In some cases, limited companies may wish to reduce the amount of capital specified in the company’s Articles of Association. This method is used when the company has capital above the company’s needs or in order to distribute profit share to the shareholders. Reducing the basic capital amount numerically is subject to a special procedure in the Turkish Commercial Code. In this bulletin, the conditions and procedures that limited companies are obliged to fulfill in order to reduce their capital are explained.
İçindekiler
1) The Main Reasons for Capital Reduction
Limited companies may choose to reduce their capital for different reasons. The most natural of them is that the company has more capital than it needs. If the company has more capital than it needs, there will be an unused capital, which will adversely affect the company’s profit share ratios. It is possible to increase the company’s profit ratio mainly through capital reduction.
“If a limited company does not allocate new shares to be fully paid in order to replace the reduced portion by reducing its capital, the General Board shall decide to amend the Articles of Association as necessary.” (TTK art.592, art.473)
Another reason is to distribute profit shares to shareholders by closing the adverse balance. It is not possible for the company to distribute profit shares to the shareholders without closing the adverse balance and recovering the losses. Because the company can distribute profit shares to the shareholders only from the net profit for the year and the appropriated reserves. For this reason, instead of waiting to recover the loss from the company’s profit, it is possible to distribute profit shares to the shareholders by reducing the capital. However, for such a capital reduction, it is stipulated that the partners shall fulfill the additional payment obligations envisaged in the Articles of Association. Article 592 of the TCC indicates the following in this regard;
“The capital shall be reduced in order to improve the insolvent balance sheet, only if the additional payment obligations stipulated in the Articles of Association are fully met.”
2) Methods of Capital Reduction
The capital reduction can take place via several different methods. These are;
- Decreasing the nominal value of shares.
- Combining shares,
- Destruction of shares,
- Cancellation of shares.
If the capital will be reduced by decreasing the nominal values of the shares, no change is made in the number of shares, only the nominal value of the shares of the partners is decreased. In this way, there is no change in the voting and profit share rights of the partners. However, it should be noted that the nominal value of a share cannot be reduced below 25 TL.
In the method of reducing the number of shares, the capital is reduced by either combining the shares or destroying the shares. If the shares are combined, the nominal value of the capital shares does not change, the shares are combined according to a certain exchange ratio and the number of shares is reduced. Here, the exchange ratios are found by comparing the new capital reduced and the capital before the reduction.
In the case of cancellation of shares, while the nominal value of the shares does not change, some of the shares are canceled and the capital is reduced. In this method, changes in the rights of the partners such as voting and profit share emerge. For this reason, the owners of the canceled shares must give their approval. While the shares of some partners can be destroyed, it is also possible to reduce the capital by destroying the shares of all partners within a certain ratio.
3) How to Reduce Capital; Methods and Procedures
Capital reduction is subject to a special procedure. Therefore, the company needs to make some decisions and declarations and adjust its financial situation accordingly. In Article 592 of the Turkish Commercial Code, it is stated that the provisions regarding the capital reduction in joint-stock companies will be applied without any further explanation regarding the capital reduction in limited companies. In the light of the provisions of the TCC regarding the capital reduction in joint-stock companies, the process in limited companies can be summarized as follows;
- Calling the General Meeting,
- Adoption of a General Board resolution to amend the Articles of Association of the company,
- Calling the creditors,
- Fulfillment of the capital reduction decision,
- Registration and announcement of the reduction decision.
3.1) Taking the General Board Resolution on the Capital Reduction
Capital reduction requires an amendment in the Articles of Association. Because the value written in the Articles of Association is being changed. For this act , it is necessary to take a General Board resolution. The call to be made to the General Board, which will be convened for the capital reduction, is subject to certain qualifications.
In order to be able to decide on the capital reduction, it should be set that the company’s assets are sufficient to fully meet the rights of the creditors, despite the capital reduction. Otherwise, the resolution on capital reduction cannot be made. In this regard, the legislator wishes to protect the company’s creditors. Sworn-in certified public accountants or public accountants shall determine that there are enough assets in the company to fully meet the rights of the company’s creditors, despite the decrease in the capital, and auditors shall do this act in limited companies which are subject to audit. (TSY m.96/1-c). These procedures must be completed before the General Board call and Meeting. Then, the call should be made duly and the capital reduction should be added to the agenda as specified.
“The reasons for the capital reduction, the purpose of the reduction and the way in which the reduction will be made are explained in detail and in accordance with the accountability principle in the call announcements of the General Meeting, in the letters and in the website announcement. Also, the director or the Board of Directors submits a report containing these issues to the General Board, and the report approved by the General Board is registered and announced.” (TCC art.473, art.592)
As it is seen, it is obligatory to explain to the partners the reason and purpose of the capital reduction and how the reduction will be made in the meeting call. The legislator, who foresees that a sound resolution can only be taken in the General Board in this way, expects the issue to be clarified before the meeting.
