Additional Report Requirement for Capital Increase via Setting Off Shareholder Receivables


İstanbul Trade Registry has made an announcement on 21 September 2015 regarding the list of documents and procedures requested to complete capital increase in joint stock companies (the “Announcement”). The Announcement is based upon the general circular of Ministry of Customs and Trade, which is applicable to all trade registries in Turkey.

In principle, if the capital increase is made by adding the internal funds or capital subscription amount itself or both together; the Registry requires a specific report outlining the details of such and which is specifically to include as to whether the share capital is fully paid up or unreturned; net asset of company; and internal funds that to be added to the share capital is actually existing in the company or not (the “Report”). The Report is prepared by certified public accountant or in the companies subject to audit, by the auditor.

The Announcement sets forth an amendment in relation to the Report. In the event the capital increase is planned to be made by adding the internal funds through setting off the shareholders receivables the company, such report shall explicitly indicate that the capital increase amount is to be provided through internal funds that to be arisen the cash indebtedness of the relevant shareholder(s); otherwise, a separate expert report and expert assignment extract shall be required by the Registry to further clarify the source of such indebtedness.

With this amendment, it is intended to have further clarification on the source of capital increase amount to be added into the share capital. It is worth to highlight that in case the capital increase amount is to be provided by way of setting off the receivables of the shareholder(s) its cash indebtedness, the trade registry does not demand an additional expert report; but specific highlighting of the cash indebtedness item in the Report, is satisfactory for the relevant trade registry. On the other hand, if the capital increase amount is not related to the cash receivable of the relevant shareholder, an expert shall be assigned in order to determine the source of the amount, which is remaining in the internal funds and planned to be added to the share capital as capital increase amount.
It should be noted that this requirement has already been requested within the scope of the capital increase registrations of limited liability companies. Now, with the above implementation, it is also applicable for registration of capital increase in joint stock companies.

Mass Sale of Substantial Amount Of The Joint Stock Company’s Assets under TCC
Article 408/II of Turkish Commercial Code (“TCC”) enumerates the non-transferable duties and authorities of general assembly and grants the shareholders the exclusive authority to decide on the issues listed thereunder. Aforementioned article explicitly rules, in line with the Court of Appeals practice in Turkey, that the mass sale of substantial amount of the joint stock company’s assets requires a general assembly resolution and does not allow the company to proceed on such sale with without general assembly approval; but only having the board of directors resolution.

Foregoing provision of Article 408/II has recently opened the doors for, among others, issues which may be grounds for different arguments in current practice. One of the major questions is as to how to determine the scope of “substantial amount” of assets.

According to aforementioned article, it is worth to note that, this provision is not applicable to any scenario where any mass sale of the company is intended; rather it is “substantial amount” element that makes the relevant sale/disposal to fall in scope of this provision. However, TCC remains silent in terms of what the “substantial amount” refers to.

An opinion in doctrine identifies the said threshold for the substantial amount as %60 of company’s assets; arguing that the amount should be determined in a way to secure the legal system and to protect the benefits of the company as much as possible. On the other hand, some scholars claim that the substantial amount should be assessed on case by case basis taking into account the assets of the company, its field of operation and financial condition. The rationale behind this is that it is not possible to determine such amount objectively in advance and it is required to analyze whether or not the company can continue to properly operate its business following the sale of assets. Further, Capital Markets Law (No: 6362) and Communiqué on Common Principles Regarding Significant Transactions and Exit Right (“Communique”) envisage the substantiality criteria for publicly-held companies. According to this Communique, the transfer of an asset (creating right in rem on such asset) shall be considered substantial if (i) the value of the asset subject to the transaction exceeds %50 of the total assets of the company or (ii) the financial value of such asset’s contribution to the company’s income is more than %50 of the annual income stated in the last financials of the company.

Although the above approaches are to be of reference in interpretation; yet, there is no any further legislative guidance or court ruling that would help to set the details as to how to determine “substantial amount” for the purpose of Article 408/II .

Unilateral Termination of Derivative Agreements in Covered Bond Transactions
In last years, with adoption of specific legislation by the Capital Markets Board of Turkey, covered bonds have become one of the attractive ways of funding for issuers in Turkey. In the meantime, there have been certain amendments imposed on the said legislation which cover derivative transaction principles in respect of the cover pool used in the transaction. Article 11 of Communiqué on Covered Bonds (III-59.1) (“Communiqué”) which sets forth the principles on the derivative instruments that may be included in the cover pool for covered bond issuances, is amended by a communiqué which was published in the Official Gazette dated 20 October 2015 and numbered 29508. Prior to the amendment, this article did not allow termination of a derivative agreement unilaterally (even in case of bankruptcy of the issuer) until all debts on outstanding covered bonds are redeemed which had given rise many questions for transaction parties including rating agencies and arrangers. With this amendment, certain termination events such as default under both derivative agreement and covered bonds and legal impossibility) that are listed in the fourth paragraph of the said provision can be included in the agreement subject to the Capital Markets Board’s approval. The amendment also provides that the Capital Markets Board may allow inclusion of other termination events which are similar to the ones explicitly stated in the article.

Legislative Highlights
For the purpose of the adaptation of Turkish banking regulations with Basel III requirements, the amendments to the certain regulations and communiques listed below have been published in the Official Gazette dated 23 October 2015 and numbered 29511, the drafts of which have been previously released by Banking Regulation and Supervision Agency of Turkey:

(i) Regulation on Equities of Banks,
(ii) Regulation on Internal Systems and Internal Capital Adequacy Assessment Process of Banks,
(iii) Regulation on Procedures and Principles regarding Accounting Practices of Banks and Document Keeping,
(iv) Communiqué on Credit Risk Mitigation Techniques;
(v) Communiqué on Financial Statements to be Disclosed by Banks, and
(vi) Communiqué on Preparation of Banks’ Consolidated Financial Statements.

In addition to the foregoing amendments regarding the banking legislation, new regulations and communiques listed below which replace the previous ones, have also been published in the same Official Gazette:
(i) Regulation on the Measurement and Evaluation of Capital Adequacy of Banks,
(ii) Communiqué on the Calculation of Credit Risk Amount with an Approach Based on Internal Evaluation,
(iii) Communiqué on the Risk Measurement Models and Calculation of Market Risk, and
(iv) Communiqué on Calculation of Risk Weighted Amounts regarding Securitizations.

Legislative Highlights
- The Competition Authority published amendments to the Communiqué Concerning the Mergers and Acquisitions Calling For Authorization of the Competition Board (No. 2010/4) and Communiqué on Application Principles regarding Competition Breaches (No: 2012/2) on the Official Gazette dated February 15, 2016. The amendments to both communiqués mentioned above are related to MERSİS numbers of the applicants and electronic notices, whereby the Competition Authority (in addition to the existing required information) require MERSİS numbers and electronic notice addresses of the applicants under Article 2 of the Notification Form Concerning Mergers and Acquisitions and Article 5/II of the Communiqué on Application Principles regarding Competition Breaches.

- Principle Decision of the Capital Markets Board dated February 4, 2016 and numbered 4/117, which has been published in the Capital Markets Board Bulletin numbered 2016/4; states that all companies listed in the stock exchange are obliged to implement and apply the system (which is provided by the Central Registry Agency) regarding participation and voting to general assembly meetings through electronic environment.

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Yours faithfully,