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Legal ReviewINCREASING THE CAPITAL STOCK AND THE ANNULMENT OF THE DECISION TO INCREASE THE CAPITAL STOCK IN JOINT STOCK COMPANIES

February 24, 20150

In this month’s bulletin we are going to cover how the capital stock may be increased with a decision of the general assembly and in what kind of situations these decisions will be invalid for joint stock companies in which we come across in key sectors that bring a large amount of capital such as banking and insurance.

A joint stock company; is a type of company which functions under a commercial name, its capital is certain and divided into shares, its responsibility for its debts is with all of its assets and the responsibilities of the partners are limited with only the amount of capital they have promised.

The people who have claims from the company cannot resort to the partner’s personnel properties in order to collect their claims. For this reason the amount of the original capital shown in the Memorandum of Association of the company is important for the claimants who have a commercial relationship with the company.

The legislator in order to provide that the shareholders bring with its real value what they have promised in the Memorandum of Association to the company and then prevent it from being returned to the shareholders has foreseen some various precautions and has stated that in some situations the decision to increase the original may be invalid.

The capital stock is the expression in cash of the total amount of assets the shareholders promise to bring the company at the time the company is being established in order to fulfil the company’s objectives.

The capital stock must entirely be promised by the partners and must be specified as definite and divided into shares.

As for increasing the capital stock, the amount of capital stock shown in the Memorandum of Association may be increased by following the method shown in the Law.

Increasing the capital stock, even if it is possible by changing the Memorandum of Association, because of its importance is bound to different sanctions which are separate from the ones in order to change the main contract.

The importance comes from the fact that the decision to increase the capital stock is a general assembly’s decision which creates a legal procedure in which affects the partnership at a first degree and also that the shareholders majority right is defined by the divided shares of the capital stock, and by changing the capital stock creating new shares or by increasing the value of the shares which exist may create a possibility which will affect the present shareholders negatively.

The regulations on increasing the capital stock may be found dispersal in the Turkish Code of Commerce – hereafter it will be referred to as TCC) Capital Markets Law and the legislations which come out according to this law and also some over special laws .

The General Assembly may optionally attempt to increase the capital stock by evaluating the partnerships’ internal and external conditions, money and capital conditions and the business and investment necessities.

In joint stock companies the decision to increase the capital stock may be given to various different reasons.

When no reason to increase the capital stock is given or when the reason is invalid these facts do not make the procedure of increasing the capital stock invalid.

The reasons to increase the capital stock may be to avert the need for funds which are needed for new investors or because of the increase in the company’s activities, the desire to expand the company’s level of activity or the capital being insufficient because of inflation.

For the General Assembly’s decisions to have an existence and become valid some conditions are looked for in some various law regulations. Legal disability (when failing to comply with mandatory rules of procedure) may be seen in four ways according to the nature of the law regulation which has been breached. These are inexistence, nullity and pending nullity, annulment. We want to explain these four situations in the light of the decisions of the Court of Appeals.

1- INEXISTENCE: An inexistence may be a subject when there is a contradiction to the mandatory regulations which have the characteristic of being establishing-formal and which defines the necessary conditions needed for a legal procedure to occur and the legal procedure cannot be established due to this.

Inexistence may be claimed by anyone who has a benefit from it and may be claim without being bound to any time restrictions it may also be considered by the judge on his own accord.

The definite decision which detects that the decision to increase of the capital stock was inexistent this is not a decision which brings forth new consequences instead it has an explanatory character.

In order for the decision to increase the capital stock not to be accepted as inexistent there has to be a General Assembly Meeting which was done according to the law and in this meeting the decision to increase the capital stock must have been given.

In order for the invitation to the General Assembly to be valid; the invitation must be made to all of the shareholders, it must be done by the authoritive and commissioned bodies or people and it must be at a certain place and time which the shareholders can predict that the General Assembly will assemble, by showing normal interest and caution.

For example, if the invitation for the General Assembly is not made by the appropriate authority or if a General meeting is made without any invitations at all or if there is a meeting record which does not have the signature of the Government commissioner then the decision to increase the capital stock is accepted as inexistence.

On this subject, the 11th Civil Chamber of the Court of Appeals, 30.09.2004 dated 2003/12717 E. and 2004/9100 K. numbered decision this conclusion has been made; ‘‘In this mentioned case according to the 370th article of the Turkish Commercial Code, the General Assembly’s decisions have been accepted as inexistent because the Meeting has commenced without carrying out the formal procedure for invitation and has been shown as if all 5 shareholders had been gathered although the plaintiff has not been in any of the meetings and also it has been detected that a fake signature in his name was made in order to show that the plaintiff was in the meeting.”

The same Civil Chamber of the Court of Appeals delivered a decision at the date of 24.09.1993 and numbered 1992/5419 E. 1993/5326 K. which states that; ‘‘ In order to mention about a General Assembly’s decision, firstly the shareholders must have had gathered and decided accordingly to the main contract and the Laws. If the shareholders could not have gathered and decided accordingly to the Memorandum of Association then the decision made is accepted as inexistent. In order to annul a decision which has been vitiated by inexistence or for the case in detecting inexistence the binding time limits shown in the laws shall not be applied. Also the judge has to take this factor into account while inspecting the case on his own accord.”