The director or the Board of Directors must also submit a report to the General Board, which includes why, how and in which way the capital will be reduced.
Resolutions on the capital reduction in the General Board are taken with the affirmative votes of the owners or representatives of the shares constituting at least seventy-five percent of the capital. (TCC art.592, art.473/3, 421/3). If this majority is not achieved in the first meeting, the same majority will be sought in other farther meetings.
The General Board resolution shall indicate how the capital reduction will be made and the method to be used.
Finally, it should be noted that the capital can only be reduced up to 10,000 TL, which is the minimum amount of capital stipulated in the Law for limited companies. It is not possible to reduce the capital below this value.
3.2) Making Call to Creditors
If the General Board decides to reduce the capital as stated above, the director or the Board of Directors will post this decision on the company’s website. The director or the Board of Directors also announces it three times every seven days in the Turkish Trade Registry Gazette as well as in the format set out in the Articles of Association (for example, in the national or local newspaper). In the announcement, it is also stated to the creditors that they can demand the payment or securing of their receivables, upon notifying, within two months following the third announcement in the Turkish Trade Registry Gazette. In addition to the announcement, call letters are also sent to the creditors known by the company.
The reason for this notification to the creditors is that the capital can only be reduced after the expiration of the deadline given to the creditors and the payment or securing the receivables to be declared. Because, without fulfilment of these conditions, the creditors will be able to file an action for the annulment of the capital reduction within two years from the announcement of the registration of the capital reduction act at the Commercial Court where the headquarters of the company is located. In case the security shown for the receivables is not sufficient, an action for annulment may be filed.
The exception to this situation is that if the capital is reduced in proportion to these deficits in order to close the adverse balance occurred as a result of losses, the Board of Directors may waive the call of the creditors and the payment or security of their rights.
3.3) Implementation of the Capital Reduction Resolution
In order for the de facto implementation of the capital reduction resolution, the time given to the creditors must expire and the declared receivables must be paid or secured. In cases where it is necessary to reduce the number of stock certificates by changing or stamping or in another way in order for the reduction resolution to be implemented, the stock certificates that are not returned despite the warning regarding this matter may be cancelled by the company. In the warning made, it is written that the bills that are not returned to the company will be cancelled. (TCC art.592, 475)
If the number of share certificates returned by the company’s partners to the company for replacement is not sufficient to amend it as per the decision, these securities are cancelled and the new securities to be given in return for these are sold and the amount of their shares is kept in the company. (TCC art.592, 475)
The book profit that will arise due to the capital reduction can only be used in the destruction of the shares. (TCC art.592, 473).
3.4) Registration of the Decision
After the General Board resolution and the termination of the above processes, the decision to reduce the capital and the actual capital reduction in line with this decision must be registered in the trade registry. For the registration, it is necessary for the director or the Board of Directorsto apply to the trade registry directorate with the necessary documents. The following documents must be submitted to the trade registry directorate;
- Notarized copy of the General Board resolution on capital reduction, showing how the capital reduction will be made.
- A report on the reduction of capital prepared by the company director or managers and approved by the General Board, showing the reasons for the capital reduction, the purpose of the reduction and in which way the reduction will be made.
- Sworn-in certified public accountant or public accountant report determining the assets in the company in an amount that fully covers the rights of the company’s creditors despite the capital reduction or the auditor’s report on these determinations in companies subject to audit.
- The new amended Articles of Association adapted to the new situation.
- Samples of the trade registry gazette showing that the creditors of the company have been called three times in every seven days.
- Samples of documents showing that receivables have been paid or secured
- In addition to these documents, if the capital is reduced in proportion to these deficits and in order to close the adverse balance as a result of losses;
- The document showing that the additional payment obligations stipulated in the Articles of Association have been fully paid, are submitted to the directorate accompanying with the documents specified in the first paragraph,
- If the company directors have waived calling the creditors and paying their rights or taking security, and the decision of the Board of Directors regarding this has been submitted to the directorate, samples of the trade registry gazette indicating that the company’s creditors have been called three times every seven days and documents showing that the receivables have been paid or secured shall not be sought.
Conclusion
Limited companies shall fully comply with the procedure stipulated in the Law and Regulation for capital reduction. In particular, paying or securing the receivables notified as a result of the call to be made to the creditors is crucial. Because otherwise, the creditors may file a case for the annulment of the capital reduction resolution.
You can contact our team for more detailed information and legal support on the subject.
Best Regards.
Solmaz Law and Consultancy Team.
References
ALTAŞ, Soner, (2016), Türk Ticaret Kanunu’na Göre Limited Şirketler, Seçkin Yayıncılık, p. 424-433.
BİLGİLİ, Fatih/DEMİRKAPI, Ertan, (2013), Şirketler Hukuku Dersleri, Dora Yayıncılık, p. 417-418.
Turkish Code of Commerce
Trade Registry Regulation.
