Detailed Guide on Company Type Conversions in Turkey
Company type conversions (CTC) in Turkey involve the legal transformation of a company from one legal form or structure to another. This can include converting a limited liability company (LLC) to a joint-stock company (JSC), or vice versa, depending on the company’s strategic needs, such as changes in ownership structure, capital requirements, or business expansion plans.
Under the Turkish Commercial Code (TCC), company conversions are allowed, and the process is regulated to ensure that such transformations are carried out in compliance with Turkish corporate law.
I. Legal Framework for CTCs in Turkey
CTCs in Turkey are primarily governed by the Turkish Commercial Code (TCC). These provisions outline the process, requirements, and conditions for transforming a company from one legal form to another.
The key types of company conversions are between:
- Limited Liability Company (LLC) (Limited Şirket Ltd. Şti.) to a Joint Stock Company (JSC) (Anonim Şirket A.Ş.)
- Joint Stock Company (JSC) to a Limited Liability Company (LLC)
These transformations are generally permitted as long as the capital and liabilities of the company are handled appropriately and there is no violation of legal or regulatory requirements.
II. Conditions for CTCs
Certain conditions and requirements must be met for the conversion of a company in Turkey:
1. Shareholder Approval
The conversion must be approved by the General Assembly (shareholders’ meeting) of the company. This usually requires a supermajority unless otherwise stated in the Articles of Association.
2. Evaluation and Expert Report
- An independent expert may need to prepare a valuation report to assess the company’s assets, liabilities, and capital to ensure that the conversion is carried out fairly.
- If the company is converting to a Joint Stock Company (JSC), there must be a minimum capital requirement of 250,000 TRY for the new company structure (for Ltd. Şti. to A.Ş. conversion).
3. Compliance with the New Structure
The company must ensure that it can comply with the requirements of the new legal structure after conversion, including but not limited to:
- Minimum capital for a JSC (250,000 TRY).
- Board of Directors and other governance structures for a JSC.
- New Articles of Association reflecting the new type and governance structure.
4. Shareholder and Capital Adjustments
In the case of converting from a LLC to a JSC, shareholders may need to adjust the number and types of shares they hold, as a Joint Stock Company issues shares to its owners.
There must be an assessment to ensure that the capital of the new company is appropriately structured.
5. Notification to the Trade Registry
Once the conversion is approved, the company must submit the conversion documents to the Trade Registry for registration. The new Articles of Association reflecting the new type will also need to be filed.
6. Creditors’ Rights
Creditors of the company must be informed about the conversion. They can object to the conversion if they believe their claims will be harmed. If they raise objections, the company may need to provide guarantees or take steps to resolve creditor concerns.
III. Steps for Converting a Company in Turkey
The process for converting a company typically involves the following steps:
Step 1: Preparation of Conversion Documents
The company prepares the conversion agreement and the necessary legal documentation, which includes the new Articles of Association that reflect the new company structure.
A valuation report by an independent expert might be required, especially to ensure that the company’s assets are fairly valued for the new structure.
Step 2: General Assembly Approval
The company holds a General Assembly meeting where shareholders vote to approve the conversion. This meeting must meet quorum requirements and obtain the necessary majority for approval.
Step 3: Approval of Shareholders
After shareholder approval, the new Articles of Association are drafted, reflecting the new legal structure (for instance, changes in the number of directors, capital structure, or shareholder rights).
Step 4: Registration with the Trade Registry
The conversion must be registered with the Trade Registry to be legally effective. The documents required include:
- Minutes of the General Assembly meeting that approved the conversion.
- New Articles of Association of the company.
- Independent expert report, if applicable.
- Capital verification documents, ensuring the minimum required capital is met.
Step 5: Public Disclosure
The Trade Registry will publish the conversion in the Turkish Trade Registry Gazette. This is the official notice that the conversion has been successfully completed.
