ABSTRACT
As companies search for capital increases to finance new investments, to strengthen their capitals where affected by changing conditions of the economy and the market, to carry out mergers, or to establish subsidiaries, the conditional capital system adopted in Article 463 of Turkish Commercial Code (TCC) No. 6102 constitutes an important alternative. This article examines the characteristics of conditional capital increase, how it differs from other methods of increasing capital, and the conditional capital increase procedures, evaluating them within the framework of joint stock companies.
I. INTRODUCTION
Capital is the sum of the assets that shareholders undertake to bring to a partnership in joint stock companies and its expression in cash1. From time to time, companies may wish to increase their capital to finance new investments, to strengthen their capital where affected by changing conditions of the economy and the market, to carry out mergers, or to establish subsidiaries2. A capital increase is an increase in the fixed amount shown as the principal capital in joint stock companies’ articles of associations. Companies have a legal right to increase their capital and it does not have to be based on valid reasons as long as it follows the conditions and procedures specified in law3.
Conditional capital increase has been introduced for the first time in Turkish legislation as a method for raising capital and is regulated by Article 463 of TCC No. 6102. According to Article 463, conditional capital increase is a method for raising capital that aims to turn the creditors of newly issued bonds and similar debt instruments into company shareholders, thus helping the company increase its finances through employees providing capital and becoming shareholders. Article 463 takes its source from Articles 653 to 653.i of the Swiss Code of Obligations. This method of raising capital, which is designed to meet the need arising from the practical application in Swiss and German law, is a response to the slowness of formalities of other capital raising methods, has become a necessity in terms of Turkish law and commercial practice and is regulated in the TCC.
With conditional capital increase, the holders of bonds or other debt securities, who are company creditors, are given shares instead of a money return for their receivables. In this way, foreign capital can be converted into equity capital by preventing cash outflow from the company. Another function of this method is to enable employees to become partners in the company. Article 463 of the TCC lists employees who have exchange and purchase rights, including all employees, regardless of their titles, of the company and the group of companies4. The inclusion of employees as shareholders in a partnership through participating in raising capital also ensures that the employees have the same interests as the company and are encouraged to improve their performance.
In conditional capital increase, capital increases over time as the employees exercise their right to exchange and purchase. It is also a variable and unpredictable method of raising capital since the capital increase occurs through third parties utilizing their right to purchase and exchange. The point at whic the increase takes place depends on the decision of those with the rights to purchase and exchange, namely, the condition. These right holders gradually increase the capital by utilizing their rights, notwithstanding the approval or the decision of the general assembly or the administrative board in terms of the provision of the articles of association as soon as they notice the market conditions are appropriate. In this type of increase, capital does not increase upon the decision of the general assembly. It increases when the creditors of the bonds and similar debt instruments and the company employees acquire new shares by utilizing their rights to exchange or purchase. In other words, it is not the decision that is conditioned but the acknowledgment of a provision of the articles of association stipulating the increase of capital to the utilization of the rights to purchase and exchange. Conditional capital increase differs from other methods of raising capital in many aspects such as the decision to increase, the method of increase, and the registration.
This study evaluates conditional capital increase within the framework of joint stock companies. In particular, it analyzes the characteristics of conditional capital increase, how the procedures differs from other methods of raising capital, and the method of raising capital.
II. THE CONCEPT OF CAPITAL AND CAPITAL IN CREASEIN JOINT STOCK COMPANIES
A. The Concept of Capital
The concept of capital differs depending on the discipline, for example, economics, accounting, and law. Capital in joint stock companies is the cash expression of the total assets that the shareholders have committed to bring to the company in order to achieve the company's purpose5. Since conditional capital increase will be evaluated within the framework of joint stock companies, the concept of capital is also defined within the concept of joint stock companies, where it refers to the principal capital in principal capital systems, and issued capital in registered capital systems6. That is, the concept of capital corresponds to principal capital in joint stock companies that adopt a principal capital system7. In joint stock companies that adopt a registered capital system, however, the concept of capital is used to express the issued capital.
B. Capital Systems
1. Principal Capital
Principal capital refers to the capital stipulated in the articles of association in accordance with Article 322 of the TCC. During the establishment phase of a company, the quantity of principal capital is determined by the shareholders and represented with a fixed value in the articles of association, as stipulated by law. In the principal capital system, shareholders are obligated to pay the undertaken shares to the company. The fact that the capital is committed in the articles of association, states this situation. The amount of capital expressed with a fixed value in the articles of association can only be increased or decreased by the transformation of articles of association with a decision by the administrative board.
