. Can Restrictions on the Transfer of Registered Shares Prevent the Exercise of Pre-Emptive Rights? Under Article 461 of the Turkish Commercial Code, the company cannot prevent shareholders to whom pre-emptive rights have been granted from exercising those rights by arguing that transfers of registered shares are restricted by the articles of association. This provision is one of the rules protecting the effective exercise of pre-emptive rights. Can Pre-Emptive Rights Be Restricted? Yes, but restriction of pre-emptive rights is not unrestricted. Under Article 461 of the Turkish Commercial Code, the general assembly may restrict or remove shareholders' pre-emptive rights through the capital increase resolution only where justified grounds exist and with the affirmative votes of at least 60 percent of the basic capital. Therefore, merely obtaining the necessary voting ratio is not sufficient; a justified ground must also exist. Can Pre-Emptive Rights Be Completely Removed? Where the statutory conditions are fulfilled, pre-emptive rights may be completely removed. However, a justified ground must exist and the decision quorum prescribed by law must be satisfied. In addition, restriction or removal of pre-emptive rights must not unjustifiably benefit or disadvantage any person. What Is a Justified Ground for Restricting Pre-Emptive Rights? A justified ground refers to an objective reason making restriction or removal of pre-emptive rights necessary in light of the company's legitimate interests. Article 461 of the Turkish Commercial Code identifies public offerings, acquisitions of enterprises or parts of enterprises, acquisitions of participations and employee participation in the company as examples of justified grounds. These should not be regarded as the only possible justified grounds; the purpose of the particular transaction must also be examined. Does Bringing in a New Investor Require Removal of Pre-Emptive Rights? Where a strategic investor is intended to be brought into the company, restriction or removal of existing shareholders' pre-emptive rights may arise depending on the structure of the capital increase. However, merely stating that “a new investor will be brought in” does not mean that the statutory requirements are automatically fulfilled. It must be assessed whether the transaction is based on a justified ground from the company's perspective, whether existing shareholders are unfairly disadvantaged and whether an unjustified benefit is provided to the new investor. Can a Public Offering Be a Justified Ground for Restricting Pre-Emptive Rights? Yes. The Turkish Commercial Code expressly identifies a public offering as an example of a justified ground for restricting or removing pre-emptive rights. However, capital markets legislation also applies to public companies, and the provisions of the Turkish Commercial Code should therefore not be considered in isolation. Can Employee Participation in the Company Be a Justified Ground? Yes. Enabling employees to participate in the company is expressly identified in the Turkish Commercial Code as an example of a justified ground for restricting or removing pre-emptive rights. Nevertheless, the method used must not create an unjust result among shareholders. Can Pre-Emptive Rights Be Removed to Weaken a Particular Shareholder Within the Company? Restriction or removal of pre-emptive rights cannot be used for the purpose of unfairly disadvantaging a particular shareholder. The Turkish Commercial Code expressly provides that no person may be unjustifiably benefited or disadvantaged through restriction or removal of pre-emptive rights. Accordingly, a capital increase is not an unlimited mechanism that majority shareholders may use to unfairly reduce the capital proportion of minority shareholders. What Voting Ratio Is Required to Remove Pre-Emptive Rights? Under Article 461 of the Turkish Commercial Code, restriction or removal of pre-emptive rights by the general assembly requires affirmative votes representing at least 60 percent of the basic capital. However, satisfying this voting ratio alone is not sufficient. The requirement of a justified ground and the principle that shareholders must not be unjustifiably disadvantaged must also be satisfied. Can the Board of Directors Restrict Pre-Emptive Rights Under the Registered Capital System? Under the registered capital system, the board of directors must be expressly authorised by the articles of association in order to restrict shareholders' rights to acquire new shares. Article 460 of the Turkish Commercial Code requires authority in the articles of association for the board of directors to restrict pre-emptive rights. In addition, statutory protections concerning restriction of pre-emptive rights are also important for board resolutions under the registered capital system. Must the Board of Directors Provide Reasons for Restricting Pre-Emptive Rights? Yes. Under Article 461 of the Turkish Commercial Code, the board of directors must explain in a report the reasons for restricting or removing pre-emptive rights, the reasons why new shares are issued with or without a premium and how the premium is calculated. This report must be registered and announced. This rule aims to ensure transparency of the transaction and allow shareholders to assess the economic reasons underlying the capital increase. Can Shares Be Issued at a Premium in a Capital Increase? New shares may be issued at a price above their nominal value, meaning with a premium. Particularly where the company's economic value is significantly higher than its nominal capital, allowing a new investor to participate only at nominal value may create an economic imbalance for existing shareholders. Where pre-emptive rights are restricted or removed, the board of directors must explain in its report the reasons for issuing new shares with or without a premium and the calculation of the premium. How Does a Capital Increase Affect Shareholding Ratios? Where a shareholder does not participate in the capital increase, their nominal amount of shares may remain unchanged but their percentage of the total capital may decrease because the total capital has increased. This may be described in practice as dilution of