Capital commitment is one of the indispensable conditions for becoming a shareholder in a Turkish joint-stock company ("JSC"). Under Turkish law, the main responsibility of a shareholder, whether in the stage of incorporation or capital increase, is to pay the undertaken capital.
Turkish Commercial Code No. 6102 ("TCC") stipulates that shareholders must fulfil 25 % of their commitment in cash before or at the time the incorporation or capital increase is registered in the relevant Trade Registry, while the remaining amount must be paid within 24 months after the registration date. If a shareholder fails to fulfil their commitment obligation within these periods, the board of directors ("BoD") of the JSC is obliged to request capital payment from the defaulting shareholder.
Forfeiture procedure against a defaulting shareholder
If a shareholder defaults on the payment of their capital contribution, the BoD may commence an enforcement proceeding against them or forfeit their shares. Actions taken during the forfeiture procedure are explicitly regulated under Article 483 of the TCC.
To initiate the forfeiture procedure:
the shareholder must default on the payment of their contribution to the registered capital of the JSC;
the BoD must serve notice through a notary public in which the following points must be indicated: (i) net amount of the debt and accrued interest; (ii) peremptory period (i.e. 1 month) to fulfil the said obligation.
Despite the served notice, if the payment is not made within the peremptory period stated therein, the BoD is required resolve on forfeiture of the relevant shares.
Consequences of the forfeiture procedure
The main consequence of the forfeiture procedure is the loss of rights to the shares that the defaulting shareholder failed to pay for. The defaulting shareholder will in any case be entitled to exercise the rights arising out of company shares other than the shares in question. If the shares in question are the only shares held by the defaulting shareholder, then the shareholder will be removed from the share ledger of the JSC and loses all shareholding rights in the JSC. Partial payment does not relieve the shareholder from the forfeiture procedure and has no effect on the forfeiture procedure over the entirety of the relevant shares. In addition, the shareholder will not be entitled to claim the return of their partial payment from the JSC and that amount will be recorded as a legal reserve.
Following the forfeiture procedure, the ownership of the shares in question will temporarily return to the JSC itself and the BoD will only be entitled to sell those shares to third parties (including the other shareholders) by protecting the interests of the JSC at the highest level.
The forfeiture procedure under Turkish law has serious legal and financial impacts on the shareholders of a JSC, including loss of shareholder rights. This system is regulated under the TCC to alleviate damages in JSCs where capital commitments cannot be collected from shareholders. The forfeiture procedure introduces an important sanctions mechanism that may be initiated against the defaulting shareholders of a JSC.
By Didem Kara, Attorney at Law, Schoenherr