Are Company Shareholders Obliged to Provide Additional Financing? Capital Increase, Additional Contribution and Shareholder Loan

A Company's Financing Need Does Not Automatically Impose a Debt on the Shareholder

A company may need additional resources because the capital planned at incorporation proves insufficient, because of investment, a disruption in cash flow, the covering of losses or the tightening of credit conditions. However, the company needing money and the shareholder being legally obliged to pay additional money are not the same thing.

The source of the shareholder's financial obligation must be identified:

• The capital debt committed at incorporation or in a capital increase,
• An additional contribution obligation provided for in the company agreement of a limited liability company,
• An ancillary performance obligation in the company agreement,
• A financing or loan contract that the shareholder has signed separately and voluntarily,
• A personal surety, guarantee or security,
• A special financing commitment in the shareholders' agreement.

Without one of these legal bases, it is not possible to impose an unlimited additional debt on a shareholder merely by a resolution of the general assembly or the management body.

The Principle of the Single Obligation in a Joint-Stock Company

According to TCC Art. 480, except for the exceptions provided by law, no obligation can be imposed on a shareholder by the articles of association of a joint-stock company other than paying the share price or the premium exceeding the nominal value of the share. This rule is called the principle of the single obligation.

The shareholder is obliged to pay the capital debt committed. The company's later making a loss, planning new investment or an increase in its credit debts does not by itself oblige the shareholder to provide additional cash.

Voluntary financing by a separate contract is possible

The principle of the single obligation does not entirely prevent a shareholder, of free will, from lending to the company, from providing goods or services to the company, or from becoming a party to a particular financing contract. However, this debt is not an obligation arising automatically from the capacity of shareholder; it arises from a separately established contractual relationship.

Ancillary obligations in kind in the articles of association

TCC Art. 480/4 allows, where the transfer of share certificates is subject to the company's approval, certain periodic performances other than money, serving the realization of the company's business purpose, to be provided for in the articles of association. This exception does not mean that an unlimited obligation to pay cash can be imposed on shareholders.

The Basic Obligation of a Shareholder of a Limited Liability Company

Under TCC Art. 573/2, shareholders of a limited liability company are not liable for the company's debts; they are obliged to pay the base capital shares they have committed and to perform the additional contribution and ancillary performance obligations provided for in the company agreement.

For this reason, three different areas must be distinguished in a limited liability company:

1. Capital commitment: The amount the shareholder must pay in return for the base capital share.
2. Additional contribution obligation: An additional monetary obligation specifically provided for in the company agreement and subject to statutory conditions and a limit.
3. Shareholder loan: Financing that the shareholder provides to the company separately and voluntarily and which, as a rule, must be repaid.

Does a Capital Increase Create an Additional Money Debt for the Shareholder?

A capital increase is the raising of the company's base capital through the resolution and registration procedure laid down by law. An increase resolution does not by itself have the consequence that every shareholder must commit to new shares. The shareholder's payment obligation arises when the shareholder agrees to take new shares or to make a commitment within the increase.

The pre-emption right is a right, not an obligation

Under TCC Art. 461 in a joint-stock company and TCC Art. 591 in a limited liability company, shareholders as a rule have the right to take new shares in proportion to their existing shares. This right enables the shareholder to protect his or her ownership ratio; it is not, however, an obligation of the shareholder to take part in the increase in every case.

If the shareholder does not exercise the pre-emption right and the increase is covered by other shareholders or a new investor, the shareholder's ratio in the total capital may decrease even if the nominal share remains the same. This may affect the ratios of voting, dividend and liquidation share.

The pre-emption right cannot be removed arbitrarily

The pre-emption right can be limited or removed only under the quorum and just-cause conditions in the law. It is not possible, through this act, to benefit certain shareholders unfairly or to cause them loss.

In its decision of the 11th Civil Chamber of the Court of Cassation dated 26.02.2019, E.2017/5121, K.2019/1547, a capital increase resolution that excessively reduced the share ratio of the minority shareholder and harmed the minority shareholder's interests, even though a need for a capital increase existed, was assessed under the rule of good faith and annulled. This approach shows that the financing purpose of a capital increase does not remove the review for abuse.

