Capital Increase through Capital Subscription

Share capital augmentation in privately held joint stock companies constitutes a significant transaction enabling the company to expand and satisfy its financing requirements by strengthening its equity structure. Share capital augmentation denotes an increase in the amount of the company’s ordinary/registered capital and is effected with the approval of a sufficient majority of shareholders. This process is governed by the provisions[i] of the Turkish Commercial Code (‘TCC’) and is subject to specific rules and conditions for non-public (i.e., privately held) joint stock companies. This article examines the methods, legal conditions, and processes of share capital augmentation in privately held joint stock companies according to the capital systems applied. Additionally, the protection and limitation of shareholders’ pre-emptive rights (right to acquire new shares) in capital augmentations will be analysed.

Methods of Capital Increase

Share Capital Augmentation from External Sources (Increase by Capital Subscription):

This is effected by obtaining new capital subscriptions in cash or in kind from outside the company or from existing shareholders. In other words, shareholders or new investors willing to contribute capital augment the capital by contributing additional funds or assets (capital in kind) to the company. This method of share capital augmentation is termed capital augmentation through subscription commitments and the company is provided with external resources.

Share Capital Augmentation from Internal Resources (Bonus Issue):

This is effected by converting the funds accumulated in the equity items of the company and permitted by the legislation to be added to the capital (such as retained earnings, share premium or reserves) into capital. In this case, the company issues new shares, but shareholders receive these shares gratuitously in proportion to their existing shareholdings. Internal capital augmentation does not provide fresh cash inflow to the company, but increases the company’s capital by transferring equity items to capital.

In the case of share capital augmentation from external sources (obtaining new subscription commitments), the TCC stipulates certain prerequisites. These requirements protect shareholders by seeking to ensure that the company’s available capital is fully utilised and that available internal resources are utilised first and foremost. The two fundamental conditions set forth in the TCC are as follows:

1. Payment of Existing Capital Subscriptions: In order to effect an augmentation through a new subscription commitment, the company must have fully paid for the previously subscribed capital shares. The Code provides that exceptions will be made for minor underpayments. Indeed, Article 456/2 of the TCC stipulates that the non-payment of amounts that may be deemed insignificant in proportion to the capital shall not constitute an obstacle to the capital augmentation. This provision has been introduced by the new law in order to eliminate the academic debate during the previous law period.
2. Absence of Internal Resources to be Added to the Capital: Prior to an external capital augmentation, the company must not have internal resources (such as undistributed profits, funds, or reserves) on the balance sheet that can be added to the capital. By introducing this condition, the TCC seeks to prevent the company from demanding new cash from shareholders when there is an opportunity to augment capital from the company’s own resources. In this way, it aims to protect shareholders who are not in sound financial condition and to prevent unnecessary external capital calls when there are existing resources within the company. The exception to Article 462 of the TCC, where this rule was drafted, is the unanimous vote of the shareholders for a capital augmentation through subscription, even if the company has internal resources on the balance sheet that can be added to the capital, as regulated by the Circulars of the Ministry of Trade.

Once the above conditions are satisfied, the capital augmentation must be duly effected. The capital augmentation process differs according to the capital system adopted by the company (ordinary capital system or registered capital system). Below, the capital augmentation processes in privately held joint stock companies under these two systems are examined under separate headings.

Capital Increase Under The Ordinary Capital System

The ordinary capital system denotes a system in which the company has a fixed amount of capital set in its articles of association and each capital augmentation requires an amendment to the articles of association. Most privately held joint stock companies, unless they have transitioned to the registered capital system, are governed by the ordinary capital system. In this system, capital augmentations are effected through a general assembly resolution and by amending the capital article in the articles of association. Consequently, the capital augmentation decision constitutes legally an amendment to the articles of association.

The steps of the capital increase process in the ordinary capital system can be briefly summarized as follows:

General Assembly Resolution: The board of directors of the company prepares a declaration concerning the capital augmentation and submits it for the approval of the shareholders. The general assembly must adopt a resolution in accordance with the quorum requirements of the TCC and the articles of association. Unless a higher quorum is stipulated in the articles of association, the capital augmentation resolution may be adopted by a majority of the votes present at the general assembly where at least half of the company’s capital is represented, as in the case of other amendments to the articles of association. This constitutes the minimum requirement of the law; the articles of association may set higher quorums. With the capital augmentation resolution adopted at the general assembly, the capital article of the articles of association is amended to indicate the new capital amount.

