Authors: Corporate Law Department, Atty. Mustafa Şahin

Introduction

Capital increase in joint stock companies is an important corporate law mechanism in terms of meeting the company’s financing needs, strengthening its financial structure, and enabling new investors to participate in the company. However, capital increase should not be regarded merely as a technical transaction that provides new funds to the company, but also as a multi-dimensional process that directly affects the economic and managerial positions of the existing shareholders.

Within the scope of a capital increase, newly issued shares may be issued at their nominal value, or, subject to certain conditions, they may be issued at a value higher than their nominal value, in other words, with a share premium. Capital increase with share premium becomes particularly important where the company’s equity exceeds its share capital, where the actual value of the company’s shares is higher than their nominal value, or where the preservation of the existing shareholding structure is intended while obtaining funds from an external investor.

In this article, as the second article of our Capital Increase Series, capital increase with share premium in joint stock companies is examined within the framework of the Turkish Commercial Code No. 6102 (“TCC”) and the relevant capital markets legislation.

The Concept of Share Premium

Share premium refers to the positive difference between the nominal value and the issue price where shares are issued at a price exceeding their nominal value in joint stock companies. Accordingly, where newly issued shares are subscribed at a price above their nominal value during a capital increase, the portion corresponding to the nominal value of the share is added to the share capital, while the portion exceeding the nominal value is included in the company’s assets as share premium.

Pursuant to Article 347 of the TCC, shares may not be issued at a price below their nominal value. Shares may be issued at a price higher than their nominal value only if there is a provision to this effect in the articles of association or if the general assembly adopts a resolution in this regard.

In this respect, issuance of shares with premium creates a distinction between the increased share capital amount and the total amount of funds contributed to the company, while enabling the company to obtain additional financing. This is because the share premium does not become a part of the company’s share capital; rather, it is included in the company’s assets and becomes subject to the statutory reserve regime.

Function of Capital Increase with Share Premium

Capital increase with share premium is particularly significant in practice where the actual economic value of the company is higher than its share capital. In such cases, issuing shares solely at their nominal value may result in the dilution of the shareholding ratios of existing shareholders who are unable to participate, or who participate only to a limited extent, in a manner incompatible with economic reality.

For this reason, issuance of shares with premium serves, on the one hand, to provide financing to the company and, on the other hand, to prevent the position of existing shareholders in the company from being impaired in a manner contrary to the principle of good faith and the principle of equal treatment. Particularly in investment rounds, it is possible to structure the total investment amount to be contributed by the investor by allocating a certain portion to share capital and the remaining portion to share premium, instead of adding the entire investment amount to the share capital.

Through this structure, the company obtains the financing it needs, while the shareholding ratios of the existing shareholders do not change to the extent that would arise if the entire investment amount were added to the share capital. Therefore, capital increase with share premium stands out as a type of capital increase in which both the financing need and the shareholding balance are taken into account.

Capital Increase with Share Premium under the Principal Capital System

In joint stock companies that adopt the principal capital system, capital increase is carried out by amending the capital clause of the articles of association. Therefore, capital increase with share premium is also, as a rule, carried out by a general assembly resolution.

Pursuant to Article 347 of the TCC, in order for shares to be issued at a price higher than their nominal value, there must be a provision to this effect in the articles of association or the general assembly must adopt a resolution on this matter. If the company’s articles of association contain an explicit provision allowing the issuance of shares with premium, the capital increase resolution may be adopted based on such provision. If there is no such provision, the general assembly must separately resolve that the shares will be issued with premium.

Within the scope of capital increase with share premium, all shares representing the increased capital must be subscribed. Subscription undertakings must clearly indicate not only the nominal value of the shares, but also the total amount payable due to the issuance of the shares with premium. In this regard, the subscription undertaking must specify, without any ambiguity, the number of shares, their nominal value, if any, their group, the amount of share premium, and the total payment obligation.

Payment of the Premium Amount

The payment regime in capital increases with share premium differs in certain respects from ordinary cash capital increases. Pursuant to Article 344 of the TCC, at least one-fourth of the nominal value of the shares subscribed in cash must be paid before registration, and the remaining amount may be paid within twenty-four months at the latest.

However, where shares are issued with premium, the entire amount of the share premium must be paid before registration. Therefore, the amount payable within the scope of the capital increase must be evaluated under two separate items. The first item is the capital subscription corresponding to the nominal value of the shares. The second item is the share premium amount exceeding the nominal value of the shares.

In practice, trade registry directorates require the submission of bank letters or receipts evidencing that both the minimum capital amount required to be paid by law and the share premium have been paid at the time of the registration application. Therefore, in capital increases with share premium, the bank blockage letter and payment documents are among the most critical documents in the registration process.

Board of Directors’ Report and Pre-Emption Right

Pursuant to Article 461 of the TCC, each shareholder has the right to acquire newly issued shares in proportion to their existing shares. This right is referred to as the pre-emption right and constitutes one of the fundamental mechanisms that protects the shareholding ratios of existing shareholders in joint stock companies against dilution arising from capital increases.

