A Quick Guide to Capital Increase In-Kind

Introduction

A capital increase is a strategic step companies take to achieve growth and sustainability. An in-kind capital increase involves contributing assets such as real estate and intellectual property instead of cash, offering financial flexibility and allowing for the diversification of company assets. However, the legal and financial aspects of this transaction pose significant risks if not properly managed. This article explores the in-kind capital increase process under Turkish Commercial Law, focusing on the legal framework and key procedures.

What is a Capital Increase In-Kind?

 Capital in-kind refers to the capitalization of immovable property, securities, and other tangible and intangible assets with economic value in commercial companies. The key characteristic of this form of capital increase is the utilization of non-cash assets.

Assets That Can Be Used as Capital In-Kind

According to Article 127/1 of the Turkish Commercial Code (TCC), the following assets can be contributed as capital to commercial companies:

a) Money, receivables, negotiable instruments, and shares of capital companies;

b) Intellectual property rights;

c) Movables and immovables;

d) Usufruct and usage rights of movables and immovables;

e) Personal labour;

f) Commercial reputation;

g) Commercial enterprises;

h) Values such as transferable virtual environments, domains, names, and marks that are rightfully used;

i) Mining licenses and other rights of economic value;

j) Any value that can be transferred and valued in cash.

Capital Increase In-Kind in Joint Stock Companies and Limited Liability Companies

While Article 127 of the TCC does not limit the values that may be brought as capital in-kind, Article 342 of the TCC sets forth conditions for capital contribution to a joint stock company. Similarly, pursuant to Article 578 of the TCC, these provisions also apply to limited liability companies.

An important consideration is that the assets brought as in-kind capital must not have any limited real right, attachment, or injunction on them. This practice, which limits the ability to bring immovables with a lien record of lower value as capital, has been criticized in legal doctrine.

Acts of service, personal labour, commercial reputation, and receivables that are not yet due cannot be used as capital. Additionally, the value intended to be brought as capital in-kind must have the characteristics of tangible performance, transferability, and cash consideration. These qualities are defined as follows:

• Tangible performance: This refers to a material obligation that must be fulfilled directly with the assets of the debtor. Personal obligations that can be fulfilled by physical or intellectual labour are not acceptable as capital.

• Transferability: Only transferable asset rights can be used as capital. If there is a transfer restriction on a capital-in-kind element, it cannot be brought as capital.[1]

• Valuation in cash: This refers to the requirement that the capital of a joint stock company must be definite, divided into shares, and expressed in cash.[2]

Stages in Using Immovable Property as Capital In-Kind

Commitment

The source of the capital in-kind commitment is the articles of association. A valid and existing debt arises as a result of a duly realized capital commitment.

Court Decision

Assets other than cash must be valued by court-appointed experts according to Article 343 of the TCC. The experts are to be appointed by the commercial court where the company's head office is located. The valuation report must not only determine the value of the asset but also detail the methods used. This regulation has been introduced to ensure the protection of the company's assets and to secure the rights of shareholders and third parties. After the expert report is prepared, the founders and stakeholders may object to this report. Objections must be made before the report is approved by the court, as the report approved by the court is a final judgment and cannot be reversed.

Land Registry

Immovable properties included in the company agreement or articles of association, with their values determined by an expert, will be accepted as capital in-kind if annotated to the title deed. The original copy of the letter from the relevant land registry stating that there is no restriction on the capital in kind invested for capital increase in kind is also required. This process ensures that the immovable property is eligible to be the property of the company and results in the company gaining the authority to dispose of the immovable property as capital in-kind.

Intellectual Property Rights as Capital In-Kind

Although the stages of bringing intellectual property rights as capital in-kind are the same as those for immovable property, it is necessary to mention some specific situations. Pursuant to Article 128 of the TCC, for assets registered in special registries to be used as capital in-kind, these registries must be annotated. However, this requirement does not apply to all intellectual property rights. Industrial property rights must be registered in the special registry for their creation and transfer.  Without registration, no disposition can be made on those rights. However, there is no such obligation for intellectual property rights. The Law on Intellectual and Artistic Works requires registration only for cinematographic and musical works. For other intellectual property rights, registration is not mandatory, but serves as evidentiary support. Therefore, while there is no obligation to register intellectual property rights as capital, annotation in the special registry may still be important for proof. It should be noted that in order for such intellectual property rights to be contributed as capital in-kind to a joint stock company, they must meet the other conditions mentioned above. In other words, they must be tangible performance, capable of being valued in cash, and transferable. In addition, there should not be any limited real rights, attachments, or injunctions on them.

Conclusion

Increasing capital in-kind allows companies to leverage non-cash assets for growth and financial flexibility. However, the process requires careful adherence to legal procedures, including accurate valuation and proper registration, to ensure compliance and safeguard stakeholders' interests. By following these legal frameworks, companies can strenghten their financial structure, mitigate risks, and foster long-term sustainability.

References

Dal, S. (2012). 6102 Sayılı Türk Ticaret Kanunu (TTK) m. 342’ye Göre Fikri Mülkiyet Haklarının Anonim Şirkete Ayni Sermaye Olarak Konulması. Marmara Üniversitesi Hukuk Fakültesi Hukuk Araştırmaları Dergisi,, p. 374. Retrieved from https://dergipark.org.tr/tr/pub/maruhad/issue/48277/615905.

İmregün, O. (1989). Anonim Ortaklıklar. İstanbul: Yasa Yayınları.