By the Assembly of the Civil Chamber make a decision on 20.11.2002 numbered 2002/11-825 E. 2002/998 K. stating that when a decision has been made without abiding to the contract and the higher quorum then it will be accepted as in existent.

2- NULLITY: When a procedure is formally established but its contents are against mandatory regulations, morality, morals or if they are impossible to conclude then nullity comes into question.

For example, a General Assembly’s decision which does not correctly restrict the pre-emptive right is deemed against morality and is null.

Or when a partnership has made the decision to increase the capital stock but it has been declared as bankrupt by the court then the decision becomes null because the subject of increasing the capital stock has become impossible.

In a decision of the 11th Civil Chamber of the Court of Appeals dated 31.05.2001 and numbered 2001/3799 E., 2001/4868 K. the plaintiff, who is a establishing partner of the defendant company has claimed that in the 13.9.1991 dated decision of the General Assembly the capital stock was increased but on this matter the permission of the privileged shareholders was not given and therefore has to be invalid and has requested and has opened a case for the detection of the nullity of this registration

If the reason which brings forth nullity is only related to a part of the contract and if it is accepted that the parties would do the contract without this part then only the mentioned part accepted as null and this situation is called partial nullity.

The only precondition for a partial nullity is; being able to divide the legal consequences of the decision in which according to the General Assembly’s desire constitutes a whole and has interiors bounds between its parts.

Inexistence and the detection of nullity lawsuit are opened against the joint stock company. The authorized court will be the court of the place where the company’s registered office is. On the other hand the authority of the courts is determined according to the object of demand as the Court of Peace or the Court of First Instance.

If there is a Court of First Instance found at the place where the registered office of the company is, then the lawsuit must be opened at this court. If the decision of refusing the case is made for the lawsuit concerning inexistence or the detection of nullity then this only binds the parties of the case, however if this case is accepted as a definite judgement then this binds all the shareholders whether they were a side to the case or not and it is also valid and binding to the company and to third persons as well.

Inexistence and null transactions may not be amended later on, it may only be valid if the procedure is done again. Definite nullity may be forwarded by anyone who has a legal benefit and may forward it by means of objection in front of any authority or may also make it an independent case.

Also it is a subject which must be looked into by the judge as well on his own accord. Just like every right the right to claim the nullity of General Assembly decisions may only be done in the frame of the good faith.

For example the 11th Civil Chamber of the Court of Appeals has made the decision dated 17.10.2003, 8620 E., 1197 K. states that, the plaintiffs have participated in the decisions of the Board of Directors and the General Assembly relating to the increase of the capital stock and have partially paid the amount of the new shares which fell on them from their own shares they have abused their right to claim the nullity of the decision to increase the capital stock.

The legal consequences tied to inexistence and nullity although limited they are still different. In the case of nullity although the legal procedure formally exists the objected terms have no consequences on anybody from the beginning.

On the other hand in the case of inexistence because the establishing components of the legal procedure are missing it does not even gain a formal existence. Legally when a procedure is nonexistence no legal consequence can be tied to it whereas a null procedure which exists formally may be kept alive by means of transformation.

3- PENDING NULLITY:

If in order for a valid legal procedure to bring into effect the terms in which is objected is tied to the fact that another legal procedure or action is implemented, then this procedure is accepted as pending nullity.

For example when a decision on increasing the original capital of a joint stock company is made it has to be approved by the privileged shareholders groups and if they exist, privileged shareholders who have privileged in making the decision to increase the original capital or by the council which these members have established otherwise the decision can not be implemented in other words it will be deemed as pending nullity.

Also until the General Assembly’s decision to increase the capital stock is registered, the decision will be deemed as pending. So if the additional conditions are met then this procedure is valid, if not then it is deemed invalid, and in the period which passes in between the procedure is called pending nullity.

4- ANNULMENT LAW SUIT:

Annulment of decisions for increasing the capital stock is regulated between 334 and 381 articles of the TCC.

When the General Assembly’s decision to increase the capital stock is against the law, Company contract or objective good faith then a law suit may be opened to annul it. In joint stock companies decisions are made by getting the majorities opinion and this decision also binds people who have not participated in the meeting and also the ones who voted against the decision as well.

In order for an annulment law suit to be opened there has to be a General Assembly’s decision, this decision has to be against the law, main contract or principles of good faith. There also should be a casual connection between the decision and the contradiction.

Contradiction to the law includes all the articles in the laws, the general customs and contradiction to the equality principle and the principle of using rights in the way which will cause the least harm to someone else.

As a rule contradiction to a bylaw or legislations decisions or notifications do not give ground to annul a decision. The question of whether a General Assembly’s decision is null, nonexistence or can be annulled may be debatable and there are different views on this subject.

