Capital Reduction

A capital reduction is a reduction of the company’s share capital. Since capital is security for creditors, the Code subjects capital reductions to strict procedures protecting creditors (TCC Art. 473-475).

Types

• Reduction with payment to shareholders: Excess capital is returned to shareholders.
• Reduction to cover losses: A balance sheet loss is covered by reducing capital; no payment is made to shareholders. This is one of the methods used in case of capital loss.
• Simultaneous reduction and increase: Capital is reduced to cover losses and simultaneously increased to at least its previous amount with new capital. No call to creditors is then required.

Process

1. Board report: Explains the purpose and scope of the reduction.
2. Audit report: Confirms that creditors’ claims can be fully covered despite the reduced capital.
3. General assembly resolution: Adopted with the quorum for amending the articles.
4. Call to creditors: Creditors are invited to declare their claims through three announcements in the Turkish Trade Registry Gazette and as provided in the articles. Claims of creditors who apply within two months of the last announcement are paid or secured.
5. Registration: The reduction is registered with the trade registry.

Capital cannot fall below the statutory minimum as a result of the reduction; if it would, a simultaneous increase must be made. For minimum amounts, see Joint Stock Company and Limited Liability Company.

When Is It Used?

• Returning excess capital to shareholders,
• Covering losses to clean up the balance sheet and restructuring the company before bringing in a new investor,
• Cancelling shares on a shareholder’s departure.

For increasing capital, see Capital Increase.