What is Capital Increase?

Capital, the first investment expected to yield value, lays the foundation for subsequent investments, enabling a company with a strong base to increase profitability with confidence. In joint-stock companies, capital increase can occur through internal or external sources. In paid capital increase, shareholders or investors acquire new shares issued by the company. In bonus capital increase, the company utilizes funds like retained earnings, and reserves without altering the ownership structure. This article explores how capital increases are executed, the limitations, and the legal remedies available to shareholders against capital increase.

How to do Capital Increase in Joint-Stock Companies in Turkey?

The process of capital increase in joint-stock companies is not explicitly defined in the Turkish Commercial Code. Instead, it is subject to precedents and principles established in legal doctrines. Within certain limits, capital can be increased for various purposes. The Court of Cassation stated that what matters is whether the capital increase aims to cause damage to the shareholders and reduce their share in the company or meet the company's capital needs for legitimate reasons.

Some reasons for capital increase in joint-stock companies include:

  • Strengthening the company's equity with new financial resources.
  • Meeting the capital needs of planned investments (technological advancements, acquisitions, etc.).
  • Resolving insolvency issues regarding debt payments.
  • Improving the company's financial structure with increased capital.
  • Replenishing lost capital due to losses.
  • Enhancing the company's reputation.
  • Facilitating the healthy progress of partnerships.
  • Realizing specific projects.
  • Coping with reduced credit sources or costly loans.

Limitations of Capital Increase in Turkey

As a general rule, capital cannot be increased unless the cash values of the shares are fully paid. An exception is the increase from internal sources. However, the existence of unpaid insignificant amounts does not prevent the capital increase in joint-stock companies.

In capital increase, general principles of law, such as the principle of fairness, minimum harm in exercising rights, and the principle of equal treatment, define the framework. Exercising the majority shareholders' voting power to the detriment of the company's interests and other shareholders' rights in capital increase decisions is considered an abuse of rights. For instance, capital increase decisions that grant preferential rights to certain shareholders would violate the principle of equal treatment.

Important limitations regarding capital increase in joint-stock companies are established through various court decisions, including:

  • Whether the capital increase serves the interests of the majority shareholders rather than the company (Court of Cassation 11th Civil Chamber, Application No: 1996/6988, Decision No: 1996/7163, Date: 22.10.1996).
  • Whether the capital increase constitutes an abuse of rights (Court of Cassation 11th Civil Chamber, Application No: 1996/6988, Decision No: 1996/7163, Date: 22.10.1996).
  • Whether the capital increase aims to cause damage to the shareholders and reduce their share in the company, and voting rights (Court of Cassation 11th Civil Chamber, Application No: 1996/6988, Decision No: 1996/7163, Date: 22.10.1996).
  • Whether the capital increase is necessary for the company's current situation, incentive practices, and benefitting from opportunities (Court of Cassation 11th Civil Chamber, Application No: 1996/6988, Decision No: 1996/7163, Date: 22.10.1996).
  • Whether the capital increase restricts some shareholders' pre-emptive rights indirectly or directly in favor of other shareholders without necessitating the company's interests or needs (Court of Cassation 11th Civil Chamber, Application No: 2003/13782, Decision No: 2004/10454, Date: 28.10.2004).
  • Compliance of the capital increase decisions with good faith.

What Can Be Done Against Capital Increase Decisions?

Filing Lawsuit

Shareholders can file a lawsuit seeking the cancellation of a capital increase decision if it undermines the balance of rights and interests between shareholders due to a breach of fairness. As stated in a precedent:

"Shareholders who claim that the capital increase decision of the general assembly causes a disruption of the rights and interests among the shareholders, that their pre-emptive rights are not recognized or are assigned to others in a manner contrary to the law, articles of association, and good faith, and that they cannot exercise their pre-emptive rights may file a lawsuit to have the relevant general assembly decision invalidated."

As per the Article 445 of the Turkish Commercial Code ... shareholders may file a lawsuit to have general assembly resolutions that violate the law or the articles of association, especially the principle of good faith, annulled within three months from the date of the resolution.

Therefore, within three months, a lawsuit can be filed against the general assembly decision on capital increase if it disrupts the balance of rights and interests and restricts pre-emptive rights due to a breach of fairness.

However, the reduction of share and profit ratios solely due to some shareholders not participating in the capital increase does not automatically render the decision in breach of good faith. As stated in a precedent:

"If the shareholders have the financial means to participate in the capital increase without any impediments, and if there is no harm to them if they participate, and if it cannot be proven that the capital increase aims to cause damage to the plaintiffs, it cannot be accepted that the reduction in the shares and profit ratios of such shareholders solely due to their inability to participate is contrary to objective good faith principles."

Obtaining Provisional Measure

Another action that can be taken against a capital increase decision is to obtain a provisional measure. The provisional measure can be obtained either before or after filing the lawsuit. According to Article 390 of the Code of Civil Procedure ("CCP"), the party requesting a provisional measure should provide evidence close to demonstrating the reasons and justifications for the measure, even if they cannot present conclusive evidence.

In order to obtain a provisional measure, certain conditions are required:

  • The possibility of a significant difficulty or complete impossibility in obtaining the right due to a change that may occur in the current situation.
  • Concerns about the occurrence of a disadvantage or serious harm due to delay.

By approximately proving the existence of these conditions, the plaintiff can request the suspension of the general assembly decision regarding the capital increase in Turkey.

Conclusion

In conclusion, capital increase in joint-stock companies is subject to certain limitations, guided by the principles of good faith and fairness. Shareholders have the right to seek legal remedies against capital increases aimed at harming other shareholders. Capital increase can be a complex process, and taking legal steps with caution is crucial. Otherwise, opportunities may be missed, resulting in loss of time and effort. Therefore, it is advisable to work with an experienced corporate law attorney in Turkey for expert guidance.

Originally published 05 July 2023

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.