How to Increase Capital in Joint Stock and Limited Liability Companies?

How to Increase Capital in Joint Stock and Limited Liability Companies? 

In company law, capital is not merely an accounting item; it is also a fundamental element that determines a company's economic strength, market credibility, and legal liability limits. Especially in joint-stock and limited liability companies, capital represents the value that shareholders pledge to contribute to the company, and this value serves as a guarantee mechanism for the company's continued operation.

However, business life is not static. Companies grow, invest, need financing, or want to strengthen their existing financial structures. This is where one of the most important institutions comes into play: capital increase. A capital increase means raising the amount of capital stated in a company's articles of association. However, this definition is insufficient to explain the complex structure in practice. Because a capital increase is not just about raising a figure; it is also about reshaping the company's financial structure, ownership relationships, and legal status.

The Turkish Commercial Code regulates capital increases in detail and subjects this process to specific procedural rules. The main reason for this is that capital directly concerns not only the shareholders but also the company's creditors. This is because capital is one of the most important indicators of a company's ability to meet its debts. Therefore, capital increase transactions are regulated in a way that protects both the rights of the shareholders and the trust of third parties.

Capital increases generally serve two main purposes. The first is to provide the company with new financing and increase its economic strength. This involves an influx of new value from outside the company, directly increasing its assets. The second purpose is to restructure the company's existing financial system and strengthen its balance sheet. In this case, there is no influx of new external resources; instead, the company's internal resources are converted into capital, creating a stronger capital structure.

These two different objectives form the basis of capital increase methods. In practice, capital increases are carried out either by using external resources or by converting internal resources into capital. This distinction is not only a technical difference but also quite important in terms of its legal consequences.

Another important aspect to consider during a capital increase is maintaining balance among the shareholders. Shareholding ratios in companies not only represent economic value but also determine management power and decision-making authority. Therefore, protecting the rights of existing shareholders is crucial when increasing capital. The legislator has foreseen various mechanisms to ensure this balance. The most important of these mechanisms is the priority right granted to existing shareholders to acquire new shares.

Furthermore, a capital increase is not merely an internal decision-making process. This transaction is subject to specific formal requirements and must be registered with the commercial registry. A capital increase without registration has no legal effect. This demonstrates that the capital increase process is not only about decision-making but also requires the completion of certain procedures to gain validity internationally.

In joint-stock companies, capital increases are carried out by a general assembly resolution, and this resolution constitutes an amendment to the articles of association. Therefore, it is subject to certain majority requirements. Similarly, in limited liability companies, a resolution of the shareholders' meeting is required. In both cases, the resolution must comply with the form and procedure prescribed by law.

Another important aspect of the capital increase process is oversight and transparency. Especially in companies of a certain size or publicly traded companies, this process is subject to the oversight of public authorities. This oversight aims to ensure that capital reflects reality and to protect investors.

In conclusion, a capital increase is a process that strengthens a company's financial structure, affects ownership relationships, and requires careful execution due to its legal consequences. A proper understanding and execution of this process are vital for both the company's sustainability and the protection of shareholders' rights.

To properly understand the capital increase process, it is necessary to clearly explain the methods used. Capital increases are not carried out using only one method; rather, they can be implemented using different techniques depending on the company's needs, financial situation, and strategic goals. In practice, these methods are broadly categorized into two main types: paid-in capital increase and bonus share issue.

This distinction is not merely a technical classification. Both methods have different effects on the company's financial structure, ownership balance, and legal consequences. Therefore, the choice of which method to use in the capital increase process is as critical a decision as carrying out the increase itself.

Capital Increase in Joint Stock and Limited Liability Companies (Increase through External Funding)

A paid-in capital increase is a method of increasing a company's capital by receiving cash or in-kind value from existing shareholders or new investors. The most distinctive feature of this method is that it provides an influx of new economic value into the company from external sources.

Therefore, a paid-in capital increase:

• investment in need
• financing gap
• growth target

This is one of the most effective methods for companies.

In capital increases, those who acquire new shares pay a specific price to the company. This price is directly reflected in the company's assets and increases its financial strength. However, this situation can also affect the company's ownership structure, as the distribution of new shares has the potential to change the shareholding percentages of existing shareholders.

This is where the most important legal protection mechanism comes into play : the right of priority.

Preservation of Pre-emptive Rights and Partnership Balance

Pre-emptive rights are a right that allows existing shareholders to acquire a share of the increased capital before anyone else. This right allows existing partners to maintain their shareholding ratios within the company.

The primary purpose of this arrangement is clear:
to maintain the balance of power within the company.

If pre-emptive rights were not granted, the entry of new investors into the company could significantly reduce the shareholding percentages of existing shareholders, or even completely change control of the company. Therefore, pre-emptive rights are an indispensable element of the capital increase process.