the shareholder's interest. The pre-emptive right gives the shareholder an opportunity to prevent this result by participating in the capital increase in proportion to their existing interest. Can a Capital Increase Affect Voting Rights? A decrease in a shareholder's proportion of the company's capital may also reduce their influence at the general assembly depending on the voting rights attached to the shares. Therefore, a capital increase may have important consequences not only financially but also in terms of company control and corporate governance. Particularly where pre-emptive rights are restricted, the persons to whom the new shares are allocated and the post-transaction shareholding structure should be carefully assessed. Are Privileged Shares Important in a Capital Increase? Yes. Where the company has privileged shares, the effect of the capital increase on the rights attached to those shares should be separately assessed. Whether the capital increase infringes existing privileges, whether new privileged shares are being issued and whether any necessary special assembly procedures apply should be examined in relation to the particular transaction. Under the registered capital system, statutory authorisation requirements are also important for the board of directors to issue privileged shares. Is the Equal Treatment Principle Important in a Capital Increase? The equal treatment of shareholders under equal circumstances is a fundamental principle of joint stock company law. A capital increase and particularly a restriction of pre-emptive rights should not be implemented in a manner that unjustifiably places particular shareholders in an advantageous or disadvantageous position. Therefore, the mere fact that a capital increase resolution has formally been adopted with the statutory majority does not mean that the resolution is lawful in every case. Can an Action Be Filed Against an Unlawful General Assembly Capital Increase Resolution? Where a general assembly resolution concerning a capital increase is alleged to be contrary to the law, the articles of association or the principle of good faith, the right to bring an action may arise under the provisions of the Turkish Commercial Code concerning annulment of general assembly resolutions. Who may bring the action, the applicable time limit and the grounds of unlawfulness that may be raised must be assessed in relation to the particular resolution. Unlawful removal of pre-emptive rights or a capital increase that unfairly disadvantages certain shareholders may also be subject to judicial review depending on the nature of the dispute. Can an Action Be Filed Against a Board Resolution Under the Registered Capital System? Yes. Under Article 460 of the Turkish Commercial Code, shareholders and members of the board of directors may bring an annulment action against the board's capital increase resolution, where the statutory grounds exist, within one month from the date on which the resolution is announced. This period should be carefully followed particularly in capital increases carried out under the registered capital system. What Happens If Pre-Emptive Rights Are Unlawfully Removed? Where pre-emptive rights are restricted or removed without a justified ground, without satisfying the required decision quorum or for the purpose of providing an unjustified benefit to particular persons, the lawfulness of the capital increase resolution may become disputed. The legal remedy available to the shareholder depends on whether the resolution was adopted by the general assembly or board of directors, the capital system of the company and the nature of the particular unlawfulness. Therefore, the capital increase resolution, board report, general assembly minutes and trade registry records should be examined together. Must the Capital Increase Resolution Be Registered? Yes. The capital increase must be registered with the trade registry in the manner prescribed by law. Depending on the type of capital increase, general assembly or board resolutions, the new capital provision of the articles of association, capital subscriptions and other necessary documents may form part of the trade registry process. Registration and announcement are fundamental stages in the legal completion of the capital increase. Why Are Trade Registry Procedures Important in a Capital Increase? The capital of a joint stock company is one of the fundamental company details registered with the trade registry. Therefore, a change in the amount of capital must be duly registered and the necessary announcements must be made. Missing documents, an incorrectly drafted resolution or non-compliance with the statutory procedure may create problems during registration. Are Board Statements and Reports Important in a Capital Increase? Depending on the type of capital increase, the board of directors may be required to prepare statements and reports prescribed by law. Particularly where pre-emptive rights are restricted or removed, it is a statutory obligation for the board of directors to report the reasons and explain whether shares are being issued with or without a premium. These documents may also be important in subsequent disputes between shareholders. Can a New Investor Be Given Shares Through a Capital Increase? Yes. A new investor may join the company by subscribing for newly issued shares. However, the pre-emptive rights of existing shareholders must be taken into account. Where it is intended to allocate new shares directly to an investor, the requirements of the Turkish Commercial Code concerning exercise, restriction or removal of pre-emptive rights must be fulfilled. Are a Capital Increase and a Share Transfer the Same Thing? No. In a share transfer, an existing shareholder transfers their existing shares to another person. The company's capital amount does not change merely because of the transfer. In a capital increase, the company increases its capital amount by issuing new shares. Although a new investor may enter the company through either method, the legal structure and economic consequences are different. To Whom Does Money Paid in a Capital Increase Belong? In a cash capital increase, amounts paid in return for subscription of newly issued