In capital increases with share premium, the report to be prepared by the board of directors is of particular importance. Where the pre-emption right is restricted or abolished, the board of directors is obliged to explain the reasons for such restriction or abolition. In addition, the reasons for issuing new shares with or without premium and the method of calculating the premium must also be set out in the board of directors’ report.

The main purpose of this report is to demonstrate the economic and legal rationale of the capital increase. In particular, factors such as the company’s financial condition, equity value, investment needs, negotiations with the potential investor, and the actual economic value of the shares may be taken into account in determining the premium amount. However, regardless of the method adopted, the rationale behind the calculation of the premium must be explained in an objective and verifiable manner.

Issuance of Shares with Premium under the Registered Capital System

In joint stock companies that adopt the registered capital system, capital increase may be carried out by the board of directors within the scope of the authority granted under the articles of association. However, in order for the board of directors to issue shares with premium, it must be explicitly authorized to do so under the articles of association.

Pursuant to Article 480 of the TCC, under the registered capital system, the board of directors may be granted the authority to issue shares with premium. For publicly held companies, special provisions regarding the registered capital system apply within the framework of Article 18 of the Capital Markets Law. In this respect, under the registered capital system, the board of directors’ ability to issue shares above their nominal value depends on its authorization under the articles of association.

When issuing shares with premium under the registered capital system, the board of directors must duly adopt resolutions regarding the capital increase, the premium amount, the exercise of pre-emption rights and, if applicable, the restriction thereof; such resolutions must be announced in accordance with the articles of association and capital markets legislation and, where necessary, published on the company’s website.

Special Regime for Publicly Held Companies

For publicly held companies subject to capital markets legislation, capital increase with share premium must be assessed within the framework of the Capital Markets Law and the regulations of the Capital Markets Board, in addition to the provisions of the TCC.

Pursuant to Article 12 of the Capital Markets Law, the price of issued shares must, in principle, be paid fully and in cash. In addition, the Capital Markets Board may require that the shares to be issued be sold at a premium price and that pre-emption rights be exercised at a premium price if the market price or book value of the shares is above their nominal value.

This regulation is important for the protection of investors and the maintenance of the principle of equal treatment among shareholders in publicly held companies. This is because, in publicly held companies, the market value of shares may be higher than their nominal value. In such a case, issuing shares at nominal value may disrupt the economic balance between existing shareholders and new shareholders.

Legal Nature and Use of Share Premium

Share premium is included in the company’s assets, not in its share capital. However, it should not be assumed that the company may freely use the share premium. Pursuant to Article 519 of the TCC, the portion of the premium obtained from the issuance of new shares that has not been used for issuance expenses, redemption provisions, or charitable payments must be added to the general statutory reserves.

Therefore, share premium is subject to the statutory reserve regime. Unless the general statutory reserves exceed one-half of the share capital or issued capital, they may only be used to cover losses, to continue the business in times of financial distress, or to take measures suitable for preventing unemployment and mitigating its consequences.

Accordingly, although the portion exceeding the nominal value that enters the company as a result of a capital increase with share premium strengthens the company’s equity, it does not constitute freely disposable income in the ordinary sense. This matter should be taken into consideration particularly in investment processes and financial planning.

Trade Registry Registration Process

For capital increase transactions, registration with the trade registry has a constitutive effect; accordingly, a capital increase with share premium becomes legally effective upon its registration with the trade registry. Therefore, the capital increase resolution must be registered with the trade registry within the period prescribed by law.

Within the scope of the registration application, the documents generally submitted include the notarized general assembly resolution, the amendment text of the articles of association, the list of attendees, the board of directors’ statement, subscription undertakings, the board of directors’ resolution regarding the pre-emption right and, if any, the board of directors’ report, the bank blockage letter, documents evidencing payment of the share premium, and the document evidencing payment of the Competition Authority fee.

In capital increases with share premium, three issues are particularly important in the trade registry review. The first is whether there is a provision in the articles of association or a general assembly resolution legally allowing the shares to be issued above their nominal value. The second is whether the entire premium amount has been paid before registration. The third is whether the reasons for issuing shares with premium and the method of calculating the premium are explained with sufficient clarity in the board of directors’ report.

Conclusion

Capital increase with share premium is an important capital increase method in joint stock companies that enables the financing needs of the company to be met while preserving the shareholding balance. Through this method, the required funds are provided to the company, while the difference between the actual economic value and the nominal value of the shares is taken into account, thereby preventing the existing shareholding structure from being disproportionately diluted.

However, capital increase with share premium is a process that must be prepared more carefully compared to ordinary capital increases. The provision in the articles of association or the general assembly resolution regarding the issuance of shares with premium, the board of directors’ report on the calculation of the premium, the pre-emption right regime, payment documents, and the trade registry application must be assessed as a whole.

Therefore, in capital increases with share premium, not only the amount of capital to be increased, but also the economic rationale for issuing the shares with premium, the method by which the premium amount is calculated and the impact of this structure on the balance among shareholders must be accurately set out.