Turkey: Amendments To The Communiqué Regarding Capital Loss And Negative Equity

Recent Development

The Communiqué on Amendments to the Communiqué on the Procedures and Principles Regarding the Application of Article 376 of the Turkish Commercial Code No. 6102 ("Communiqué") was published in the Official Gazette No. 31346 dated December 26, 2020 and became effective on the same date.

The Communiqué introduces additional regulations regarding equity calculations to eliminate the practical ambiguities and paves the way for companies experiencing capital loss or negative equity to conduct activities with less resources within this period. The Communiqué broadens the scope of the current practice, which has been in effect since September 15, 2018. To that effect, the Communiqué regulates that half of the sum of expenses arising from leases, amortizations and personnel expenses accrued in 2020 and 2021 may not be considered in the calculations regarding capital loss and negative equity, in addition to the exchange difference expenses.

What's New?

• Half of the sum of expenses arising from leases, amortizations and personnel expenses accrued in 2020 and 2021 may not be considered in the calculations regarding capital loss and negative equity, in addition to the exchange difference expenses.

Prior to the amendment, only the exchange difference expenses arising from foreign currency obligations that have not been performed may not be considered in companies' calculations regarding capital loss and negative equity until 01.01.2023. The Communiqué eliminates the practical ambiguities whether the exchange difference expenses occurred before 2018 are considered in equity calculation and clarifies that all exchange difference expenses will be considered within this framework.

Taking into consideration the problems companies face during the pandemic, the Communiqué enables, in addition to all exchange difference expenses, half of the sum of (i) expenses arising from leases; (ii) amortizations; and (iii) personnel expenses accrued in 2020 and 2021 not to be considered in the calculations regarding capital loss or negative equity until 01.01.2023.

The Communiqué further stipulates that the above amounts will be calculated without being repetitive; that no records will be included in the financial statements in relation to these calculations; and that the situation will be shown in the footnotes for information purposes.

• The Communiqué states situations where the sum of the share capital and the statutory reserves will be determined by taking into account the "loss", and clarifies the concepts of at least half or two-thirds of the sum of the share capital and the statutory reserves being uncovered.

At least half of the sum of the share capital and the statutory reserves are uncovered, if the loss is (i) equal to half of or (ii) more than the half and less than two-thirds of the sum of the share capital and the statutory reserves.

In line with this understanding, the Communiqué regulates that at least two-thirds of the sum of the share capital and the statutory reserves are uncovered, if the loss is (i) equal to or (ii) more than two-thirds, of the sum of the share capital and the statutory reserves.

• The opportunity to decrease the share capital to the minimum share capital amount if the equity are preserved within the foreseen boundaries was introduced in cases of capital decrease, in addition to continuation of the "remaining share capital".

The Communiqué enables share capital decrease till the remaining share capital amount if such capital decrease realizes as a result of the fact that at least two-thirds of the sum of the share capital and the statutory reserves are uncovered due to loss.

In addition, the Communiqué stipulates that the share capital can be decreased to the minimum share capital amount if at least half of the sum of the share capital and the statutory reserves are preserved in the equity.

• The Communiqué limits the use of the loss compensation fund to offset losses.

The Communiqué clarifies that the loss compensation fund, which is contributed by all or a part of the shareholders in order to cover balance sheet deficits and recorded under the equity, can only be used by offsetting losses.

• The Communiqué reformulates the principles regarding the payment of cash contribution in capital increases.

Without prejudice to the provisions of the capital market legislation of public joint stock companies, the Communiqué stipulates that the cash capital contribution will be paid in accordance with the general rule foreseen in Articles 344 and 585 of the Turkish Commercial Code for capital increases simultaneously after the capital decrease transaction which is performed by offsetting losses. The amendment states that a company's ability to pay the increased share capital within 24 months following the registration for limited liability companies and paying at least one-quarter of the cash capital contribution before the registration for joint stock companies will continue to apply.

The Communiqué clearly determines the amount required to be paid before the registration for capital increase without capital decrease which is performed by offsetting losses, must be the amount that will ensure that at least half of the sum of the share capital and the statutory reserves are preserved within equity. Prior to the amendment, it was stipulated that the amount corresponding to at least half of the share capital must be paid before the registration.

The Communiqué regulates that the share capital can be increased in the desired amount and then decreased, provided that (i) at least half of the sum of the share capital to be registered in consequence of the transactions to be carried out within the scope of the Communiqué and the statutory reserves are preserved in equity and (ii) the share contributions are paid in full.

Conclusion

It is of great importance for companies to examine their financial situations in accordance with the provisions of the legislation in a continuous matter, and to evaluate whether their current resources are sufficient or not. The new regulations foreseen in the Communiqué must also be taken into consideration when making calculations regarding capital loss and negative equity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.