Capital Increase through Internal Resources in Joint Stock Companies
Introduction
In joint stock companies, capital increases can be made through capital commitment or internal resources. Capital increases through internal resources enable the conversion into capital of the reserve funds and freely-usable parts of the statutory reserves, the funds that are allowed by legislation to be added to the capital and included in the balance sheet. It was a notable absence, in the former Turkish Commercial Code numbered 6762, not to embrace this frequently used method. That being said, Turkish Commercial Code numbered 6102[1] (“TCC”) explicitly regulates this method under a separate article. This article examines the internal resources that are allowed by legislation to be added to the capital, as well as the procedures and conditions for capital increases through internal resources within the scope of the relevant provision.
Resources Convertible into Capital
Pursuant to Article 462/1 of the TCC, the capital can be increased through internal resources by way of conversion into capital of the reserve funds that are allocated by the articles of association or a general assembly resolution, not allotted for a specific purpose, the freely-usable parts of the statutory reserves and the funds that are allowed by legislation to be added to the capital and included in the balance sheet.
The preamble of the article states that the internal resources specified in the article are not listed numerus clausus[2]. The funds are regulated as the funds that are allowed by the legislation to be added to the capital without explicitly being defined or exemplified. The revaluation fund, the participation and real estate sales proceeds fund, as well as the inflation fund, are examples in this respect[3]. In practice, generally, the accumulated reserve funds in the company, and the debts that are borrowed by the company from its shareholders, are converted into capital.
Conditions for Capital Increases through Internal Resources
Under Article 462/2 of the TCC, it is stated that the existence of the amount that covers the increased part of the capital through internal resources within the company shall be verified by the certified annual balance sheet, and by an express and written statement given by the board of directors. The TCC regulates these principles for the purposes of transaction security because it is necessary to audit whether or not the internal resource used for the capital increase actually exists and, if indeed it does, whether or not this resource is counted among the amount used for the increase[4].
Furthermore, it is required by the article that if six months have passed since the date of the balance sheet, a new balance sheet shall be prepared and approved by the board of directors. The legislator assumes that the subject internal resource has been used in the event six months period is exceeded, and requires verification of the internal resource with a more recently dated balance sheet[5]. Accordingly, in the event a capital increase is made through internal resources within the first six months of the year that follows the end of the accounting period, the certified balance sheet of the previous year suffices; however, in the event that the increase in question is made within the second six month period, the previous year’s balance sheet cannot be used, and a new balance sheet shall be required[6]. In the preamble of the article, it is stated that so long as the conditions of the specific case enable, it is possible for the relevant new balance sheet to be prepared through the revision of the previous balance sheet’s values; in other words, through the exercise of the facilitated inventory method stipulated under Article 67 of the TCC, or the methods that facilitate valuation, as stipulated under Article 81 of the TCC[7].
The contents of the statement to be prepared by the board of directors are regulated under Article 457/2 of the TCC. According to this provision, in the event of a capital increase through internal resources, the statement shall include a guarantee regarding the resources, by which the capital increase is covered, the actuality of these resources, and proof of their existence within the assets of the company. Furthermore, documented and justified explanations shall be made regarding freely-usability of the funds and reserve funds converted into capital, obtainment of the approvals from the required bodies and institutions, fulfilment of legal and administrative requirements, justifications if the pre-emptive rights are restricted or removed, its amount and rate and to whom, why and for what amount the unexercised pre-emptive rights are granted. Furthermore, pursuant to Article 73 of the Trade Registry Regulation[8], it is required to provide a certified public accountant or independent accountant and financial advisor report or, for the companies subject to audit, an audit report, with regards to whether or not the capital is unrequited, determination of the company’s equity capital, and whether or not the amount covered through the internal resources is actually available within the company.
Procedure for Capital Increases through Internal Resources
Requirement of full payment of the previous capital for the capital increase through capital commitment is not sought for the capital increase through internal resources. This being said, there are also certain procedural rules to be followed in the process of capital increases through internal resources. These rules are listed under Article 462/3 of the TCC:
- In the event of existence on the balance sheet of funds that are allowed by legislation to be added to the capital, capital cannot be increased through capital commitment without first converting such funds into capital. On the other hand, it is possible to convert such funds into capital and increase the capital through capital commitment, both at the same time and in the same proportion.
The rationale behind this regulation is that in practice, some companies prefer capital increases through capital commitment, although there are funds that could be added to the capital on the balance sheet, and most of the time in a considerable amount and, therefore, take advantage of this through practically preventing some shareholders to participate in the capital increase and increasing the share capital of the shareholders who are able to participate in such capital increase[9]. Through this method, since the share capital of such certain shareholders increases, the number of gratis shares that they acquire also increases. The provision aims to protect the shareholders through precluding such kinds of practices; the legal consequence of non-compliance with such mandatory rule that has no exceptions, and which cannot be eliminated for any reasons, being nullity[10].
