Evasion of Law in Company Establishments

Provisions on Capital in Kind

Pursuant to Articles 329/2 and 480/1 of the TCC, the shareholders of joint stock companies are liable to the company only for the capital shares they have subscribed and, with the exceptions stipulated by law, the articles of association may not impose obligations on the shareholders other than the performance of the share price or the premium exceeding the nominal value of the share. The obligation of shareholders to contribute capital to the company, also considered the "sole obligation principle", may be fulfilled through different methods. Pursuant to Article 127 of the TCC, the values that may be contributed as capital to capital companies are listed. Accordingly, in addition to cash capital, it is also possible to contribute capital in kind as assets. The special procedure to be applied in case of capital in kind is regulated under Article 342 of the TCC. In order to understand the purpose of the article on evasion of the law, it would be useful to address the provisions regarding capital in kind in company incorporations first.

Pursuant to Article 342 of the TCC, assets that are not subject to any limited real right, attachment, or injunction, and that can be valued and transferred in cash may be contributed as capital in kind. The determination of the value of these assets that will be added as capital in kind is of great importance for the company, shareholders, and the commercial world. In fact, if the determination of the value of a real asset is made by the shareholder, who contributes it as capital to the company, instead of an independent and expert person, that may bring along various risks. For example, if the value of the asset is determined much higher than its real value, the shareholder who put the asset as capital in kind will have more shares and capital in the company than they actually deserve. Thus, other shareholders may suffer from consequences. On the other hand, the interests of the company's creditors may also be jeopardized due to an inconsistency in the actual assets of the company. For this reason, there is a special provision in the TCC on how to determine the value of the capital in kind.

Pursuant to Article 343 of the TCC, the capital in kind and the enterprises and real property to be acquired during the establishment shall be valued by the experts appointed by the commercial court of first instance in the place where the head office of the company will be located. In the valuation report, the following matters shall be explained with satisfactory justifications and in accordance with the requirements of the principle of accountability: the applied valuation method is the fairest and most appropriate choice for everyone in terms of the characteristics of the concrete case; the reality, validity and compliance with Article 342 of the receivables contributed as capital, their collectability and their full value; the amount of shares to be allocated for each asset contributed in kind and their Turkish Lira equivalent. In the justification of the said provision, legal security and the principle of capital protection are emphasized.

As it is understood from the above, the value of the assets to be contributed as capital in kind must be determined by experts and shall be disclosed transparently. The "evasion of the law" regulation, which will be discussed in detail below, aims to prevent the circumvention of the transparent and impartial process envisaged by the legislator.

Evasion of the Law

The provision on evasion of the law under Article 356 of the TCC was also included in the abolished Turkish Commercial Code No. 6762 ("Abolished Code"):

"Contracts to be executed within two years following the registration of the company regarding the acquisition of an enterprise, installation or other goods and rights by the company for a consideration exceeding one-tenth of the share capital shall not be valid unless they are approved by the general assembly and registered in the trade registry. Even the disposals made for performance of such agreements before their approval and registration shall not be valid."

When the decisions of the Court of Cassation (Yargıtay) during the term of the Abolished Code are reviewed, various evaluations regarding the purpose of the relevant provision are observed:

"(...) the main purpose of this provision is to prevent the fraudulent circumvention of the provisions of the establishment using such a transfer, by subjecting the transfer agreement to the procedure and supervision specified in this article within two years from the establishment of the joint stock company to the procedure and supervision specified in this article. In other words, it is accepted that this provision has been enacted to prevent the transformation of the company's capital into "straw" capital, as it is called in the doctrine, to the detriment of the company's shareholders and receivables."^[1] 

When Article 356 of the TCC in force is reviewed, a provision parallel to the provision in the Abolished Code is observed:

"Contracts for the acquisition or lease of an enterprise or non-monetary assets for a consideration exceeding one-tenth of the capital within two years following the registration of the company shall not be valid unless approved by the general assembly and registered in the trade registry. Prior to the approval and registration of these agreements, all kinds of disposals, including payments made for the purpose of fulfillment thereof, shall be invalid."

When the abolished and current articles are reviewed, it is observed that the legislator has also included lease agreements within the scope. In the following section, the elements and application areas of the relevant provision are evaluated.

Elements

Time Period

As clearly stated in the Article, newly established companies are obliged to comply with the regulation introduced under Article 356 of the TCC for two years. The said period starts as of the registration of the company.

Another noteworthy point regarding the wording of the Article is the part regarding the "contracts relating to acquisition or lease". There are opinions that the time limit here is related to the conclusion of the contract. Accordingly, it is argued that even if the performance of the contract will be after two years if the transfer or lease agreement is concluded within two years from the establishment of the company, it should be considered within the scope of the Article.^[2]

Acquisition or Lease of Enterprise or Non-Monetary Asset

The regulation envisaged by the Article covers the acquisition or lease of businesses or non-monetary assets. However, the Article also contains various exceptions. Pursuant to Article 356/3 of the TCC, the provisions of this Article shall not apply to the non-monetary assets and enterprises that constitute the subject matter of the company's business or that are acquired through compulsory execution.

In addition, as stated above and unlike the Abolished Code, leasing has been added to Article 356 of the TCC, and the scope of application of the provision has been accordingly expanded.

Exceeding One Tenth of the Capital

If the value of the enterprise or non-monetary asset to be acquired or leased exceeds one-tenth of the company capital, Article 356 of the TCC shall be applicable. The approval of the general assembly shall not be sought for agreements regarding the enterprise or non-monetary asset that do not exceed this threshold. A question that may come to mind is whether the company's capital has been paid or not and whether the relevant threshold will vary accordingly. The wording of the article does not contain any indication regarding this distinction. Therefore, it is considered that the calculation should be made based on the total capital amount specified in the articles of association.

General Assembly Approval

As stated in the article, the validity of these agreements exceeding one-tenth of the share capital is subject to the approval of the general assembly. Accordingly, a general assembly meeting must be held for the approval of the relevant agreement, and an approval decision must be taken at this meeting. Pursuant to Article 356/3 of the TCC, reference is made to Article 421/3-4 of the TCC for general assembly meetings and resolution quorums. The relevant paragraphs of Article 421 stipulate an aggravated quorum. Accordingly, the affirmative votes of the shares constituting at least 75% of the share capital are required. If this quorum is not reached in the first meeting, the same quorum shall be sought in the subsequent meetings.

Registration in the Trade Registry

In addition to the approval of the general assembly, the other validity condition stipulated in the article is the registration to the trade registry. In this context, the registration process must be carried out before the trade registry directorate to which the company that is a party to the agreement regarding the transfer or lease is affiliated.

According to the opinions in the doctrine, within the scope of the said registration; the date of the agreement, the date of the approval decision of the general assembly, from whom and the price of the thing to be acquired or leased should be specified, and it should be published in the Turkish Trade Registry Gazette.^[3]

Conclusion

The valuation provisions regarding the capital in kind may be circumvented due to the interests of various persons and may cause losses to the company, shareholders, and creditors of the company. Pursuant to Article 356 TCC, a special procedure is required for various transactions to be carried out after incorporation. For this reason, it is important for the incorporators to take the relevant provision into consideration.