Newsletter-21

35 COMMERCIAL LAW Primarily, the general assembly shall allot five percent of the annual profit as statutory reserve until this sum reaches twenty percent of paid-in capital (“primary reserve”) (TCC, Art. 519/1). The articles of association of the company may set forth a higher amount for allotted reserves (i.e. ten percent of the annual profit). Upon reaching such threshold, the following amounts shall be added to the general statu- tory reserves: a) the portion of the premium generated by issuance of new shares that is not used for issuance expenses, amortization considerations and charity payments, b) the portion of the considera- tion payment as the fee of the share certificates annulled as a result of [squeeze-out] after the deduction of the new share certificate issuance fees, c) ten percent of the total amount of profits to be distributed to relevant persons sharing the profits, upon payment of a 5% dividend to the shareholders (“secondary reserve”) (TCC, Art. 519/2). Articles of association may set forth that a reserve may be allotted to company managers and employees to establish charitable founda- tions. Finally, even if unforeseen under the articles of association, the general assembly may resolve to allot reserves if required for the re- instatement of the assets, and be justified in terms of the development of the company and distribution of dividends, considering the interest of the shareholders. Is Payment of Primary Reserve Obligatory? The provision that specifies “ payment of a 5% dividend to share- holders ” under TCC, Art. 519/2(c) is controversial as to whether it levies on companies the obligation to distribute to shareholders 5% of the annual profit. The controversy stems from TCC, Art. 519/2(c), which includes different wording from the former TCC. Pursuant to Art. 466/2 of the former TCC, it was required to add to the primary reserves, “ ten percent of the total amount of profits to be distributed to relevant persons sharing profits, upon allotment of a 5% dividend to shareholders.” Hence, under the former TCC, the obligation could be fulfilled by allotment of 5% of the profits to shareholders. On the other hand, TCC, Art. 519/1(c) amends the wording, and instead uses the phrase, “ after payment of a 5% dividend to shareholders. ” The