AMENDMENTS AT THE IMPLEMENTATION OF THE COMMUNIQUÉ REGARDING CAPITALL LOSS AND NEGATIVE EQUITY IN THE FRAME OF CORPORATE GOVERNANCE IN TURKEY

“The Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102 (“Communiqué”)” had been published in the Official Gazette dated December 15, 2018. Within the scope of the communique, the procedures and principles to be followed in cases of capital loss and negative equity had been explained. In order to expand the scope of the current practice which has been in effect, “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 and entered into force on the same day.

Various amendments in the practices that will be applied in cases of negative equity and capital loss were foreseen in this communique and these amendments are aimed at eliminating some economic problems experienced during the pandemic.

In this context, with the purpose of ensuring that the companies experiencing capital loss or negative equity to conduct their commercial activities with fewer resources, the equity calculations contained in the content of the relevant article have been regulated as follows; 

• The Communiqué regulates the situations where the sum of the share capital and the statutory reserves being uncovered by taking into account the “loss”.

According to new regulation, the situation where at least half of the sum of the share capital and the statutory reserves is uncovered due to financial loss occurs when the loss is, equal to half of or more than half and less than two-thirds of the sum of the share capital and the statutory reserves. Thus, in line with this amendment, the Communiqué regulates that at least two-thirds of the sum of the share capital and the statutory reserves are uncovered, if the loss is equal to or  more than two-thirds, of the sum of the share capital and the statutory reserves.

• Unless the share capital decrease in the event that at least two-thirds of the sum of the share capital and the statutory reserves are uncovered, without any specific rate requirement, companies can continue their activities with remaining share capital.

Under the Communiqué, in case that at least two-thirds of the sum of the share capital and the statutory reserves is uncovered due to financial loss, general assembly may decide to decrease the share capital up to the minimum capital amount determined provided that at least half of the sum of share capital and legal reserves will be preserved within equity.

• The capital completion fund can only be used for setting off the losses. 

One of the amendments made within the scope of the new regulation is that the capital completion fund, which is contributed by all or a part of the shareholders in order to cover balance sheet deficits and recorded under the equity, can only be used by offsetting losses.

• Without prejudice to the provisions of the capital market legislation of public joint stock companies, the Communiqué states that the cash capital contribution will be paid pursuant to the general rule foreseen under the relevant articles of Turkish Commercial Code for capital increases simultaneously after the capital decrease transaction which is performed by offsetting losses

In this context, for limited liability companies, the share capital increased simultaneously can be paid within 24 months after registration; for Joint Stock Companies, at least 25% of the cash capital contribution must be paid before registration.

• In other respects, when the capital loss is compensated through a direct capital increase, the amount of the share capital to be paid shall be determined according to the capital to be preserved.

This regulation can be implemented provided that at least half of the sum of the share capital to be registered in consequence of the transactions to be carried out within the scope of the Communiqué and the statutory reserves are preserved in equity and the share contributions are paid in full.  In accordance with this new regulation, it is stipulated that the amount of the share capital that must be preserved will be taken into account, not the amount of the capital that has been increased in terms of determining the amount that must be paid. Thus, it rendered possible to decrease the amount of the share capital to be paid during the capital increase.

• In addition to paragraph 1 of article 10 of the Communiqué, it enables the capital increase and decrease to be issued in the same general assembly. 

However, as a result of such transactions mentioned above, at least half of the total of the share capital to be registered and legal reserves must be preserved in the company’s equity.

• Half of the sum of expenses arising from leases, amortizations and personnel expenses accrued in 2020 and 2021 may now be excluded from the calculations to be made regarding capital loss and negative equity, in addition to the exchange difference expenses.

The current practice can only apply for the exchange difference expenses arising from foreign currency obligations that have not been performed, until 01.01.2023.  Under the new regulation, it clarifies that all exchange difference expenses will be considered within this implementation. The Communiqué further stipulates that the above amounts will be calculated without being repetitive; that no records will be included in the financial statements in relation to these calculations; and that the situation will be shown in the footnotes for information purposes.

As a result, it is important that the new regulations provided for in the Communique must be taken into account when evaluating the financial position of companies, and where is a capital loss or negative equity, the required calculations will be carried out in compliance with the legal legislation.

Nilsu Sertoğlu, Attorney At Law