The Additional Contribution Obligation in a Limited Liability Company

TCC Art. 603 allows shareholders of a limited liability company to be bound by the company agreement to make an additional contribution beyond the price of the base capital share. However, this institution is not an unlimited call for financing.

The additional contribution must be in the company agreement

For the additional contribution obligation to be directed at a shareholder, it must be expressly provided for in the company agreement. If the obligation is to be introduced or increased later, under TCC Art. 607 the shareholders concerned must decide unanimously. A new additional contribution debt cannot be created by a simple majority resolution without the shareholders' consent.

In which cases may it be requested?

According to TCC Art. 603, an additional contribution may be requested only when one of the following cases occurs:

• If the total of the company's base capital and statutory reserves does not cover the company's loss,
• If the company cannot properly continue its business without these additional means,
• If another case defined in the company agreement and giving rise to a need for equity has occurred.

With the opening of bankruptcy, the additional contribution obligation falls due. When the conditions are met, the authority to make the call belongs to the managers.

The upper limit of the additional contribution

The additional contribution obligation must be written as a specific amount based on the base capital share and must not exceed twice the nominal value of the relevant base capital share. Each shareholder is liable only for the additional contribution tied to his or her own share.

Can the additional contribution be returned?

Under TCC Art. 605, additional contributions that have been made may be returned to the shareholder only if the amount of the additional contribution is fully covered by freely usable reserves and funds. The repayment is not arbitrary; the financial situation and audit conditions must be examined before the transaction.

An Ancillary Performance Obligation Is Different from an Additional Contribution

TCC Art. 606 allows the company agreement to provide for ancillary performance obligations serving the realization of the company's business purpose. An ancillary performance may be the delivery of goods, a service, a right of use or an obligation of particular conduct. An additional contribution, by contrast, is in the nature of cash equity support.

The subject, scope and other essential points of ancillary performances must be specific or determinable in the company agreement. Vague provisions such as "the shareholders shall meet the company's needs" do not create a source of unlimited debt.

A Shareholder's Lending to the Company Is Not an Additional Contribution

A shareholder loan is the shareholder providing financing to the company to be repaid. By this transaction, the company becomes indebted to the shareholder. An additional contribution, on the other hand, is a special shareholding obligation based on the company agreement and the conditions in the law; its return is limited.

Financing Commitments in the Shareholders' Agreement

In a shareholders' agreement, it may be agreed that the parties will provide resources to the company depending on a particular budget deficit, investment round or performance indicator. This commitment may not automatically create a capital debt in terms of company law; however, it may give rise to contractual liability and compensation between the parties.

The following points should be clear in a financing provision:

• Who will determine the resource need, and on the basis of what data?
• Will the contribution be in proportion to the share ratio or fixed?
• Will the resource be treated as capital, a loan or a capital advance?
• How will interest, maturity and security be determined?
• If one shareholder does not pay, will the other shareholder's contribution change the share ratio?
• How will the admission of a new investor or a share transfer operate?
• What is the method of objection to a financing call and of independent audit?

What Happens If the Other Shareholder Puts in More Money?

If one shareholder pays the company's debts or provides excess financing to the company, this amount does not automatically become the other shareholder's debt. Where the payment is made in the company's name and is the company's debt, the claim is as a rule directed at the company.

For recourse against the other shareholder, there must be an undertaking to share between the shareholders, an assumption of the debt, a guarantee or another legal basis. In the practice of the Court of Cassation, a management body's imposing additional debt on the other shareholders solely for the purpose of paying the company's debts has not been accepted as lawful; it has been stated that the shareholder's debt is limited to the capital committed.

Can a Financing Call Be Abused?

A capital increase or a financing call must be based on a genuine company need and comply with the rules of equal treatment and good faith. If the aim is to dilute a shareholder's share by taking advantage of the shareholder's financial strength, to force the shareholder out of the company or to seize control, annulment of the resolution and the liability of managers may come into play.

The following indicators increase the risk of abuse:

• The absence of a budget or report showing the financing need,
• Failure to examine internal resources and more moderate options,
• An unusually high amount of increase,
• Limiting the pre-emption right without justification,
• Giving a very short time to a particular shareholder,
• Converting shareholder receivables into capital in a manner contrary to the facts or disputed,
• Obstructing requests for information and inspection,
• The increase serving to change the shareholding ratio rather than the company's needs.

