AMENDMENTS AT THE IMPLEMENTATION OF THE COMMUNIQUÉ REGARDING CAPITALL LOSS AND NEGATIVE EQUITY IN THE FRAME OF CORPORATE GOVERNANCE IN TURKEY

“The Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102 (“Communiqué”)” had been published in the Official Gazette dated December 15, 2018. Within the scope of the communique, the procedures and principles to be followed in cases of capital loss and negative equity had been explained. In order to expand the scope of the current practice which has been in effect, “The Communiqué on Amendments to the Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102” was published in the Official Gazette No. 31346 dated December 26, 2020 and entered into force on the same day.

Various amendments in the practices that will be applied in cases of negative equity and capital loss were foreseen in this communique and these amendments are aimed at eliminating some economic problems experienced during the pandemic.

In this context, with the purpose of ensuring that the companies experiencing capital loss or negative equity to conduct their commercial activities with fewer resources, the equity calculations contained in the content of the relevant article have been regulated as follows; 

  • The Communiqué regulates the situations where the sum of the share capital and the statutory reserves being uncovered by taking into account the “loss”.

 

According to new regulation, the situation where at least half of the sum of the share capital and the statutory reserves is uncovered due to financial loss occurs when the loss is, equal to half of or more than half and less than two-thirds of the sum of the share capital and the statutory reserves. Thus, in line with this amendment, the Communiqué regulates that at least two-thirds of the sum of the share capital and the statutory reserves are uncovered, if the loss is equal to or  more than two-thirds, of the sum of the share capital and the statutory reserves.

 

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General Assembly Meeting in the event that at least half of the sum of the share capital and the statutory reserves being uncovered

Article 6- (1) In the event that at least half of the sum of the share capital and the statutory reserves is uncovered, the board of directors shall present the remedial measures it deems appropriate to the general assembly. 

Article 7- (1) In the event that at least two-thirds of the sum of the share capital and the statutory reserves being uncovered due to loss, General Assembly which is invited to the meeting may resolve, as follows:

a) Continuaton with the one-third of share capital and resolve to oversee a capital decrease in accordance with Articles 473 and 475 of TCC,

b) Completion of the uncovered capital,

c) Capital increase. 

General Assembly Meeting in the event that at least half of the sum of the share capital and the statutory reserves being uncovered due to loss

Article 6- (1) The situation where at least half of the sum of the share capital and the statutory reserves is uncovered due to loss occurs when the loss is, equal to half of or more than half and less than two-thirds of the sum of the share capital and the statutory reserves. In such case, the board of directors shall present the remedial measures it deems appropriate to the general assembly.

Article 7- (1) In the event that the loss is equal to two-thirds of or more than two-thirds of the sum of the share capital and the statutory reserves, General Assembly which is invited to the meeting may resolve, as follows:

a) Continuaton with the share capital and resolve to oversee a capital decrease in accordance with Articles 473 and 475 of TCC,

b) Completion of the uncovered capital,

c) Capital increase.

 

  • Unless the share capital decrease in the event that at least two-thirds of the sum of the share capital and the statutory reserves are uncovered, without any specific rate requirement, companies can continue their activities with remaining share capital.

Under the Communiqué, in case that at least two-thirds of the sum of the share capital and the statutory reserves is uncovered due to financial loss, general assembly may decide to decrease the share capital up to the minimum capital amount determined provided that at least half of the sum of share capital and legal reserves will be preserved within equity.

 

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Capital Decrease

Article 8- (1) When the General Assembly of the company, which at least two-thirds of the sum of the share capital and the statutory reserves are uncovered due to loss, resolve to continue with the one-third of share capital, the capital decrease shall be made in accordance with articles 473-475 of the TCC. The share capital can be decreased to the minimum share capital

amount provided that at least half of the sum of the share capital and the statutory reserves are preserved in the equity

Capital Decrease

Article 8- (1)  When the General Assembly of the company, which at least two-thirds of the sum of the share capital and the statutory reserves are uncovered due to loss, resolve to continue with the remained share capital, the capital decrease shall be made in accordance with articles 473-475 of the TCC. The share capital can be decreased to the minimum share capital

amount provided that at least half of the sum of the share capital and the statutory reserves are preserved in the equity

 

 

  • The capital completion fund can only be used for setting off the losses. 

One of the amendments made within the scope of the new regulation is that the capital completion fund, which is contributed by all or a part of the shareholders in order to cover balance sheet deficits and recorded under the equity, can only be used by offsetting losses.

 

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Completion of the capital 

Article 9- (3) The payments made in accordance with the obligations to cover the balance sheet losses shall be collected and recorded in the capital completion fund account under the company’s equity.