However, in some cases, the pre-emptive right may be restricted or completely abolished for the benefit of the company. This is only possible if certain conditions are met and the general assembly makes an explicit decision to that effect. Otherwise, the transaction becomes unlawful and may be annulled.

Capital Increase from Internal Resources in Joint Stock and Limited Liability Companies

A bonus share issue is a method where a company converts its own internal resources into capital. This method does not involve the inflow of new funds from outside the company.

The main sources used in bonus share issues are as follows:

• past year profits
• reserve funds
• capital adjustment positive differences
• revaluation funds

In this method, the company's total assets remain unchanged; only a transformation occurs between the items within the balance sheet. In other words, while the company's equity remains the same, its capital is increased.

This has an important consequence:
Partners become new shareholders without making any payment.

Therefore, a bonus share issue does not create a financial burden for the shareholders; on the contrary, it strengthens and organizes the company's capital structure.

The Key Difference Between Paid and Unpaid Capital Increases

The fundamental difference between a paid-in and a bonus share issue is the new value that enters the company's coffers.

• Capital increases bring a new source of revenue into the company
• In bonus share issues, existing resources are converted into capital

This difference has not only financial but also legal consequences. While paid-in share capital increases require the active participation of shareholders, bonus share capital increases involve a redistribution of existing rights.

Principle of Prioritizing Internal Resources

The Turkish Commercial Code has adopted an important principle regarding the capital increase process. According to this principle, if a company has funds that can be added to its capital, a direct cash capital increase cannot be made without utilizing these funds.

The purpose of this regulation is to ensure that the company's financial structure is accurately reflected. This is because a cash increase made without using internal resources may present the company's financial situation differently than it actually is.

Therefore, in practice:
-Internal resources are evaluated
first -then, if necessary, external resources are increased.

Capital Increase Through In-Kind Capital (Special Case)

Capital increases are not limited to cash or internal resources. Companies can also increase their capital by contributing in-kind capital.

In-kind capital:

• real estate
• intellectual property rights
• businesses
• machinery and equipment

It may consist of values ​​such as these.

However, in such capital increases, the accuracy of the value contributed is of great importance. Therefore, in capital increases with in-kind contributions, valuation procedures are subject to special methods and often require expert examination.

Choosing the Right Type of Capital Increase in Joint Stock and Limited Liability Companies

One of the most critical decisions in the capital increase process is which method to use. This choice:

• the company's financial needs
• partnership structure
• investment plans

It should be determined accordingly.

Choosing the wrong method:

• It can create imbalance between partners
• It could negatively affect the company's financial structure
• This can lead to legal problems

Although capital increases are based on similar principles in general, they are subject to different procedures and conditions in practice depending on the type of company. In particular, there are significant differences between joint-stock companies and limited liability companies in terms of both decision-making processes and implementation techniques. Therefore, to properly understand the capital increase process, it is necessary to evaluate each company type separately.

Capital Increase in Joint Stock Companies

Increasing capital in joint-stock companies is a highly systematic and strictly regulated process. This is primarily because joint-stock companies are generally larger in scale and have more complex shareholder structures.

Decision-making Process

In joint-stock companies, capital increases are generally general assembly resolution . Since this resolution constitutes an amendment to the articles of association, it is subject to specific quorum requirements stipulated by law.

However, in joint-stock companies subject to the registered capital system, the board of directors can also decide on a capital increase within certain limits. This provides great convenience, especially in commercial processes where quick decisions are required.

Ministry Representative Requirement

In joint-stock companies, an important aspect of the capital increase process is the mandatory presence of a Ministry representative at the general assembly meeting. This representative is especially required to be present at general assembly meetings where a capital increase is on the agenda.

This requirement shows that the capital increase process is not merely an internal company decision, but also a matter of public order.

Registration and Legal Validity

In joint-stock companies, capital increases only become legally effective upon registration with the commercial registry. Therefore, if the decision is not registered, the capital increase is considered invalid.

The registration period is of critical importance in practice. Applications not submitted on time may render the decision null and void.

Cash Capital Increase

In joint-stock companies, when a cash capital increase is made, a certain portion of the increased capital must be paid before registration. This regulation has been introduced to ensure that the capital reflects reality.

Capital Increase in Kind

In joint-stock companies, the accuracy of the value contributed through in-kind capital increases is of paramount importance. Therefore, an expert is appointed by the court to conduct a valuation. In-kind capital increases carried out without a valuation may be deemed invalid.

Capital Increase in Limited Liability Companies

Capital increases in limited liability companies have a simpler structure compared to joint-stock companies. The main reason for this is that limited liability companies have a more closed ownership structure.