2. Registered Capital
As a concept, registered capital is not a capital committed or declared in real terms, but an abstract number demonstrating the maximum amount of share capital that the company is authorized by its articles of association to issue to shareholders8. In joint stock companies that adopt a registered capital system, capital increase can be carried out to the amount determined in the articles of association or registered in the trade registry without the need for a decision by the administrative board or the formalities envisaged by the law.
C. Capital Increase
Companies may prefer to increase their capital on the grounds that it is required to funding new investments, to shore up the remaining capital where it is insufficient, and to establish subsidiaries or branches. In joint stock companies, capital increase is an increase in the fixed amount signified as the principal capital in the articles of association9. In the principal capital system, this signifies the increase of the fixed amount stipulated in their articles of association as envisaged by the law, and in the registered capital system, the issuance of new shares to the maximum amount stipulated in the articles of association.
In order to carry out a capital increase in joint stock companies that have adopted the principal capital system, it is necessary to pursue a difficult and long formality. Primarily, preparation to alter the articles of association by the administrative board; receiving permission from the Ministry if the alteration is subject to allowance; convoking an annual meeting in a manner envisaged by the law; ensuring the meeting is in quorum, balloting and receiving approval from the privileged shareholders, and, afterwards, registering this decision which must be announced10. In consequence of these formalities making it slow and difficult to increase capital specifically in multi-partnered joint companies, faster methods were.
III. CONDITIONAL CAPITAL INCREASE
A. The Concept of Conditional Capital
Conditional capital increase is a method for increasing capital that converts creditors of newly issued bonds and similar debt instruments or company employees into shareholders of the company, thus ensuring the company receives capital, aiding the company finances and allowing the issuance of shares to employees.
Analysis of the historical process that led to the emergence of conditional capital in Germany and Switzerland shows that the main reason was the prompt utilization of substitute share certificates to issue shares according to the company’s requirements. Substitute share certificates are utilized for issuing shares according to the company’s requirements and for a prompt resolution in cases when the partnership could not provide the required shares due to the restrictions of capital increase11. Since new shares issued in this way are used as a means of certain hazardous operations and are too costly, the application of substitute shares has been abandoned and replaced by conditional capital increase. However, in Swiss Law, conditional capital increase was introduced to legislation by the regulations effective in 1922. Regulations related to conditional capital increase in Swiss Law are essentially parallel to German Law and its foundation is German Law12.
With Article 463 of TCC No. 6102, conditional capital increase was introduced into Turkish legislation as a method of raising capital for the first time. This regulation derives its origin from Articles 653 and 653.i of the Swiss Code of Obligations. The aim of the regulation, as in other types of capital increase, is to increase capital by meeting the financial resource requirements of the company from within by granting the owners of newly issued bonds and similar debt instruments or employees the right to exchange and purchase. During this capital increase, current shareholders are also given the right to maintain their share ratios, thus preventing losses. With this, the proper functioning of a conditional capital increase is aimed at protecting the interests of the exchange and credit right holders and company employees participating in the capital increase.
1. The Characteristics and Basic Features of a Conditional Capital Increase
a. Being subject to a condition
The condition stipulated in a conditional capital increase is not the decision of the general assembly to increase capital, but the capital increase application to be made based on that decision because, with this method, the capital increase is tied to an uncertain future event, third parties’ utilization of their right to purchase and exchange13. In other words, the owners of the rights to purchase and exchange exercising their rights is the condition of a conditional capital increase. Put another way, it is not the decision that is tied to the condition, but the acknowledgment of a provision in the articles of association by the general assembly that conditions the capital increase to the utilization of the rights to purchase and exchange.
b. Being one method of capital increase
As clarified in the justification of Article 463 of the TCC, conditional capital increase is a method of raising capital. It is controversial in the doctrine whether a conditional capital increase is an increase method or a capital system14. However, we surmise that, as regulated in the systematic of the TCC, a conditional capital increase is a method of raising capital as a result of the fact that it is clearly defined as an increase method in the justification of the aforementioned article and is applicable to both joint stock companies with principal capital and joint stock companies with registered capital.
c. Having a full and cash payment policy
The policy of full payment refers to the full payment of the price corresponding to the share. The policy of cash payment on the other hand, states that share prices cannot be paid in any other way than cash and that in-kind capital elements cannot be accepted15. According to these policies, in a conditional capital increase, share prices shall be paid in full and in cash. There is no possibility of paying committed share prices in installments or with an in-kind capital element. These regulations covering a conditional capital commitment have been envisioned as a requirement of the principle of preservation of capital.
d. Originating from the right to exchange or purchase
The right to exchange is a right granted to those who are creditors due to newly issued bonds or similar debt instruments from the company or group of companies. By utilizing the right to exchange, the creditor trades his receivables with the capital debt, and the title of creditor changes to the title of company partner, reducing the debts of the company and increasing its capital16.
