Ⅰ. Introduction
The capital structure of joint stock companies is regarded as a determining factor in terms of both their economic assets and legal identity. Pursuant to the Turkish Commercial Code No. 6102 (“TCC”), capital increases in joint stock companies may be carried out either through new commitments from external sources or by converting internal resources into capital. In this context, Article 462 of the TCC explicitly regulates capital increases from internal resources, thereby allowing the addition of internal resource items—permitted under the TCC and available for free disposal within the company’s equity—to the capital without the need for any new capital contribution.
a. Capital Increase from Internal Resources and Its Purpose
According to the definitions in legal doctrine and the first paragraph of Article 462 of the Turkish Commercial Code, which constitutes the main regulation on capital increase from internal resources, capital increase from internal resources is defined as the increase of the capital amount—and accordingly the number of shares or the nominal value of existing shares—without any capital commitment and without adding new assets to the company’s estate, by using the reserves that are allocated by the articles of association or a general assembly resolution and are not earmarked for any specific purpose or are allocated for capital increase, the freely usable portions of statutory reserves, the funds permitted by the legislation to be included in the balance sheet and added to capital, and the distributable net profit for the relevant period.
In this regard, a capital increase from internal resources is a type of capital increase carried out without obtaining any external funds, solely by transferring items that already exist within the company and qualify as equity into the capital account. As a result of this transaction, the company’s share capital increases; however, no increase occurs in the total assets of the company. In this respect, a capital increase from internal resources is not considered a traditional increase in assets, but rather a strengthening of the tied assets.
The primary reasons for applying this method in practice include the desire to enhance the company’s self-financing capacity, the ability to provide shareholders with returns without causing cash outflows, the intention to increase the liquidity of shares, and ultimately the goal of improving the company’s financial appearance. In certain cases, technical requirements such as benefiting from tax advantages or meeting the legal minimum capital requirements may also necessitate a capital increase through internal resources.
Ⅱ. Internal Resources Convertible into Capital
As explicitly stated in Article 462 of the TCC, the internal resources that can be used for capital increases are not limited in number but are interpreted broadly to include all equity elements permitted by legislation to be listed in the balance sheet and added to capital. Within the legal system, these resources are mainly categorized under three headings: reserves, funds, and distributable net profit.
Reserves include not only the portions of statutory reserves exceeding the legal limit but also optional reserves set aside by the articles of association or general assembly resolution. These items must not be allocated for any other specific purpose in order to be eligible for conversion into capital. On the other hand, funds consist of items such as positive inflation adjustment differences, disclosed hidden reserves that have become open reserves, funds that can be included in the balance sheet and added to capital, and investment property and real estate sale proceeds funds. There are no legal obstacles to transferring these items to the capital account. Lastly, the net profit for the period, which has not been resolved to be distributed by the general assembly, is also considered eligible for conversion into capital.
Ⅲ. Procedure for Capital Increase from Internal Resources
To initiate a capital increase from internal resources, it must first be determined that the internal resources actually exist within the company. In this regard, the amount to be covered from internal resources must be verified through an approved annual balance sheet and an explicit and written declaration issued by the board of directors. If more than six months have passed since the date of the approved balance sheet, a new balance sheet must be prepared and approved by the board of directors.
The regulations regarding the written declaration to be issued by the board of directors are set forth in Article 457 of the TCC. Accordingly, the board must prepare a declaration that complies with the principle of accountability and outlines (i) which internal resources are used for the capital increase, (ii) the authenticity of these resources, and (iii) their actual existence within the company’s assets. The declaration must also include a documented and justified explanation that the fund or reserve transferred to capital is freely disposable and that all necessary approvals and legal requirements have been fulfilled.
Pursuant to Article 73 of the Trade Registry Regulation, a report must be prepared by a sworn-in certified public accountant or a certified public accountant—or by an independent auditor in companies subject to audit—confirming whether the capital has become insolvent, verifying the company’s equity and the verification that the amount to be covered from internal resources actually exists within the company.
However, as stipulated in the third paragraph of Article 462 of the TCC, if there are funds in the balance sheet that are permitted by legislation to be added to capital, capital may not be increased by way of capital commitment without first converting these funds into capital.
In a capital increase through internal resources, since the increase is achieved not by introducing new cash or in-kind contributions into the company, but by incorporating the company’s already existing and balance sheet-recorded resources into the capital, an amendment to the articles of association is required. Accordingly, in companies under the fixed capital system, the general assembly must resolve on the capital increase through internal resources; whereas in companies under the registered capital system, the board of directors is authorized to resolve on such increase up to the registered capital ceiling. Pursuant to the Turkish Commercial Code, the general assembly resolution must be adopted at a meeting where at least half of the company’s share capital is represented, by the majority of the votes present. However, it is possible to stipulate a higher quorum in the articles of association. If this quorum is not met in the first meeting, a second meeting must be held within one month, where the resolution may be adopted with the majority of the votes of shareholders representing at least one-third of the capital. Furthermore, in accordance with Article 32 of the Regulation on Procedures and Principles of General Assembly Meetings of Joint Stock Companies and Attendance of the Ministry Representatives in Such Meetings, if a capital increase is on the agenda of the general assembly of a joint stock company with more than one shareholder, a Ministry representative must be present for the meeting to be valid.
The capital increase becomes final upon registration and announcement of the amended articles of association following the general assembly or board of directors’ resolution. The registration must be completed within three months of the resolution date; otherwise, the resolution will be deemed null and void.
Ⅳ. Acquisition of Shares Arising from Capital Increase from Internal Resources
According to the third paragraph of Article 462 of the TCC, the shares arising from the capital increase from internal resources are allocated to the existing shareholders at the time of registration, free of charge and automatically, in proportion to their shareholding ratios, without the need for any application. The right to acquire these bonus shares is considered part of shareholders’ financial rights, and this right cannot be removed, restricted, or waived by shareholders.
Thus, any decrease in the book or market value of existing shares due to the capital increase is offset by the acquisition of bonus shares, thereby protecting shareholders’ interests. Additionally, this right serves not only to protect financial rights but also governance rights, since the ratio of voting rights and other participation rights are determined based on the share capital. Equal allocation of bonus shares ensures that shareholders’ shareholding percentages and the rights attached to those shares are not diluted.
Ⅴ. Conclusion
Capital increase from internal resources is a unique method that strengthens a company’s financial structure without imposing a direct financial obligation on shareholders and contributes to the company’s prestige in capital markets. This method is carried out by converting existing equity items into capital. Reserves set aside by articles of association or general assembly resolution that are not allocated for a specific purpose, distributable profits, and certain funds fall within this scope. Pursuant to Article 462 of the TCC, the relevant balance sheet must be approved, and a written declaration must be provided by the board of directors. If there are funds in the balance sheet that are required to be added to capital, capital may not be increased through new commitments. Upon registration, bonus shares are proportionally and automatically allocated to existing shareholders. This method serves to both enhance the company’s financial position and protect the rights of its shareholders.