Decision-making Process

In limited liability companies, capital increases a decision of the shareholders' meeting . Since this decision constitutes an amendment to the articles of association, it is subject to certain majority requirements.

However, the decision-making process in limited liability companies is more flexible and practical compared to joint-stock companies.

Registration Process

In limited companies, capital increases do not have legal effect until they are registered in the commercial registry. Therefore, timely registration of the decision is mandatory.

Registration is a complementary element of the capital increase process, and the increase cannot take place without this process.

Cash Capital Increase

In limited companies, it is also possible to increase capital in cash. In this case, the partners are obliged to pay the increased capital amount to the company.

However, compared to corporations, payment processes and auditing mechanisms may be more flexible.

Increase from Internal Resources

In limited companies, capital can also be increased from internal sources. In this case, the company's existing resources are converted into capital, and the partners receive new capital shares according to their share percentages without making any payments.

Key Differences Between Joint Stock and Limited Liability Companies

The differences between joint-stock and limited liability companies in terms of capital increase can be summarized as follows:

• In joint-stock companies, the process is stricter and more heavily regulated
• In limited companies, the process is more flexible and practical
• Joint-stock companies may be required to have a Ministry representative
• There is no such requirement in limited liability companies
• The registered capital system can be applied in joint-stock companies
• Limited companies do not have a registered capital system

These differences directly affect how the capital increase process will be conducted.

After outlining the theoretical framework and practical steps of the capital increase process, the most critical aspect of this area is its practical outcomes and judicial approach. This is because a capital increase is not merely an internal company decision; it is a transaction that directly affects the rights of shareholders, the confidence of creditors, and the legal existence of the company. Therefore, even the smallest procedural error can lead to the cancellation or invalidation of the capital increase.

At this point, Supreme Court rulings are one of the most important sources determining under what circumstances capital increase transactions are considered valid and under what circumstances they are deemed unlawful.

The Supreme Court's Approach to Capital Increase

The Supreme Court focuses on three fundamental principles when evaluating capital increase transactions:

• conformity to shape rules
• protection of partners' rights
• the reality of capital

The violation of any of these three elements may render the capital increase invalid.

Particularly in the practice of the Supreme Court of Appeals, it is not considered sufficient for capital increase decisions to have merely been made; it is required that these decisions have been made and implemented in accordance with the procedure prescribed by law.

Non-compliance with Formal Requirements and Their Consequences

Capital increase is a transaction subject to strict formal requirements. Therefore:

• failure to convene the general assembly in accordance with procedure
• failure to secure the necessary majority
• the decision is not clear and unambiguous

Situations like these may lead to the cancellation of the capital increase.

The Supreme Court generally considers the transaction "null and void" or "cancellable" in such cases. This results in the capital increase transaction being deemed invalid from the outset.

Violation of Priority Rights

One of the most frequently litigated issues in the capital increase process is the violation of pre-emptive rights. According to the Supreme Court, the right of existing shareholders to acquire new shares is one of the fundamental rights that must be protected.

Because:

• partners were not given sufficient time
• no information provided
• arbitrary restriction of rights

Situations like these may lead to the cancellation of the capital increase transaction.

The Supreme Court views the right of pre-emption not merely as a technical right, but as a fundamental mechanism for maintaining the balance of ownership in a partnership.

The Principle of the Reality of Capital

One of the most sensitive issues for the Supreme Court is whether the capital represents the true value. Especially in cash capital increases, it is of great importance whether the committed capital has actually been paid.

If:

• if the capital has not been actually paid
• if a value that does not actually exist is presented as capital

In this case, the capital increase may be considered invalid.

A similar approach applies to capital increases in kind. If the valuation is not carried out accurately, or if the property is shown to be worth more than its true value, the Supreme Court deems these transactions unlawful.

Partners' Rights

The rights of shareholders during a capital increase are of great importance in terms of the legality of the transaction.

Partners:

• They have the right to participate in and vote on the capital increase decision
• They can protect their share percentages by exercising their pre-emptive rights
• You can file a lawsuit to annul unlawful actions

These rights are the most important safeguards preventing the arbitrary conduct of the capital increase process.

Protection of Minority Shareholders

Protecting minority shareholders is of paramount importance during the capital increase process. This is because the process can be used by majority shareholders to exert pressure on the minority.

The Court of Appeals adopts a protective approach for minority shareholders in such cases and:

• abuse of rights
• disruption of partnership balance

It intervenes in situations such as these.

Creditors Protection

Capital increases concern not only shareholders but also company creditors, as capital serves as a form of security for creditors.

Because:

• capital does not reflect reality
• increases without compensation

In such cases, creditors may suffer losses. The Supreme Court protects creditors by deeming the capital increase invalid in these situations.