Capital Reduction in the Registered Capital System

Types of Capital Reduction

Under Turkish law, capital reduction is carried out in two main forms.

In a founding reduction, which is made for the purpose of releasing excess capital, the capital may either be refunded to the shareholders or transferred to reserves. It functions as an exception to the prohibition on returning capital, although refunding is not the sole purpose. In this type of reduction, the company suffers an actual loss of assets, and therefore the protection of creditors is of particular importance.

In a simplified reduction, which is carried out to align the accounting records with the actual situation where the capital has effectively decreased due to losses, no refund arises and no payment is made to shareholders. Pursuant to TCC Art. 474/2, in the case of a simplified reduction the board of directors may forgo the creditor call. This is because, in such circumstances, the company’s assets have already decreased, and the reduction merely reflects this situation in the accounting records.

Methods of Capital Reduction

Capital reduction may be carried out by lowering the nominal value of the shares or by reducing the number of shares. Lowering the nominal value of the shares is a method in which the number of shares remains unchanged, and only the nominal value of each share is decreased. Reducing the number of shares, on the other hand, may be implemented through different methods. The exchange ratio is determined by merging shares, thereby preserving equality among different groups. Alternatively, the corporation may acquire and cancel its shares through redemption.

Procedure for Capital Reduction

Capital reduction requires a complex procedure. In the initial stage, a draft amendment to the articles of association is prepared, and the board of directors issues a report explaining the reason, purpose, and method of the reduction. At the same time, a sworn financial advisor’s report is obtained confirming that, despite the reduction of capital, the company has sufficient assets to fully cover the rights of its creditors. In companies where amendments to the articles of association are subject to approval, the permission of the Ministry of Trade is obtained, after which the general assembly meeting—where the amendment is discussed—is held with the participation of the ministry representative. Following the general assembly resolution, three announcements are made to creditors, and a two-month waiting period begins as of the third announcement. During this period, persons who notify the company of their creditor status are paid or provided with security. After the payment or securing of due debts is completed, the board of directors carries out the necessary steps for the registration and announcement of the capital reduction.

Capital Reduction in the Registered Capital System

The registered capital system (“RCS”) is a comprehensive system which grants the board of directors the authority to increase capital up to a ceiling. The registered capital system was introduced to provide companies with flexibility in capital increases. Under this system, the board of directors may increase the capital by its own resolution up to the ceiling amount specified in the articles of association. However, under Turkish law, this flexibility does not apply to capital reduction. The board of directors is not granted the authority to reduce capital within the RCS; the reduction is carried out by the general assembly.

Capital Band System and Capital Reduction under Swiss Law

In Swiss law, the capital band system (Kapitalband) is a system that grants the board of directors the authority to increase and decrease capital within a certain period and amount. Pursuant to Art. 653s of the Swiss Code of Obligations (CO), the articles of association may authorize the board of directors, for a period of up to five years, to increase or reduce the capital within the capital band specified in the articles. The articles of association must clearly indicate the upper and lower limits within which the board may adjust the capital; in this regard, the upper limit may not exceed one and a half times the capital registered in the commercial register, and the lower limit may not fall below half of the registered capital. In addition, the articles of association may restrict the board’s authority by permitting only an increase or only a reduction. However, the articles may grant the board the authority to reduce capital only if the company is not exempt from the limited audit of its annual accounts. This requirement aims to ensure a reliable determination of the company’s financial condition and to protect creditors.

If capital is reduced within the capital band, the provisions applicable to creditor protection, interim balance sheets, and auditor verification in an ordinary capital reduction apply by analogy.

The capital band system offers significant advantages, particularly for companies with dynamic business models. Thanks to this system, companies with variable financing needs—such as technology companies or holding companies—can adjust their capital structure relatively more swiftly in line with market conditions.

Conclusion

The capital band system under Swiss law offers important lessons for Turkish company law. The flexibility and procedural simplifications introduced by this system enable companies to adapt rapidly to changing market conditions and enhance their international competitiveness.

Under Turkish law, the current registered capital system grants the board of directors authority only for capital increases and does not provide flexibility with respect to capital reduction. This makes it more difficult for companies to optimize their capital structures in line with market conditions. The Swiss reform experience offers valuable insights into how the shortcomings in this area may be addressed.

Naturally, several points must be considered for any amendment like the Swiss model. First, robust creditor-protection mechanisms must be established. Second, it is important to set reasonable limits—both in amount and duration—regarding the breadth of the capital band.