Detailed Guide on Capital Decrease (CD) of Companies in Turkey
Capital decrease of companies in Turkey is a process where a company reduces its share capital. This can be done for various reasons, such as adjusting the capital structure, offsetting losses, or improving the financial ratios of the company. The process is regulated by the Turkish Commercial Code (TCC) and requires careful legal and procedural steps to ensure compliance with the law.
Types of CD in Turkey
1. Reduction to Offset Losses
If a company has accumulated losses, it may reduce its share capital to offset those losses, which helps restore the company’s financial position. This is done by reducing the nominal value of the shares.
2. Return of Capital to Shareholders
A company may decide to return part of its capital to shareholders, typically in the form of a reduction in the nominal value of shares or through share buybacks. In this case, the company reduces its capital but still remains solvent.
3. CD to Adjust Capital Structure
A company may also decrease its capital if it wants to adjust its capital structure. This can be done if the company finds that its capital is too high for its operational needs, or it wants to improve certain financial ratios.
4. Redemption of Shares
Another form of CD occurs when a company redeems (buys back) shares from shareholders, usually at the nominal value. The redeemed shares are then cancelled, which reduces the total number of outstanding shares.
Legal Framework for CD in Turkey
The process of CD is governed by the Turkish Commercial Code (TCC), specifically Articles 457 to 465. These provisions outline the procedures, requirements, and conditions for reducing a company’s capital.
The main requirements include:
- General Assembly Approval: The CD must be approved by the company’s General Assembly (shareholder meeting). This approval generally requires a supermajority (two-thirds of the votes) unless the company’s Articles of Association specify otherwise.
- Protection of Creditors: Creditors must be protected during the CD process. If the company has outstanding liabilities, the CD may not be permitted unless provisions are made to ensure creditors’ rights are safeguarded.
- Trade Registry Notification: The decision to decrease capital must be registered with the Trade Registry, and the decreased capital must be published in the Trade Registry Gazette.
Steps for CD in Turkey
Step 1: Decision by the General Assembly
A General Assembly meeting must be held to approve the CD. The decision should include:
- The amount of the decrease.
- The method of decrease (e.g., return of capital, offsetting losses, or share buybacks).
- The adjustment of the Articles of Association to reflect the new capital amount.
- The exact terms and conditions for the CD.
- The decision requires a two-thirds majority vote unless otherwise specified in the company’s Articles of Association.
Step 2: Notification to Creditors
- Before implementing the CD, the company must notify its creditors in writing. This gives creditors a chance to object to the decrease if they believe their claims will be jeopardized.
- Creditors have a right to object: They have 30 days from the notification date to object. If there is no objection or if an agreement is reached with creditors, the CD process can proceed.
Step 3: Independent Expert Report (If Required)
- In some cases, especially for capital reductions to offset losses, an independent expert report may be required. The expert evaluates the company’s financial situation and confirms that the CD is in the company’s best interests and does not jeopardize creditors’ rights.
Step 4: Amendment of the Articles of Association
- If the CD affects the nominal value of the shares or the overall capital of the company, the Articles of Association must be amended to reflect the new capital structure. These amendments must be approved by the General Assembly and then submitted to the Trade Registry.
Step 5: Registration with the Trade Registry
Once the CD is approved and the necessary documents are prepared, the company must register the decision with the Trade Registry.
The following documents are required:
- The General Assembly resolution that approved the CD.
- Amended Articles of Association reflecting the new capital.
- Proof of notification to creditors (if applicable).
- Independent expert report (if required).
Step 6: Publication in the Trade Registry Gazette
- After registering the CD with the Trade Registry, the decision will be published in the Trade Registry Gazette. This publication serves as official notice of the decrease to third parties.
Step 7: Adjusting Share Certificates
- If the CD involves reducing the nominal value of shares, the company will need to adjust the share certificates of shareholders to reflect the new value.
- If shares are redeemed, they will be canceled and removed from circulation.
Conditions and Requirements for CD
1. Minimum Capital Requirements
- Limited Liability Companies (LLC) (Ltd. Şti.): The minimum capital requirement for an LLC is 50,000 TRY, and the CD must not fall below this amount.
- Joint Stock Companies (JSC) (A.Ş.): The minimum capital for a JSC is 250,000 TRY, and capital must not fall below this threshold after the decrease.
2. Protection of Creditors
- Creditors are given the right to object to the CD if they believe it will negatively affect their ability to be repaid. The company must ensure that creditors’ claims are safeguarded during the CD process.
3. Pre-Conditions for Certain Decreases
- In cases where the company has accumulated losses, the CD may only be approved if the losses have been clearly documented in the financial statements and can be substantiated by an independent auditor or expert.
4. Shareholder Agreement
- If the CD involves returning funds to shareholders, the company must ensure that this is done in a fair and transparent manner, respecting the rights of minority shareholders.
Advantages of CD in Turkey
1. Offsetting Losses
- A CD can help companies clear accumulated losses, restoring financial health and potentially enabling them to distribute dividends in the future.
2. Improved Financial Ratios
- Reducing share capital can improve the company’s debt-to-equity ratio, making it more attractive to investors and creditors.
3. Flexibility
- CDs offer flexibility for companies to adjust their capital structure, whether by returning funds to shareholders or reducing excessive capital.
4. Simplifying Capital Structure
- By decreasing capital, a company can simplify its capital structure, making it easier to manage and more in line with its operational needs.
Challenges of CD in Turkey
1. Creditors’ Objections
If creditors object to the decrease, the company may face delays, negotiations, or even legal challenges. Companies must take care to protect creditors’ rights during the process.
2. Shareholder Approval
The CD requires approval from the General Assembly, which may not always be easily achieved, especially if shareholders disagree with the terms.
3. Impact on Shareholder Value
In some cases, a CD could be seen as a negative signal, especially if the decrease is due to financial difficulties or losses. This may lead to a drop in shareholder confidence.
4. Legal and Administrative Costs
The CD process involves legal, administrative, and registration costs, which can be burdensome for smaller companies.
A CD is a legal process that allows companies in Turkey to reduce their share capital. While it can be a useful tool for adjusting a company’s financial structure, offsetting losses, or returning capital to shareholders, the process involves careful legal and procedural requirements. Companies wishing to reduce their capital should ensure that they follow the necessary steps outlined in the Turkish Commercial Code, including shareholder approval, creditor protection, and proper registration with the Trade Registry.
Capital decrease of companies is generally considered as complex. So, legal and financial advice should be sought to navigate the complexities of the CD process. Please feel free to contact us for more information and further inquiries about our unique services. You can also subscribe to Tacirsoft Hukuk Bilgi Sistemi, that is Turkey’s only Corporate Law and Organized Industrial Zones Law database.