For this reason a distinction of when something is absolutely invalid or when it may be annulled has become necessary. On this subject there is no consensus in the court rulings.

For example, in order to prevent exercising pre-emptive rights by the shareholders with the intention of weakening the status of shareholders who have a small amount of shares , to make a decision to increase the capital stock on the inappropriate time and if the company’s finance situation higher than it needs to be , it contradicts with the principle of using rights in the way which will cause the least harm to someone else and the principle of good faith and therefore needs to be annulled. In one of the 11th Civil Chamber of the Court of Appeals decision which dated 11.12.1995 numbered 95/8154 E. 95/9165 K. this conclusion has occurred.

The plaintiff who is a shareholder of the company which is the defendant claims that in the 30.12.1994 General Assembly’s decision, the capital stock was increased without including a new reassessment fund and when there was no need for the company to make new investments, because this decision is made for the majorities convenience and aims to decrease the shares of the minority, also because it is contradictory to the rules of good faith, the Court must examine these claims and if such a goal exists then the Court must annul the decision.

The contradiction with the decision to increase the capital stock and the Memorandum of Association usually comes up when the Memorandum of Association’s special provisions on increasing the capital stock are not followed appropriately. For example; if the main contract says that the decision to increase the original capital must be accepted with a 90% majority but this majority has not been succeeded then this decision is contradictory to the main contract and therefore needs to be annulled.

In order for decision to be annulled the party/parties must open an annulment law suit. The law suit may be opened by anyone of the shareholders, supervisors or also by the Board of Directors and its members. The defendant is the company and it is represented by the Board of Directors. However if the Board of Director is the plaintiff then the Supervisory Board represent the company.

If both the Board of Directors and the Supervisory Board open the suit together then an administrator must be appointed in order to represent the company.

The annulment law suit must be opened in the 3 month time limit beginning from the time the decision was made. This period is checked by the judge on his own accord.

The annulment law suit must be opened at the Commercial Court at the place where the registered office of the company is, if there is no such court at this place then it should be opened at the Court of First Instance. With a request from the company, the Court, may decide for appropriate guarantee to be given by the plaintiffs for the possible damages that may occur to the company from this law suit.

As a rule when a law suit is opened this does not delay the appliance of the mentioned decision yet if it seems necessary then after the opinion of the Board of the Directors or the Supervisory Board is taken the Court may decide to delay the enforcement of the decision.

When the final decision of refusing the annulment law suit is given this only applies to the sides of the suit whereas when the final decision of annulment is given this applies to all the shareholders, the Board of Directors and Supervisory Board members and third persons as well whether they were a side of the law suit or not.

The annulment decision has consequences which will be retroactive. When the court decides to refuse the law suit then the company, by proving that the plaintiffs opened the law suit with in bad faith, may apply for the plaintiffs joint liability on the damages which was caused to the company.

Since the decision by the General Assembly which can be annulled is valid until it is annulled. If it is not possible to see that the decision may be annulled or that the appliance of this decision can harm the company by showing the necessary care and attention which is expected from the prudent businessman then the Board of Directors should not be held responsible for applying the decision which has been annulled.

The decision to increase the capital stock and the decision relating to the annulment of it must be registered to the Trade Registry.

If by law the right to annul the decision of increasing the capital stock is diminished, in other words, if the 3 month period has been already expired then the registry officer must register this decision to the Trade Registry.

However if a law suit against the decision to increase the capital stock is made in the time limit given or if it is still possible to open a law suit then the trade officer may decide accordingly to the situation by bearing in mind the chance that the law suit may be finalized negatively and balancing the damages which may occur by registration or annulment may decide to register completely or partially or may refuse the request for registration.

However on this subject there are contradictions in the rulings of the courts. For example, 11th Civil Chamber of the Court of Appeals decided in a case dated 13.10.1982 and 82/3701 E. 82/3867 K. in this way: In the case the General Assembly meeting and the date of the decision was 22.2.1982. On the other hand the trade officer’s refusal of registration was 1.3.1982.

According to the article 381 of the TCC, the 3 month period will expire at the date of 22.5.1982. The Trade officer will either use his own appreciation in case of existence of contradiction to the Memorandum of Association when confronted with a decision which is legal by comparing the benefits of the company and the third persons or the officer will either register or refuse the request for registration.

In the case the trade officer may begin legal procedures in the name of the Board of Directors which have registered the results which are contradictory to the main contracts 22th article which shows needed vote quorum and in the end if the general Assembly’s decision is annulled then the related people and third persons may be faced with the danger of suffering losses.

In respect to this the trade officer has used his right of appreciation accordingly and has with cogent grounds refused to register. Therefore his decision is to be accepted. However the Civil Chamber had been decided differently in a decision dated 24.04.1989 dated numbered 88/9611 E., 89/2486 K. which states that this implementation in the case is wrong and they have defined that for a trade officer to make a decision by using his own right to appreciate is contrary to the law.

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