A Quick Guide to Capital Reduction in Türkiye

Introduction

Capital reduction is the process by which a company reduces its shareholding equity. This process affects the value of the company’s shares and can benefit both the company and its shareholders in multiple ways. Capital reduction, often involving the return of capital to shareholders or covering corporate losses, is an important mechanism for achieving objectives like mergers, restructuring, and increasing shareholder value.

Capital Reduction Regulations in the Turkish Commercial Code

The Turkish Commercial Code (“TCC”) No. 6102 regulates capital reduction in joint-stock companies under Articles 473-475. These provisions allow capital reduction to return part of the capital to shareholders or cover losses. Additionally, companies can issue replacement shares for the reduced ones, resulting in simultaneous capital reduction and increase. For limited companies, Article 592 of the TCC governs capital reduction, which analogously applies the rules for joint-stock companies.

The Procedure

The company’s capital is specified in the articles of association, a mandatory element listed under Article 339 of the TCC. To reduce capital, the articles of association must be amended. The board of directors prepares a proposal for the amendment, which outlines the purpose, method, and scope of the reduction. This proposal, along with an auditor’s report confirming that the company’s assets can cover creditors' claims and other rights, is then submitted to the general assembly for a vote (Article 473).

Only the general assembly can decide on capital reduction, as this is one of its non-delegable authorities under Article 408 of the TCC. Approval requires an affirmative vote from at least 75% of the shareholders (Article 421/3). After the resolution is passed, the board of directors must register the amendment and announce it in the Turkish Trade Registry Gazette three times at seven-day intervals (Article 474).

Advantages

Capital reduction can be beneficial, especially during mergers and acquisitions or periods of financial distress. It can protect a company from severe losses, increase distributable reserves, and create a more efficient capital structure. Therefore, strict compliance with TCC procedures is essential to prevent potential legal complications.

Drawbacks

Capital reduction carries certain risks. If not managed carefully, it can negatively impact the company, particularly by limiting future capital-raising abilities and making it more challenging to issue new shares. The capital reduction process requires extensive compliance and can be time-consuming and complex to implement, necessitating careful consideration.

Conclusion

Capital reduction is a powerful tool for companies operating in Türkiye under the Turkish Commercial Code. It aids in addressing financial difficulties, enhancing shareholder value, and supporting corporate restructuring. While the benefits include creating distributable reserves and optimizing capital structures, the process is complex and requires strict adherence to compliance requirements and substantial shareholder support. Thoughtful and calculated measures in capital reduction can help stabilize a company’s financial base and pave the way for future growth.

With thanks to Songül Naz Toptaş for her contribution.