However, one should not overlook the fact that the letter of the law allocates such prohibition only to the funds that are allowed by legislation to be added to the capital, and does not explicitly propose a restriction for the reserve funds that are allocated by the articles of association or a general assembly resolution, not allotted for a specific purpose, and the statutory reserves. Due to this special regulation, there are views arguing that there is no obstacle to capital increases through capital commitment in the event of a lack of funds that are allowed by legislation to be added to the capital, but the existence of reserve funds and freely-usable parts of the statutory reserves on the balance sheet[11]. The opposing view, on the other hand, argues that the word “funds” used in the article includes the reserve funds and statutory reserves, as well as funds, such as the revaluation fund, because both of the said internal resources are components of equity capital[12].
- The increase is finalized through the registration of the relevant general assembly or board of directors’ resolution and the amended version of the relevant articles of the articles of association, just as with capital increases through capital commitment.
- Through registration, current shareholders acquire ipso iure the gratis shares in accordance with the ratio of their current shares to the company’s share capital. Such right attached to the gratis shares can neither be removed, nor restricted, and is
Pursuant to this rule, at the time of finalization of the increase made through internal resources, without the need for a company body resolution regarding the acquisition of the gratis share, the previous share is borne ipso iure embedded with the gratis share; in other words, in a form comprised of the previous share and the gratis share[13]. The right attached to the previous share regarding the gratis share is not a pre-emptive right; therefore, it is not possible to restrict or remove such right, or waive it.
Apart from those listed in such article, there are also certain rules applicable to all methods of capital increases. Accordingly, as per Article 421 of the TCC, the resolutions for capital increases through internal resources shall be adopted in a general assembly meeting where at least one-half of the share capital is represented, with the majority of the votes present at the meeting. In the event such quorum is not met in the first meeting, a second meeting may be held within one month, at the latest. The quorum for such second meeting is the representation of at least one-third of the share capital. In addition, pursuant to Article 32 of the Regulation on Procedures and Principles of General Assembly Meetings of Joint Stock Companies and the Ministry of Customs and Trade Representatives to be Present at such Meetings[14], the presence of a Ministry representative in such meetings is mandatory.
Conclusion
Capital can be increased through internal resources by way of conversion into capital of the reserve funds that are allocated by the articles of association or a general assembly resolution, not allotted for a specific purpose, the freely-usable parts of the statutory reserves, and the funds that are allowed by legislation to be added to the capital and included in the balance sheet. The internal resources specified under the TCC are not listed numerus clausus. In order to conclude this type of capital increase, existence of the certified annual balance sheet and an express and written statement given by the board of directors is mandatory. In the event of existence on the balance sheet of funds that are allowed by legislation to be added to the capital, the TCC does not allow capital increases through capital commitment without first converting such funds into capital. Through registration of the resolution for capital increase, current shareholders acquire ipso iure the gratis shares in accordance with the ratio of their current shares to the company’s share capital.
[1] TCC (Official Gazette 14.02.2011, No. 27846) entered into force on July 1, 2012.
[2] Preamble of Article 462 of the TCC.
[3] Preamble of Article 462 of the TCC.
[4] Preamble of Article 462 of the TCC.
[5] Preamble of Article 462 of the TCC.
[6] Altaş, Soner, “Anonim Şirkette İç Kaynaklardan Sermaye Artırımı”, Banka ve Finans Hukuku Dergisi, Vol. 6, No. 22, Y. 2017, p. 534-535.
[7] Preamble of Article 462 of the TCC.
[8] Official Gazette January 27, 2013, No. 28541. Regulation entered into force on the date of its publication.
[9] Preamble of Article 462 of the TCC.
[10] Preamble of Article 462 of the TCC.
[11] Altaş, Soner, “Anonim Şirkette İç Kaynaklardan Sermaye Artırımı”, Banka ve Finans Hukuku Dergisi, Vol. 6, No. 22, Y. 2017, p. 536.
[12] Tekinalp, Ünal, Sermaye Ortaklıklarının Yeni Hukuku, Değişiklikler ve İkincil Düzenlemelerle Güncelleştirilmiş 4. Bası, İstanbul 2015, p. 129.
[13] Preamble of Article 462 of the TCC.
[14] Official Gazette November 28, 2012, No. 28481. Article 19/2-b of the Regulation entered into force on July 1, 2013, provisions regulating the requirement on publication on website entered into force on October 1, 2013 and other provisions entered into force on the date of its publication.
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