Completion of the capital 

Article 9- (3) The payments made in accordance with the obligations to cover the balance sheet losses shall be collected and recorded in the capital completion fund account under the company’s equity. The capital completion fund can only be used by offsetting losses.

 

  • Without prejudice to the provisions of the capital market legislation of public joint stock companies, the Communiqué states that the cash capital contribution will be paid pursuant to the general rule foreseen under the relevant articles of Turkish Commercial Code for capital increases simultaneously after the capital decrease transaction which is performed by offsetting losses

In this context, for limited liability companies, the share capital increased simultaneously can be paid within 24 months after registration; for Joint Stock Companies, at least 25% of the cash capital contribution must be paid before registration.

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Capital Increase

Article 10- (1) By the General Assembly;

a) It can be decided to increase the share capital to the requested amount and simultaneously therewith the decrease the share capital by the amount of the actual loss. In the event of the capital increase and simultaneously with the capital decrease transaction, at least one-fourth of the increased capital must be paid..

Capital Increase

Article 10- (1) Without prejudice to the provisions of the capital market legislation of public joint stock companies,by the General Assembly;

a) It can be decided to increase the share capital to the requested amount and simultaneously therewith the decrease the share capital by the amount of the actual loss. In the event of the capital increase and simultaneously with the capital decrease transaction, the cash capital contribution shall be paid pursuant to Article 344 and 585 of Turkish Commercial Code.

 

  • In other respects, when the capital loss is compensated through a direct capital increase, the amount of the share capital to be paid shall be determined according to the capital to be preserved.

 

This regulation can be implemented provided that at least half of the sum of the share capital to be registered in consequence of the transactions to be carried out within the scope of the Communiqué and the statutory reserves are preserved in equity and the share contributions are paid in full.  In accordance with this new regulation, it is stipulated that the amount of the share capital that must be preserved will be taken into account, not the amount of the capital that has been increased in terms of determining the amount that must be paid. Thus, it rendered possible to decrease the amount of the share capital to be paid during the capital increase.

 

  • In addition to paragraph 1 of article 10 of the Communiqué, it enables the capital increase and decrease to be issued in the same general assembly. 

However, as a result of such transactions mentioned above, at least half of the total of the share capital to be registered and legal reserves must be preserved in the company’s equity.

 

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Capital Increase

Article 10- (1) …

b) It may be decided to increase the capital without capital decrease by the amount of the actual loss. In case of the capital increase to be made by this way, the amount corresponding to at least half of the share capital must be paid before the registration

Capital Increase

Article 10- … 

b) It may be decided to increase the capital without capital decrease by the amount of the actual loss. In case of the capital increase to be made by this way, the amount that will ensure the preservation of at least half of the sum of statutory reserves and the share capital within equity, must be paid before the registration of the share capital increase.

c) It may be decided to increase the share capital at the requested amount through payment of all of the subscription amount and without seeking the condition mentioned in subparagraph (b) and then decrease it in the same general assembly meeting. As a result of such transactions, at least half of the sum of the share capital to be registered and statutory reserves must be preserved in the company’s equity.

 

 

  • Half of the sum of expenses arising from leases, amortizations and personnel expenses accrued in 2020 and 2021 may now be excluded from the calculations to be made regarding capital loss and negative equity, in addition to the exchange difference expenses.

The current practice can only apply for the exchange difference expenses arising from foreign currency obligations that have not been performed, until 01.01.2023.  Under the new regulation, it clarifies that all exchange difference expenses will be considered within this implementation. The Communiqué further stipulates that the above amounts will be calculated without being repetitive; that no records will be included in the financial statements in relation to these calculations; and that the situation will be shown in the footnotes for information purposes.

 

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PROVİSİONAL ARTİCLE 1 – (1) Until January 1, 2023, it is possible to exclude foreign exchange losses arising out of forthcoming foreign exchange expenses and  from calculations to be made within the scope of article 376 of the Law to determine the capital loss or negative equity. PROVİSİONAL ARTİCLE 1 (1) Until January 1, 2023, it is possible to exclude foreign exchange losses arising out of forthcoming foreign exchange expenses and half of the sum of expenses arising from leases, amortizations and personnel expenses accrued in 2020 and 2021 from calculations to be made within the scope of article 376 of the Law to determine the capital loss or negative equity. These amounts shall be calculated without being repetitive. Any records will not be included in the financial statements regarding the calculations to be made in accordance with this article; and that the situation will be shown in the footnotes for information purposes.

 

As a result, it is important that the new regulations provided for in the Communique must be taken into account when evaluating the financial position of companies, and where is a capital loss or negative equity, the required calculations will be carried out in compliance with the legal legislation.

Nilsu Sertoğlu, Attorney At Law

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