Capital Increase and Decrease: Arising Disputes

Entrance

Capital increases and decreases are significant financial transactions that companies undertake depending on economic conditions, investment needs, or borrowing strategies. The legal regulations that companies must adhere to during this process are crucial for protecting shareholders' rights. However, disagreements can arise among shareholders during capital increases and decreases. This article will examine the legal framework of capital increases and decreases, the disputes that arise during this process, and the challenges encountered in judicial proceedings.

1. Legal Basis for Capital Increases and Decreases

Capital increases and decreases are subject to the provisions of the Turkish Commercial Code (TCC). The TCC regulates the rules and procedures that companies must follow when making changes to their capital structure

• Capital Increase: A capital increase is when a company increases its existing capital by issuing new shares or through internal sources. In this process, matters such as the decision-making process by the company's general assembly, the type of capital increase (cash, internal sources, etc.), and the priority rights granted to shareholders must be carefully considered.
• Capital Reduction: Capital reduction is the process of decreasing a company's capital to restructure its finances, pay off debts, or make changes to its structure. During a capital reduction, protecting creditors' rights, considering the impact of the reduction on the company's financial health, and following legal procedures are crucial.

2. Disputes Arising During Capital Increases and Decreases

Various disputes can arise during the process of increasing or decreasing capital. These disputes generally occur between shareholders and between company management and shareholders

• Pre-emptive Rights and Share Distribution Disputes: During a capital increase, existing shareholders have a pre-emptive right. This right ensures that new shares are allocated to existing shareholders, thus preserving their shareholding ratios. However, in some cases, this pre-emptive right may be violated, leading to disputes among shareholders. Shareholders can seek legal recourse to protect their rights if their pre-emptive rights are violated.
• Lack of Shareholder Information: Insufficient information provided to shareholders when decisions regarding capital increases or decreases are made is another source of disputes. Particularly during capital increases, shareholders must be given detailed information about the reasons for the increase, the amount increased, and the financial consequences of the process. A lack of information can hinder shareholders' participation in the decision-making process and may lead to litigation.
• Capital Reduction and Creditor Protection: During a capital reduction, the company's creditors may also be affected by the process. If creditors believe they may suffer a loss of rights due to the capital reduction, they may object to the reduction, which can lead to legal disputes. Creditors have the right to pursue legal avenues to protect their claims during the capital reduction process.
• Disputes Between Company Management and Shareholders: When company management makes decisions regarding capital increases or decreases at the general assembly, some shareholders may argue that these decisions will harm the company's financial situation or violate their personal rights. In such cases, shareholders can file a lawsuit to annul the general assembly decision.

3. Court Decisions and Capital Increase/Decrease Disputes

The Supreme Court has issued many important decisions regarding capital increases and decreases. These decisions play a guiding role in shaping the application and resolving disputes between the parties. The Supreme Court's decisions particularly emphasize the following points:

• Annulment of General Assembly Resolutions: The Supreme Court emphasizes that decisions regarding capital increases or decreases must be transparent and in accordance with the law, in order to protect the rights of shareholders. In cases such as lack of information or unfair share distribution, the general assembly resolutions can be annulled.
• Protection of Creditors: The importance of protecting creditors during capital reductions has been frequently emphasized in Supreme Court rulings. It has been stated that the rights of creditors should not be violated and that the capital reduction should not harm the company's financial situation.
• Protection of Company Interests: The Supreme Court emphasizes that capital transactions must be conducted in a way that protects the long-term interests of the company. In particular, it states that during capital increase or decrease processes, the company's financial structure must remain balanced and the rights of shareholders must not be harmed.

4. Alternative Solutions for Capital Increases and Decreases

In resolving disputes arising from capital increase and decrease processes, alternative dispute resolution methods can be used in addition to judicial proceedings

• Mediation and Negotiation: Mediation is an effective method to try before resorting to litigation for resolving disputes between shareholders. It can help achieve reconciliation by improving communication between the parties.
• Independent Audit Reports: Independent audit reports that evaluate the company's financial structure and the transparency of transactions during capital increases and decreases can increase shareholder confidence and prevent disputes.

Conclusion

Capital increases and decreases are crucial processes that require companies to pay close attention to legal regulations when making changes to their financial structures. Protecting shareholders' rights, preventing harm to creditors, and safeguarding the company's long-term interests are vital in preventing legal disputes during these processes. Guidance from Supreme Court rulings and the effective use of alternative dispute resolution methods can contribute to resolving disputes arising during capital increase and decrease processes. It is critical for both shareholders and the future of the company that companies conduct their capital transactions in a legally compliant and transparent manner.