Step 6: Implementation
After registration and publication, the company operates under its new legal structure, and all relevant documents (including shares, governance structure, and operational aspects) are updated.
IV. Conversion from LLC to JSC (Ltd. Şti. to A.Ş.)
When a Limited Liability Company (Ltd. Şti.) converts into a Joint Stock Company (A.Ş.), the following steps are typically followed:
- Capital Requirements: The minimum capital required for an A.Ş. is 250,000 TRY. If the Ltd. Şti. does not meet this capital requirement, it must increase its capital to comply.
- Share Structure: In a JSC, shareholders are represented by shares, and the governance structure typically includes a Board of Directors. The company’s governance must be adjusted to reflect the new corporate form.
- Share Distribution: The conversion process involves converting the ownership structure of the LLC into shareholding in the JSC, typically in proportion to each shareholder’s previous ownership stake.
- New Governance: The company must establish a Board of Directors and a General Assembly, as required for JSCs.
- Registration: After the conversion, the company must be re-registered with the Trade Registry and comply with the Capital Markets Board (SPK) regulations if it is a public company.
V. Conversion from JSC to LLC (A.Ş. to Ltd. Şti.)
Converting a Joint Stock Company (A.Ş.) to a Limited Liability Company (Ltd. Şti.) involves a reverse transformation, and it requires:
- Capital Adjustment: The minimum capital required for an LLC is 50,000 TRY, which is significantly lower than for a JSC.
- Share Structure: In an LLC, ownership is represented by membership stakes rather than shares, and the governance structure is less complex, with a General Assembly being the primary decision-making body.
- Simplified Governance: The company will be governed by a manager or a management board, as opposed to the Board of Directors required for JSCs.
- Shareholder Rights: The conversion may lead to changes in the ownership rights of the shareholders, as LLCs are more limited in terms of share transferability compared to JSCs.
- Registration: As with converting to a JSC, the conversion must be filed with the Trade Registry and publicly announced.
VI. Tax Implications of Company Conversions
- Capital Gains Tax: Company conversions in Turkey generally do not trigger capital gains tax if they are done in a tax-neutral manner, provided the transaction follows the guidelines established by Turkish tax laws.
- VAT and Other Taxes: Depending on the nature of the assets transferred, Value-Added Tax (VAT) and other taxes might apply during the conversion process. Companies should consult with tax advisors to understand potential tax liabilities.
VII. Advantages of CTCs in Turkey
- Access to Capital: Converting from an LLC to a JSC can allow a company to raise more capital by issuing shares to the public or other investors.
- More Flexibility in Governance: Converting to a JSC can offer more flexible governance structures, which may be beneficial as the company expands.
- Limited Liability: Both LLCs and JSCs offer limited liability to their shareholders, which protects personal assets from business debts and obligations.
- Attractiveness to Investors: A JSC is generally more attractive to institutional investors because of its share-based structure and ability to list on the stock exchange.
VIII. Challenges of CTCs in Turkey
- Cost: The conversion process can be expensive, as it requires legal fees, valuation reports, registration fees, and other administrative costs.
- Complexity: The conversion process can be complex, especially when moving from one company to another. It may require a complete overhaul of the company’s governance and capital structure.
- Shareholder Discontent: If the conversion leads to changes in ownership, governance, or capital structure, some shareholders may disagree with the new direction or terms.
Company type conversions in Turkey are a useful tool for adapting a business’s structure to new strategic goals, such as raising capital, expanding operations, or restructuring ownership. However, the process requires careful legal, financial, and regulatory planning to ensure a smooth transition and compliance with Turkish law. Companies looking to convert should seek the assistance of legal and financial advisors to navigate the conversion effectively and minimize potential risks. Please feel free to contact us for more information and further inquiries about our unique services. You can also subscribe to Tacirsoft Hukuk Bilgi Sistemi, that is Turkey’s only Corporate Law and Organized Industrial Zones Law database.