The right to purchase is a right granted to the creditors of the company or the company employees as the right to exchange. Here, creditors have the opportunity to acquire company shares with a declaration of sole intent without renouncing the money they have given to the company, namely, a pecuniary debt within the framework of the credit relationship. Unlike the right to exchange, the price of the shares acquired due to the right to purchase is paid in cash by the right holder17.
e. The increase being subject to limits
A conditional capital increase is subject to an upper capital limit, as stipulated in Article 464 of the TCC. In accordance with this Article, the limit of a conditional capital increase is up to half of the existing capital. Article 464 defines existing capital as the amount of capital existing at the time the conditional capital increase decision is taken. This limitation on a conditional capital increase is to prevent an unlimited increase in capital by parties other than the company organs and to protect the rights of the existing shareholders. This provision is regulated in accordance with the principle of protecting capital, as stated in the justification of the Article. Limits do not only apply to the amount of capital. There is also a limitation in terms of the persons who can participate in this increase. Within the framework of a conditional capital increase, the persons who can benefit from a conditional capital increase are limited to the creditors of the bonds and similar debt instruments issued by the company or group companies, including the rights to purchase or exchange, and company employees18. These persons, who are predicted to benefit from the conditional capital increase, can use their rights to purchase or exchange by their sole intention.
B. The Conditional Capital Increase Procedure
If conditional capital increase is accepted upon the establishment of a joint stock company, a provision regarding this must be written in the company's articles of association. However, if a decision to make use of this method is made later, it is necessary to amend the articles of association in accordance with the principles and procedures specified in the law regarding the capital system or capital increase regulations. According to Article 421 of the TCC, a decision to change the capital system must be made by a majority vote at a meeting of the general assembly where at least half of the company's capital is represented. It is not the amendment to the articles of association that realizes the conditional capital increase. The capital increase only occurs when and to the extent that certain persons stipulated by law exercise their rights to purchase and exchange and the capital debt is fulfilled through clearing or payment.
Although the legal basis of conditional capital increase is the articles of association, the issues that should be included in the articles of association are listed in Article 465 of the TCC. However, these issues cannot be applied in every new conditional capital increase. Once the capital increase is realized, the articles of association provision is ineffective and a new article of association provision needs be issued for each new conditional capital increase. Article 465 stipulates that the articles of association must include provisions regulating the nominal value of the conditional capital increase, the number of shares, nominal values and types of shares, groups that can benefit from the right to exchange or purchase, abolishing the preemptive rights of existing shareholders, the privileges to be granted to certain share groups, and the restrictions on the transfer of new registered shares.
The maximum limit of the principal capital that can be increased should be specified in the articles of association, based on the decision of the general assembly to increase the capital conditionally. Up to this maximum limit, the general assembly may freely determine the amount of conditional capital. According to Article 464 of the TCC, the total nominal value of the conditional capital is half the total of the principal capital and the participation capital19. The legislator has set a limit on the exception of the basic rule that the capital can be increased with the decision of a company organ with the aim of preventing the unlimited increase of the capital of the company by third parties. It is also required to specify the type, maximum number, and nominal value of all shares to be issued after the exercise of exchange and purchase rights in the articles of association. Within the scope of conditional capital increase, the characteristics of these new shares to be issued are left to the determination of the general assembly. One of the issues listed in Article 465 is to specify the groups that can benefit from the right to exchange or purchase. The justification of the Article states that what should be understood from the expression of groups is the regulation of an articles of association clause emphasizing the wording of the article such as “the owners of the exchangeable bonds to be issued by the company or its affiliate X in the year of… and the employees of the company who own the purchasing rights to be issued20.
Another requirement to be included in the articles of association as stipulated by Article 465 is to state that the pre-emptive rights of the current shareholders have been abolished and the amount thereof. In a conditional capital increase, the preemptive rights of the shareholders are removed so that third parties with the right to purchase and exchange can benefit from the increase. Instead, the aim is to protect the share values of the existing shareholders by introducing the right of proposal regulated in Article 466 of the TCC. Stating this matter in the articles of association is important in terms of reiterating that the current shareholders are deprived of their pre-emptive right and their current share ratios may change as a result of the increase.