Decision Sequence for Company Financing

1. The cash need, the period and the purpose of use are determined with a budget.
2. It is checked whether existing capital debts have been paid.
3. Internal resources, collection, cost reduction and bank financing are assessed.
4. A shareholder loan, a capital increase and, where there is one, the additional contribution options are compared separately.
5. The tax, share ratio, security and repayment consequences are calculated.
6. The competent body resolution, the contract, and the bank and accounting records show the same legal nature.
7. Minority rights, equal treatment and the risk of abuse are checked.

The Position of a Shareholder Who Does Not Pay

If a shareholder fails to pay the capital debt expressly committed at incorporation or in a capital increase, default, interest and the other sanctions in the law may be applied. By contrast, a capital debt cannot be imposed on a shareholder who has made no commitment to new shares merely by citing the increase resolution.

If there is a valid additional contribution obligation in the company agreement and the conditions of TCC Art. 603 are met, the managers may request payment. In a voluntary financing protocol, the sanction is assessed according to the content of the contract and within the limits of company law.

Document Check before Additional Financing

• The current company agreement and all amendments,
• The share ledger and shareholding ratios,
• Paid and unpaid capital records,
• The latest financial statements and cash flow,
• A review of loss of capital/over-indebtedness under TCC Art. 376,
• Resolutions of the general assembly and the management body,
• Pre-emption right notifications,
• Shareholder current accounts and reconciliations,
• Financing provisions in the shareholders' agreement,
• Loan, surety and security contracts.

Conclusion

A company's financing need does not mean an unlimited additional contribution obligation for the shareholders. A capital debt committed, participation in a capital increase, a contractual additional contribution in a limited liability company and a voluntary shareholder loan are different institutions. Each method has separate consequences in terms of share ratio, repayment, tax, pre-emption right and the risk of abuse. Before a financing call is made, the genuine need should be reported, more moderate options examined and the shareholders' obligation tied to a valid legal basis.

Frequently Asked Questions

If the company makes a loss, must the shareholders cover the loss out of their own pockets?

As a rule, no. The shareholder's obligation is limited to the capital committed. A different result may arise if there is a valid additional contribution obligation in the company agreement of a limited liability company and the conditions of TCC Art. 603 are met.

Is a shareholder who does not participate in a capital increase removed from the company?

Merely not exercising the pre-emption right is not an automatic ground for removal. The existing share continues; however, if the increase is covered by others, the share ratio may decrease. The non-payment of a new capital debt that has been committed is a separate matter.

In which case does a shareholder's share ratio decrease?

In a capital increase for consideration, if the shareholder does not exercise the right to take new shares and the increase is covered by others, the shareholder's ratio in the total capital may fall. In a bonus capital increase from internal resources, the ratios are as a rule preserved.

Can an additional contribution resolution be adopted by majority in a limited liability company?

The additional contribution obligation must be in the company agreement. Introducing or increasing it later requires the unanimity of the shareholders concerned. An unlimited additional contribution cannot be imposed by simple majority.

What is the limit of the additional contribution amount?

Under TCC Art. 603, an additional contribution tied to one base capital share cannot exceed twice the nominal value of that share and must be shown in the company agreement as a specific amount.

Does a loan the shareholder gives to the company increase the share ratio?

No. Lending does not by itself increase the capital share. A properly conducted capital increase, share acquisition or transfer is required for the share ratio to change.

If one shareholder pays the company's debts alone, can the shareholder have recourse against the other shareholder?

Not automatically. If the payment was made in the company's name, the claim as a rule is directed at the company. A separate contract or another legal basis is required for the other shareholder's liability.

What can be done against a bad-faith capital increase?

The dissent to the resolution should be recorded in the minutes, information and documents collected, and the violation of the pre-emption right and the breach of good faith made concrete. If the conditions are met, annulment or nullity of the general assembly resolution may be asserted.

Sources

1. Turkish Commercial Code No. 6102 - TCC Arts. 461, 480, 573, 590-592, 603-607, 621

2. Court of Cassation 11th Civil Chamber, E.2017/5121, K.2019/1547, 26.02.2019

3. Ministry of Trade - Company Information and Capital Companies

4. Hasan Karakılıç, The Additional Contribution Obligation in the Limited Liability Company