Subscription of New Shares: In order for a capital augmentation to be valid, all of the shares representing the augmented capital must be subscribed by the shareholders or new investors. In the share capital system, this subscription is either made directly in the amended articles of association approved by the general assembly or through a separate subscription commitment letter. Pursuant to the TCC, this subscription commitment must be unconditional, i.e., the share subscription cannot be made subject to any conditions. The capital augmentation cannot be completed until all new shares have been subscribed.

Payment and Registration: In cash capital augmentations, pursuant to Articles 344 and 481 of the TCC, at least one-quarter of the augmented capital must be paid into the company account before registration, and the remaining portion must be paid within 24 months. Pursuant to the relevant legislation, the payment schedule of the new share prices may be regulated in the articles of association of the company, or may be determined by the general assembly or the board of directors. After the capital augmentation resolution is adopted, this resolution must be registered with the trade registry. The TCC limits the announcement and registration of the capital augmentation resolution to a specified period of time. Accordingly, the capital augmentation resolution of the general assembly must be registered with the trade registry within three months from the date of adoption. Otherwise, the resolution and the authorisation obtained from the relevant authorities (e.g., the Ministry), if any, shall become null and void. With the registration, the legal validity of the capital augmentation is established; registration has a constitutive effect.

Ministry Permission (if required): Pursuant to the regulations issued pursuant to Article 333 of the TCC, the permission of the Ministry of Trade is required for the incorporation of some joint stock companies or amendments to the articles of association. If the company that is going to augment its capital is subject to this authorisation obligation (for example, companies operating in certain specialised sectors), the permission of the Ministry must also be obtained in advance for the capital augmentation. Whilst this step is not applicable for all companies, it constitutes a legal obligation for the sectors and situations specified in the relevant communiqués.

Pre-emptive rights of existing shareholders are preserved in the ordinary capital system. Each shareholder has the right to purchase the new shares to be issued in the capital augmentation in proportion to its share in the existing capital. This right ensures that the shareholders’ proportions are preserved as a result of the capital augmentation and thus prevents unanticipated changes in the distribution of control in the company.[ii] As a general rule, the pre-emptive right may not be restricted or abolished; however, this right may be restricted or abolished in the presence of just cause and with an enhanced quorum. Pursuant to Article 461 of the TCC, if the general assembly wishes to completely or partially abolish the pre-emptive rights whilst adopting a capital augmentation resolution, the affirmative vote of the shareholders representing at least 60% of the share capital is required for this purpose. The articles of association cannot authorise restriction of the pre-emptive right in advance; the law stipulates that this right may only be restricted within the scope of a specific capital augmentation resolution and by an enhanced majority. Furthermore, the pre-emptive right may only be restricted or revoked if there are just causes. The Law lists situations such as public offerings, business or subsidiary acquisitions within the scope of merger/division transactions, and enabling company employees to become shareholders of the company as examples of just cause. It is not legally possible to restrict the pre-emptive right without satisfying these conditions. If the general assembly decides to restrict pre-emptive rights, the board of directors is obliged to prepare a detailed report explaining the reasons for this restriction and to have it registered and announced in the trade registry. This mechanism was introduced to prevent the abuse of shareholders’ rights.

Capital Increase Under The Registered Capital System

The registered capital system is a capital system that entitles the board of directors to unilaterally augment the capital of a joint stock company up to a predetermined registered capital ceiling set by the articles of association. This system is widely utilised in joint stock companies that are publicly traded and may also be adopted by privately held joint stock companies that satisfy certain conditions. The principal advantage of the registered capital system is that it provides flexibility and speed in capital augmentation processes. Without waiting for the general assembly to convene each time, the board of directors may resolve to augment the capital at any time, provided that the company remains within the predetermined capital ceiling. This enables the company to react swiftly to market conditions or financing needs.

There are specific conditions required by law for privately held joint stock companies to apply the registered capital system. Firstly, pursuant to Article 332 of the TCC and the amendment made in 2024, the initial capital of a privately held joint stock company wishing to adopt the registered capital system must be at least TRY 500,000. This amount may be increased by the decision of the Council of Ministers (currently the President of the Republic). A company that satisfies this condition may transition to this system by adding provisions concerning the registered capital system to its articles of association and registering it with the trade registry. The company’s registered capital ceiling shall be clearly stated in the articles of association. The registered capital ceiling denotes the maximum permitted capital amount of the company, and the board of directors may augment the capital provided that it does not exceed this ceiling.

