Newsletter on the Amendments to the Communiqué Regarding Capital Loss and Financial Distress
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. With this communiqué, the following amendments were made to the Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102 (“Communiqué”).
The amendments made in the definitions of each capital loss event are as follows. There has been no amendment as to the negative equity definition regulated under Article 12 of the Communiqué:
- 1st Situation – At least half of the sum of the share capital and the statutory reserves being lost due to financial loss.
- As per the amendment of paragraph 1 of article 6 of the Communiqué, the event where at least half of the sum of the share capital and the statutory reserves is lost due to financial loss occurs when the loss is, (i) equal to half of or (ii) more than half and less than two-thirds of the sum of the share capital and the statutory reserves. With this change, it is aimed to eliminate the hesitations in practice.
- 2nd Situation – At least two-thirds of the sum of the share capital and the statutory reserves being lost due to financial loss.
- As per the amendment of paragraph 1 of article 7 of the Communiqué, the event where at least two-thirds of the sum of the share capital and the statutory reserves is lost due to financial loss occurs when the loss is, (i) equal to two-thirds or (ii) more than two-thirds of the sum of the share capital and the statutory reserves. With this change, it is aimed to eliminate the hesitations in practice.
- For the same purpose, the requirement of “continuing the operations with the remaining one-third of the capital” stated as one of the improvement measures in subparagraph (a) of paragraph 1 of article 7 of the Communiqué has been abolished. The compatibility of this abolishment with the Turkish Commercial Code is controversial.
Amendments regarding the measures to be taken in case “at least two-thirds of the sum of the share capital and the statutory reserves is lost due to financial loss“, regulated in paragraph 2 of article 376 of the Turkish Commercial Code:
- Share Capital Decrease
- As per the amendment of paragraph 1 of article 8 of the Communiqué, in the event that at least two-thirds of the sum of the share capital and the statutory reserves is lost due to financial loss, general assembly may decide to decrease the share capital up to the minimum capital amount required under the Turkish Commercial Code, provided that at least half of the sum of share capital and legal reserves will be preserved within equity.
- Share Capital Completion
- Paragraph 3 of article 9 of the Communiqué regulates that the payments made in accordance with the obligations to cover the balance sheet losses will be collected and recorded in the capital completion fund account under the company’s equity. The last sentence added to this paragraph 3 envisages that the capital completion fund can only be used for setting off the losses.
- Share Capital increase
- As per the amendment of subparagraph (a) of paragraph 1 of article 10 of the Communiqué, in the event that general assembly decides to decrease the share capital by the amount of the actual loss and simultaneously therewith, increase the share capital to the requested amount, twenty-five percent of the amount of the shares subscribed in cash shall be paid before the registration in joint stock companies. No such pre-registration payment will be required for limited liability companies.
- Subparagraph (b) of paragraph 1 of article 10 of the Communiqué regulates that a company may also decide to directly increase the share capital by the amount of the actual loss without the necessity for decreasing the share capital. Within the framework of the changes made in the Communiqué, in case of such share capital increase, the amount that will ensure the preservation of at least half of the sum of total legal reserves and the share capital within equity, must be paid before the registration of the share capital increase.
- As per subparagraph (c) added to paragraph 1 of article 10 of the Communiqué, 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 above-mentioned condition and then decrease it in the same general assembly meeting. However, as a result of such transactions, at least half of the total of the share capital to be registered and legal reserves must be preserved in the company’s equity.
Changes in expense items that will not be considered in the calculations:
As per the amendment made in the provisional article 1 of the Communiqué, in addition to the foreign exchange losses for the years 2020 and 2021, half of the total of the accrued lease expenses, amortizations and personnel expenses may now be excluded from the calculations to be made within the scope of article 376 of the Turkish Commercial Code. Thus, the types of expenses that companies will exclude from the calculations to be made within the scope of article 376 of the Turkish Commercial Code have been varied.