shares are contributed to the company. In this respect, investment through a capital increase differs from an existing shareholder selling their shares to an investor. In a share transfer, the purchase price generally goes to the selling shareholder, whereas capital subscribed in a capital increase becomes part of the company's assets. Can Disputes Arise Between Shareholders During a Capital Increase? Yes. The necessity of the capital increase, the amount of the increase, allocation of newly issued shares, whether shares will be issued at a premium, restriction of pre-emptive rights and changes in ownership ratios following the transaction may create disputes between shareholders. Particularly in transactions that change the balance of interests between majority and minority shareholders, principles of company law must be applied carefully. Can a Minority Shareholder Be Protected During a Capital Increase? Minority shareholders, like other shareholders, have statutory pre-emptive rights. Where pre-emptive rights are removed without justified grounds, particular shareholders are unjustifiably advantaged or the capital increase resolution is contrary to the law, articles of association or good faith, the legal protection mechanisms prescribed by law may arise. Therefore, not only the minority shareholder's voting ratio but also their shareholder rights should be considered. Can a Capital Increase Change Control of the Company? Yes. Where some existing shareholders do not participate in the capital increase and newly issued shares are acquired by other shareholders or new investors, the company's ownership ratios may change significantly. This change may also alter company control and the distribution of voting power relevant to general assembly decisions. Therefore, particularly where an investor enters through a capital increase, the post-transaction shareholding table should be calculated in advance. Should the Articles of Association Be Reviewed Before a Capital Increase? Yes. The company's capital system, share classes, privileges, registered capital authority and powers of the board of directors may all be regulated in the articles of association. Therefore, reviewing only the provisions of the Turkish Commercial Code may not be sufficient. The current articles of association and, where applicable, other agreements between shareholders should be reviewed before deciding on a capital increase. Can a Shareholders' Agreement Affect a Capital Increase? Agreements between shareholders may contain provisions concerning participation in capital increases, pre-emption or new share acquisition mechanisms, investment obligations and decision-making procedures. The effect of these agreements under company law and their contractual effect between the parties should be assessed separately. Accordingly, not only the articles of association but also existing shareholders' agreements may need to be examined in a capital increase. Which Documents Are Important in a Capital Increase? Depending on the type of capital increase, the company's articles of association, general assembly or board resolutions, subscription commitments, banking and payment documents, board statements, resolutions and reports concerning pre-emptive rights, valuation documents and other documents required for the trade registry may be important. Where the company is subject to special legislation, authorisation or consent documents may also form part of the process. Preparing the documents in accordance with the type of capital increase is important for the proper conduct of the registration process. Ümraniye Corporate Lawyer Assistance in a Capital Increase Legal assistance during a capital increase in a joint stock company may include reviewing the company's articles of association, determining the appropriate capital increase method, preparing general assembly or board resolutions, assessing pre-emptive rights, structuring the legal entry of a new investor, examining changes in ownership ratios and following trade registry procedures. From the shareholders' perspective, it may also be necessary to assess whether pre-emptive rights have been lawfully made available, whether the capital increase resolution creates an unjust result between shareholders and whether the conditions for an annulment action exist. Therefore, in assessments within the scope of an Ümraniye corporate lawyer, Ümraniye joint stock company lawyer, Istanbul corporate lawyer, capital increase lawyer, pre-emptive rights lawyer and company law lawyer, not only the trade registry dimension of the transaction but also its effect on the balance of shareholding within the company should be taken into account. Conclusion Capital increase in joint stock companies is an important company law transaction that directly affects the company's financial structure and relationships between shareholders. Capital increases through subscription, capital increases from internal resources and conditional capital increases are subject to different legal requirements. In addition, whether the company operates under the basic capital system or registered capital system directly affects the decision-making and implementation process. The pre-emptive right protects existing shareholders' right to acquire newly issued shares in a capital increase in proportion to their existing share of the capital. Under the Turkish Commercial Code, restriction or removal of this right requires justified grounds and, for a general assembly resolution, affirmative votes representing at least 60 percent of the basic capital. No person may be unjustifiably benefited or disadvantaged through restriction or removal of pre-emptive rights. The board of directors must also grant shareholders a period of at least 15 days when determining the principles for exercising the right. Therefore, when dealing with capital increases in joint stock companies, pre-emptive rights, rights to acquire new shares, restriction of pre-emptive rights, registered capital systems, Ümraniye corporate lawyer, Ümraniye joint stock company lawyer and Istanbul corporate lawyer, the Turkish Commercial Code, the company's articles of association, capital structure and shareholders' rights should be assessed together.