Increase and Reduction of Capital in Joint Stock Companies
Under Article 157 of the Amended Commercial Code, capital in joint stock companies may be increased through two primary methods:
- Increasing the nominal value of existing shares.
- Issuing new shares.
Both methods directly affect shareholder rights, corporate governance, and financial structure, and therefore must comply with statutory corporate procedures.
Impact of Capital Increase and Reduction on Shareholders’ Rights
Capital Increase Through Raising the Nominal Value of Shares
The required shareholder approval to increase capital by raising the nominal value of shares depends on whether the increase imposes additional financial obligations on shareholders.
First Scenario
If the increase in nominal share value creates new financial obligations for shareholders, unanimous approval of all shareholders is required pursuant to Article 159 of the Amended Commercial Code. Such an obligation arises when the company lacks distributable profits or voluntary reserves, thereby requiring shareholders to contribute additional funds personally.
Second Scenario
If the capital increase does not create financial obligations for shareholders, meaning the increased amount is funded through undistributed profits or voluntary reserves of the company, the approval requirements correspond to the voting thresholds established for extraordinary general meetings under Articles 84 and 85 of the Amended Commercial Code.
When capital is increased through raising the nominal value of shares, the additional amount must be paid in cash.
Capital Increase Through Issuance of New Shares
When capital is increased through the issuance of new shares, payment for the new shares may be made through several legally recognized methods under Article 158 of the Amended Commercial Code, including:
- Cash payment for new shares.
- Conversion of matured claims of creditors against the company into new shares.
- Conversion of undistributed profits into capital.
- Conversion of voluntary reserves into capital.
- Conversion of share premium proceeds into capital.
- Conversion of corporate bonds into shares.
When a company intends to sell newly issued shares to third parties and removes the preemptive rights of existing shareholders, the shares must be sold at their fair market value. Under Article 160 of the Amended Commercial Code, the difference between nominal value and actual sale price may be distributed among existing shareholders, converted into additional share allocations, or transferred to company reserves.
At the time of company formation, shareholder contributions may consist of both cash and non-cash assets such as property or goods. However, rules governing non-cash contributions in connection with a capital increase vary depending on the type of joint-stock company.
In private joint stock companies, non-cash contributions, including property, may be accepted in accordance with Note 1 of Article 158 of the Amended Commercial Code. In public joint-stock companies, capital increases must be funded exclusively by cash contributions.
Preemptive Rights of Existing Shareholders
Existing shareholders have priority rights to purchase newly issued shares in proportion to their shareholding percentage. These rights are transferable and must remain available for at least 60 days from the subscription announcement date, as provided in Articles 166 and 167 of the Amended Commercial Code.
Preemptive rights may be removed by resolution of the extraordinary general meeting that authorizes the capital increase. For publicly traded companies, both share transactions and transfers of preemptive subscription rights must be conducted through licensed stock exchange brokers.
Authority to Approve Capital Increase
Unlike the issuance of corporate bonds, which may be authorized by either the extraordinary general meeting or the company’s articles of association, capital increases may only be authorized by the extraordinary general meeting under Article 162 of the Amended Commercial Code. The meeting may delegate authority to the board of directors to implement capital increases within a specified period not exceeding five years. Under Article 164, the company’s articles of association cannot, by themselves, grant such authority to the board of directors.
Reduction of Capital
Mandatory Capital Reduction
Mandatory capital reduction occurs under Article 141 of the Amended Commercial Code when the company’s losses are reduced by at least half of the company’s registered capital. In such circumstances, upon the board of directors’ request, the extraordinary general meeting must decide either to dissolve the company or to reduce its capital accordingly. If no decision is made, any interested party may request dissolution through the competent court.
Voluntary Capital Reduction
Voluntary capital reduction occurs when the board of directors proposes a capital reduction, and the extraordinary general meeting approves it.
This type of reduction is typically undertaken for financial restructuring or strategic corporate management purposes.
Frequently Asked Questions About Capital Increase and Reduction in Joint Stock Companies
Capital may be increased by raising the nominal value of existing shares or by issuing new shares.
If increasing nominal share value imposes financial obligations on shareholders, unanimous approval is required. If no additional obligation is created, approval by the extraordinary general meeting is sufficient. Payment for new shares may be made through cash contributions, conversion of retained earnings, voluntary reserves, or bond conversion.
Non-cash contributions may be accepted in private joint stock companies. In public joint stock companies, capital increases must be funded solely through cash contributions.
Existing shareholders have priority rights to purchase new shares proportional to their ownership. These rights must remain available for at least sixty days and may be transferred or removed by resolution of the extraordinary general meeting.
Only the extraordinary general meeting may authorize capital increases and may delegate implementation authority to the board of directors for a limited period not exceeding five years.
Capital reduction may be mandatory due to significant financial losses or voluntary, when approved by shareholders based on strategic corporate considerations. What are the methods of increasing capital in joint stock companies?
How does capital increase affect shareholder rights?
Are non-cash contributions permitted in capital increases?
What are the preemptive rights of existing shareholders?
Which authority may authorize capital increases?
What types of capital reduction exist in joint stock companies?
Can a company increase its share capital without bringing in new investors?
Yes, in some cases. Depending on the applicable corporate laws, a company may increase its share capital through retained earnings or by issuing additional shares to existing shareholders. The available options depend on the company’s legal and financial structure.
If I don’t buy the new shares, will my ownership percentage go down?
It may. If additional shares are issued and you choose not to participate while other shareholders do, your percentage ownership could be diluted. The exact outcome depends on the terms of the share issuance and your legal rights as a shareholder.
Why would a company reduce its share capital if business is doing well?
A reduction in share capital is not always a sign of financial difficulty. Companies may reduce capital as part of a restructuring, to improve their balance sheet, or to return excess capital to shareholders where permitted by law.
Can creditors object if a company decides to reduce its capital?
In many jurisdictions, creditors are given certain protections when a company reduces its share capital. Whether they can object depends on the applicable corporate laws and the circumstances of the reduction.
Does increasing share capital always mean the company is growing?
Not necessarily. While a capital increase may support expansion, it can also be used to strengthen the company’s financial position, repay obligations, or fund other corporate objectives. Each situation should be considered individually.
Can preferred shareholders be affected differently from ordinary shareholders during a capital increase?
Yes. The rights of preferred and ordinary shareholders may differ depending on the company’s articles of association and the terms attached to each class of shares. Those documents should always be reviewed before assessing the impact.
Who usually has the authority to approve a capital increase?
In most corporate structures, the decision must be approved by the shareholders through the procedures required by the applicable company law and the company’s governing documents.
Can a company reduce its capital and then increase it again a few months later?
Yes, that can happen if each step complies with the applicable legal requirements and corporate procedures. The reasons behind each decision and the interests of shareholders and creditors should also be taken into account.
Is shareholder approval always required before changing share capital?
In many jurisdictions, shareholder approval is a key requirement for significant changes to share capital. However, the exact approval process depends on the relevant corporate legislation and the company’s constitutional documents.
Can a minority shareholder challenge a decision to increase or reduce share capital?
In some circumstances, yes. If a shareholder believes the decision violated the law, the company’s governing documents, or their legal rights, there may be remedies available. Whether a challenge is possible depends on the specific facts and the applicable legal framework.