If the shares to be issued as a result of the conditional capital increase are to be granted to certain share groups and there is a restriction regarding the granting of this privilege and the transfer of new registered shares, these issues must also be included in the articles of association. These two elements are compulsory elements on condition that they are foreseen. This compares to the aforementioned issues because they must be included in the articles of association only if privileges are given to shares issued using the exchange and purchase rights or if a restriction is imposed on the transfer of shares.
After the general assembly adopts the decision to amend the articles of association, which includes the issues regarding the conditional capital increase, if there are privileged share groups in the joint stock company and if the rights of the privileged shareholders will be violated by this decision, a special board of the privileged shareholders will convene concerning this decision. Decisions are taken in this meeting in accordance with the special meeting and the quorum for decisions specified in Article 454 of the TCC.
Ultimately, the decision to increase conditional capital must be registered with the trade registry after adoption of the amendment of the articles of association, but announcement is not required. The registration does not have a founding effect, since the conditional capital increase is not realized by the decision of the increase but by the owners of the right to exchange and purchase. Therefore, unlike other capital increase methods, the provision “if the increase is not registered within three months from the date of the increase decision in Article 456 of the TCC becomes invalid” is not valid for conditional capital increase.
C. Conditional Capital Increase
As mentioned above, during the establishment of a company, after the conditional capital provisions are regulated in the articles of association or accepted by the general assembly, although there is no delegation of authority to the board of directors in the decision to increase, the board of directors must take an implementation decision to fulfill the conditional capital increase21. In this implementation decision, the number and types of share certificates to be issued, the period within which the employees and the owners of the rights to exchange and purchase can exercise their rights, the highest nominal value required to reach the conditionally increased capital, and the reasons for which the conditional capital increase is required are notified to the general assembly22. In public joint stock companies, a conditional capital increase is subject to the permission of the Capital Markets Board of Turkey (CMB). The necessary approval can be obtained by submitting to the CMB the provisions of the articles of association including the amendment regarding the increase. If the joint stock company increasing their capital is a company whose establishment is subject to permission, the increase can be realized by submitting the amendment of the articles of association, which provides the basis for the capital increase, to the approval of the Ministry.
According to Article 468 of the TCC, which regulates the procedure and conditions of capital increase, formative exchange and purchase rights are notified in a written statement from the owner to the company. In this statement, by referring to the provision of the articles of association, the rights used in accordance with the concrete event, the type, number and nominal value of the shares to be purchased or exchanged should be included. This written statement, which is a condition of validity, is an element that helps the company to determine the right used23.
The execution of the commitment is carried out either by depositing the value of the share or by using the right to exchange. An explanatory registration is made after the realization of this clearing transaction, so that the capital increase is realized before registration. The legislation has left the task of examining compliance with the conditions in Article 468 of the TCC to the representative bank that performs the purchase or exchange. It is necessary for the bank to examine the provisions of the articles of association and the declaration of the rightful owner and to decide whether the conditions to accept the fulfillment of the commitment are met. As a result of the bank’s examination, the relevant shares are left to the disposal of the owner by accepting the fulfillment of the commitment and the shareholding rights become available.
D. Protection of Stakeholders in Conditional Capital Increase
The pre-emptive rights of shareholders are abolished so that third parties who have the right to purchase and exchange the capital increase with the conditional capital method can benefit. Therefore, since the shareholders cannot get new shares, the participation rate in the company decreases. With the regulation in Article 466 of the TCC, this loss is balanced by the right to be proposed. The right to be proposed is a new shareholding right regarding the obligation to first offer bonds or similar debt securities that contain the rights to exchange or sell in conditional capital increases. This shareholding right arises from the company's obligation to propose, that is, to make a proposal. By means of the right to be proposed, the shareholder indirectly protects his right to purchase new shares. This right is only granted if bonds and similar debt instruments contain the rights to exchange and purchase; otherwise, the shareholders do not have the right to be proposed in the purchase rights granted to the employees24.
According to the provision in the second paragraph of Article 466, the right to be proposed can only be removed or limited for just cause. The decision of the general assembly regarding the abolition or limitation of this right must be taken in accordance with the provisions of Article 421/4 of the TCC. The just cause should be evaluated within the framework of the company’s interests and the principle of equal treatment and the principle of exercising rights in absence should be followed. In the third paragraph that follows the Article, it is stated once again that it aims to protect the interests of the shareholders by regulating that no one can benefit or lose in an unjustified way due to the abolition or limitation of the priority and the right to be subject to the proposal.
In addition to the protection of the shareholders, it is important to legally protect the beneficiaries on the other side of this increase, who have the right to purchase and exchange, in order for the conditional capital increase institution to function properly. If the use of these rights is restricted or prevented through the articles of association, they will not seek to acquire these rights. The regulation in Article 467 of the TCC also prevents these interests from being harmed.