The procedure for capital increases under the registered capital system includes the following:

Authority and Resolution of the Board of Directors: In a company that has adopted the registered capital system, the board of directors is authorised to augment the capital up to the registered capital ceiling set by the general assembly. The board of directors may resolve to augment the capital at the time and in the amount it deems necessary. However, in order to adopt this resolution, the articles of association of the company must expressly grant this authority to the board of directors. The authorisation of the board of directors to augment the capital in this manner may be granted for a maximum period of five years; at the end of five years, the general assembly must extend the period (re-authorisation by amendment to the articles of association) in order for the authorisation to continue. A change in the board of directors does not remove the authorisation to augment registered capital; new administrations may also exercise this authorisation until the expiration of the term.

Limit on Authorised Capital Ceiling: Whilst the TCC does not directly set an upper limit for the registered capital ceiling, the relevant Communiqué (Communiqué dated 19 October 2012) issued for privately held joint stock companies has established a limit on this issue. According to the Communiqué, the upper limit for registered capital may be at most five times the initial capital of the company. If the ceiling is to be increased in the periods following the transition to the registered capital system, the new ceiling may be set at a maximum of five times the current issued capital at the time of the general assembly meeting where the augmentation will be approved. This regulation seeks to prevent arbitrary increases by setting the registered capital ceiling excessively high and ensures that the company grows by remaining within a reasonable upper limit.

Scope of the Board of Directors’ Resolution: When resolving upon a capital augmentation, the board of directors determines the nominal value, number, type (such as registered or bearer shares), premium, or privileged status of the new shares to be issued. In addition, the resolution shall specify the duration and manner of exercise of pre-emptive rights. If the board of directors is going to limit or remove pre-emptive rights or issue shares at a price above the market value (premium), there must be an explicit authorisation provision in the articles of association for the board of directors to adopt these measures. In other words, if the articles of association do not authorise the board of directors to restrict the pre-emptive rights or issue privileged shares, the board of directors cannot adopt resolutions on these matters. In the registered capital system, the newly issued shares are also subscribed by the shareholders or investors through a subscription undertaking, which must also be unconditional.

Status of Pre-emptive Rights: In the registered capital system, the fundamental principles concerning the pre-emptive right in the ordinary capital system also apply. Existing shareholders have the right to acquire new shares in proportion to their existing holdings. If the board intends to restrict this right, the articles must authorise it, and there must be legitimate grounds. The board must prepare a detailed report explaining the justification, and this report must be registered and published in the trade registry. Particularly in privately held companies, such balancing provisions are of considerable importance to protect the interests of minority shareholders.

Registration and Publication of the Resolution: The capital augmentation resolution of the board of directors must be registered with the trade registry, just as the general assembly resolution must be. In the registered capital system, the registration of the board of directors’ resolution must be effected within three months; otherwise, the board of directors’ resolution may become null and void (similar time limitations apply since it is deemed to be a general assembly resolution). In order for the board of directors’ capital augmentation resolution to have legal effect, it must be announced in the trade registry gazette, thereby informing creditors and shareholders.

Board of Directors’ Declaration: One of the significant innovations introduced by the TCC is the obligation of the board of directors’ declaration in capital augmentations. After the capital augmentation is completed, the board must issue a written declaration confirming that the transaction was carried out in compliance with legal procedures and that all required permits and approvals were obtained. If capital was contributed in kind or in cash, the declaration must affirm its proper execution. Where pre-emptive rights are restricted, the beneficiaries of the unsubscribed shares and the rationale for the allocation must be disclosed. It constitutes a legal obligation for the transparency and accountability of the transaction to ensure that the board of directors’ declaration is complete and truthful; otherwise, legal liability may arise.

Whilst the resolutions of the board of directors adopted in the registered capital system are not deemed to be general assembly resolutions owing to their nature, they have a similar legal effect. Consequently, shareholders or stakeholders may object or bring an action for annulment against the capital augmentation resolution of the board of directors in the manner prescribed by law.[iii] Pursuant to Article 445 et seq. of the TCC, the provisions stipulated for the annulment of general assembly resolutions shall also apply by analogy to the resolutions of the board of directors on registered capital augmentation. In this context, shareholders who oppose the capital augmentation resolution may bring an action for annulment through commercial proceedings within one month from the date of the resolution. In order to ensure the protection of the shareholders, even in the registered capital system, the legislator has maintained judicial review against the resolutions of the board of directors. However, the conditions for bringing an annulment action and the limitation period are strictly applied; if the action is not brought within one month, the resolution becomes final.

