A Quick Guide to Capital Increases in Türkiye Due to Mergers

Introduction

Mergers and acquisitions (“M&A”) are frequently employed by companies as strategies for exponential growth and international expansion. In general terms, a merger, under corporate law, refers to a legal process in which two or more companies combine to form a single entity.

This article provides a comprehensive guide to capital increases for companies in Türkiye arising from mergers. It covers the basic legal framework governing mergers under Turkish law, along with the specific procedures required for capital increases during mergers by acquisition, ensuring that companies can navigate the process smoothly and in compliance with legal requirements.

A. Mergers under Turkish Law in a Nutshell

Under Turkish law, the procedures, and principles governing M&As are set out in the Turkish Commercial Code (“TCC”). Mergers are voluntary processes carried out through specific agreements between the relevant legal entities.

Pursuant to Article 136 of the TCC, mergers are classified into two categories:
(i) merger by acquisition, and

(ii) merger by formation of a new company.

In a merger by acquisition, one commercial company (the acquirer) absorbs another (the acquiree). In a merger by formation of a new company, two or more companies combine to create a newly established entity.

In mergers by acquisition, a capital increase is a mandatory consequence. By contrast, in mergers by formation of a new company, the issue of capital increase is not relevant, as the new entity’s capital will be determined in the articles of association. Accordingly, this article focuses on capital increases in the context of mergers by acquisition.

B. Capital Increase Due to Mergers by Acquisition

In a merger by acquisition, the acquiring company assumes all assets, liabilities, and obligations of the acquired company. As a result, the acquired company is dissolved and automatically removed from the Turkish Trade Registry without undergoing a liquidation process (TCC Art. 136).

The assets of the acquiring company increase by the value of the acquired company, necessitating a capital increase to ensure legal continuity. Pursuant to Article 142 of the TCC, a capital increase is mandatory for the acquiring company.

1. Rationale Behind the Capital Increase

In line with the principle of continuity of shareholding—one of the key principles of mergers—the acquiring company is required to increase its capital to safeguard the rights of the shareholders of the acquired company.

2. Status of Shareholders

2.1. Shareholders of the Acquiring Company

In the case of a capital increase, the pre-emptive rights of the existing shareholders of the acquiring company are typically restricted to enable the issuance of new shares to the shareholders of the acquired company.

2.2. Shareholders of the Acquired Company

According to Article 141 of the TCC, shareholders of the acquired company may receive:
(i) shares in the acquiring company, or

(ii) a separation payment.

The separation payment may be offered as an alternative (i.e., an exit right) or may be imposed mandatorily (i.e., squeeze-out). In the case of a mandatory squeeze-out, a 90% majority of the total votes in the general assembly of the acquired company is required (TCC Art. 151). If a valid squeeze-out decision is taken, the acquiring company is not required to increase its capital.

3. Procedural Steps

The process begins with the preparation and execution of a merger agreement, which is signed by the boards of directors (“BoD”) of the companies involved. However, this agreement alone does not complete the merger; it must also be approved by the general assembly (“GA”) of each company.

Importantly, the GA’s approval of the merger agreement is not sufficient on its own. A separate GA resolution of the acquiring company approving the capital increase must also be adopted.

3.1. Requirements for the Capital Increase Resolution

The acquiring company’s GA resolution regarding the capital increase must include the following:

• The amount of the capital increase
• The type and nominal value of the shares, and the rights/preferences associated with different share classes
• The number of shares to be issued
• The balance sheet used as the basis for the merger
• A statement indicating that the pre-emptive rights of the acquiring company’s shareholders are restricted (TCC Art. 461)

4. Registration and Public Announcement

For the merger to become effective, the approved merger agreement must be registered with and announced in the Turkish Trade Registry Gazette. The following points should be noted:

4.1. If the merger requires a capital increase, all legally required documents for the capital increase must be included in the registration application.

4.2. If all companies involved have not yet adopted the merger decision, none of them may proceed with registration, even if their respective GA has approved the merger.

4.3. Amendments to the articles of association must be submitted to the trade registry. The capital increase and the merger decisions must be registered concurrently.

4.4. If a capital increase is not required (e.g., due to 100% ownership by the acquirer), this must be clearly stated in the board resolution of the acquired company and reflected in the registration documents.

Conclusion

Capital increases arising from mergers by acquisition represent a critical process under the TCC. The acquiring company is legally obligated to increase its capital to protect the rights of the shareholders of the acquired company. This process involves several procedural steps, including the preparation of a merger agreement, GA approvals, adoption of a separate capital increase resolution, and registration. A clear understanding of and compliance with these legal requirements is essential for ensuring a smooth and successful merger in Türkiye.

References

Eriş, G. (2017). Ticari İşletme ve Şirketler/ Vol. 2, 3rd ed., (Only in Turkish).

Genç, Ö. F., & Kalkan, B. (2018). Turkish Mergers and Acquisitions (M&As): A Historıcal View Of Characteristics, Trends, and Directions. Retrieved from Dergipark: https://dergipark.org.tr/tr/download/article-file/1123858

Pulaşlı, H. (2024). Şirketler Hukuku Genel Esaslar, 9th ed. (Only in Turkish).

Yavuz, M. (2016). The Merger Procedure and Process of Trading (Only in Turkish). Retrieved from Dergipark: https://dergipark.org.tr/en/download/article-file/1020020