According to this regulation, it is possible for creditors or employees, who have the rights to purchase and exchange and who are granted the right to acquire registered shares, to exercise their rights and to limit the transfer of shares, only if it is stated in the articles of association that the restrictive provisions in the articles of association regarding registered shares will be applied exactly to the conditional capital increase.
IV. CONCLUSION
Conditional capital increase is a method of raising capital that provides capital to a company by converting the creditors of newly issued bonds and similar debt instruments into company shareholders, helps the company to raise finance, and allows the issuance of shares for employees.
Conditional capital increase is different from other methods of raising capital in many aspects, for example the decision to increase and the method of increase. In the principal capital system, the decision to increase capital is left completely to the general assembly, while in the registered capital system, the authority to increase the capital or the amount to be increased by transferring the authority to the board of directors to decide on the capital increase by the general assembly passes to the board of directors. In conditional capital increase, the general assembly is responsible for deciding on a provision of the articles of association regarding the conditional increase, and then the board of directors is responsible for making the implementation decision regarding this increase. A capital increase decision is not made exactly at this stage in terms of nature.
The sole intent of those who are predicted to benefit from the conditional capital increase means that the capital of the company will increase at the time and rate it needs, and therefore the company can easily obtain the capital it needs. On the other hand, there is a risk that the increase in capital will be insufficient since the capital increase is unpredictable due to the use of purchase or exchange rights. One of the disadvantages of this method is the removal of the pre-emptive right of the existing shareholders and, thus, a decrease in the share ratios of the existing shareholders for the owners of the purchase and exchange rights to acquire from the newly issued shares and the proper operation of the conditional capital method.
As a result, although the conditional capital increase is advantageous in many ways, such as motivating employees by providing them with the opportunity to join the company by granting the right to purchase, freeing the company from the arduous formalities of other methods of raising capital, offering an easier method, not having the time limitations existing in other capital increase methods such as the obligation to register the increase decision within three months or the authorization of the board of directors for five years for the increase of the registered capital, it can also be regarded as disadvantageous in terms of decreasing the share ratios of the existing shareholders and making the increase in capital unpredictable.
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FOOTNOTE
1 Moroğlu, Anonim Ortaklıkta Sermaye Artırımı, s. 1
2 Kaya, Şartlı Sermaye Artırımı, s. 23; Saraç, Anonim Şirketlere Şarta Bağlı Sermaye Artırımı s. 3
3 Tekinalp, Poroy, Çamoğlu, Ortaklıklar Hukuku II, s.777
4 Gerekçe, Türk Ticaret Kanunu, madde 463
5 Türkoğlu, Türk Anonim Şirketler Hukukunda Kayıtlı Sermaye Sistemi, s.24
6 Gerekçe, Türk Ticaret Kanunu, madde 332
7 Aras, Anonim Şirketlerde Şarta Bağlı Sermaye Artırımı, s.
8 Pulaşlı, Şirketler Hukuku Genel Esaslar, s.274
9 Kaya, s. 23; Moroğlu, s. 1
10 Türkoğlu, Türk Anonim Şirketler Hukukunda Kayıtlı Sermaye Sistemi, s.20
11 Biçer, Anonim Şirketlerde Şartlı Sermaye, s.57
12 Biçer, Anonim Şirketlerde Şartlı Sermaye, s.57
13 Saraç, Anonim Şirketlere Şarta Bağlı Sermaye Artırımı, s.77
14 Aras, Anonim Şirketlerde Şarta Bağlı Sermaye Artırımı, s.42
15 Aras, Anonim Şirketlerde Şarta Bağlı Sermaye Artırımı, s.45
16 Demir, Özel Esas Sözleşme Değişiklikleri Şarta Bağlı Sermaye Artırımı ve Esas Sermayenin Azaltılması, s.13
17 Demir, Özel Esas Sözleşme Değişiklikleri Şarta Bağlı Sermaye Artırımı ve Esas Sermayenin Azaltılması, s.19
18 Gerekçe, Türk Ticaret Kanunu, madde 464
19 Biçer, Anonim Şirketlerde Şartlı Sermaye, s.89
20 Gerekçe, Türk Ticaret Kanunu, madde 465
21 Kaya, Şartlı Sermaye Artırımı, s.34
22 Kaya, Şartlı Sermaye Artırımı, s.34
23 Gerekçe, Türk Ticaret Kanunu, madde 468
24 Gerekçe, Türk Ticaret Kanunu, madde 466