Pre-emptive Right and its Protection

The pre-emptive right (right to acquire new shares) in capital augmentations is a legally guaranteed right granted to existing shareholders in order to protect their shareholding in the company’s capital. In privately held joint stock companies, pre-emptive rights are critical for the majority and minority shareholders to maintain their relative balance of power over the company. The TCC regulates the pre-emptive right as a fundamental principle and introduces detailed provisions concerning the exercise of this right.

The principal rule is that the pre-emptive right may not be abolished or completely restricted by a general assembly resolution or by the articles of association. This right cannot be disabled by a general provision in the articles of association of the company; however, it may be restricted by an exceptional and one-off resolution depending on the characteristics of the capital augmentation. In both the ordinary capital system and the registered capital system, there must be a justified reason for the restriction of the pre-emptive right and the enhanced quorum stipulated by law must be satisfied.

In capital augmentations effected by the general assembly, the pre-emptive right may be restricted or abolished with at least 60% of the capital, provided that just causes are presented. This threshold is intended as a mechanism to protect minority shareholders; it is not possible to set a quorum lower than 60% in the articles of association. Restriction of pre-emptive rights without just cause is strictly prohibited. The concept of just cause is listed in Article 461 of the TCC in an illustrative manner. For instance, the public offering of the company’s shares (public offering), issuance of shares in exchange for the acquisition of another company or enterprise, or enabling the company’s employees to become shareholders of the company are recognised as just cause.

In the registered capital system, whilst the resolution to restrict pre-emptive rights is actually adopted by the board of directors, the authority of the board of directors in this regard only arises if it is explicitly regulated in the articles of association. If the board of directors wishes to restrict pre-emptive rights, it must document the situation by preparing a report stating its reasons and register this report with the trade registry. In practice, this report prepared by the board of directors is usually included as an annex to the capital augmentation resolution and explains to the shareholders in detail why the right to purchase new shares is restricted.

This obligation to act in accordance with the principles of transparency, honesty, and equal treatment is intended to protect the rights of shareholders in both systems and is particularly important in terms of informing shareholders in private companies. In conclusion, the pre-emptive right constitutes an indispensable shareholder priority right in joint stock companies. The exercise, limitation, or removal of this right during the capital augmentation process is regulated in detail by law and subject to specific conditions. This legal framework on pre-emptive rights in private companies ensures that the balance of power within the company is maintained and trust amongst shareholders is preserved.

Conclusion

Share capital augmentation is a frequently utilised method in privately held joint stock companies in line with the company’s growth strategies and financing requirements. As analysed in this article, capital augmentations are subject to different procedures under the ordinary capital system and the registered capital system. In the ordinary capital system, the requirement of approval of the capital augmentation by the general assembly and amendment of the articles of association provides democratic participation in the process, but may also result in a certain degree of delay. In the registered capital system, on the other hand, capital augmentations can be effected more flexibly and swiftly owing to the authority granted to the board of directors within specified limits. Companies may choose one of these two systems depending on their size and capital needs, or may benefit from the advantages of the registered capital system to the extent permitted by law.

In both systems, the mandatory provisions of the TCC ensure that the capital augmentation is carried out in a sound manner. In particular, the conditions that the existing capital must be paid up and internal resources must be utilised first, which are required in capital augmentations from external sources, are of considerable importance in terms of financial discipline and protection of shareholders’ rights. Additionally, the regulations on the protection of pre-emptive rights ensure a fair transaction by preventing the dilution of the existing shareholders’ shareholding in the company against their will in capital augmentations.

Consequently, when the capital augmentation process in privately held joint stock companies is carried out within the framework of the rules stipulated by the legislator, it serves both to strengthen the capital structure of the company and to protect the rights of shareholders. When implemented correctly and in compliance with legal obligations, capital augmentations constitute an effective tool for companies to achieve their long-term growth objectives.

This article was authored by Erdem & Erdem Partner, Head of Corporate and M&A, Tuna Çolgar.

[i] Turkish Commercial Code No. 6102 and Related Legislation Provisions.

[ii] Tekinalp, Ünal, The New Law of Capital Companies, 4th updated edition, 2013, p. 214

[iii] Karahan, Sami, Company Law, 2012, relevant sections.