Although change of type is regulated under Articles 180 et seq. of the Turkish Commercial Code (TCC), a clear definition is not provided. In the doctrine, the concept of change of type is defined as the change of the legal form of a company and the emergence of a company under another legal form without liquidation and without transferring its assets.

What is important here is that the company, whose type is changed, does not need to be dissolved and liquidated. The reason for this is that, according to Article 180 of the TCC, the company changed into a new type is the continuation of the old one. After the change of type, there is no change in the economic identity, legal personality, rights, debts and other obligations of the company. In other words, the TCC adopts the 'shape-changing' type change, and only the legal mould of the company changes.1

Another issue is that Article 181 of the TCC introduces certain limitations to the change of type. Pursuant to the said Article, a limited number of varieties of change of type are listed in the TCC and any changes other than these shall not be valid. A change of type from one capital company to another, in practice, is the most common one.

In short, the lawmakers have facilitated the process in favour of commercial enterprises. This is because, according to the TCC, commercial companies may at any time terminate their activities through dissolution and liquidation and then establish a new company of their choice. However, this method does not seem rational for companies in view of principles of cost and time economy.

Procedure Regarding the Conversion from Limited Liability to Joint Stock Company

In practice, the most common change of type practice is from limited company to joint stock company.

Although the transactions to be carried out by companies in case of change of type are basically regulated in the Law, the documents to be submitted to the Trade Registry Directorates and the matters to be registered are regulated in the Trade Registry Regulation. In this context, the procedure is as follows:

  1. The process of change of type must start with the decision of the managing body. Then, with the decision, the managing body shall take initiate transactions such as the financial statements, the preparation of the change of type plan and report.
  2. The most important financial statements are the company's balance sheets. According to the TCC, it is necessary to pay attention to whether more than six months have elapsed between the date of balance sheet and the date of the change of type report. If more than six months have elapsed between the date of balance sheet and the date of the change of type report, or if significant changes have occurred in the company's assets since the last balance sheet was issued (even if less than six months have elapsed between the date of the change of type report and the date of balance sheet), an interim balance sheet must be required (Art. 184/2 TCC).
  3. Another important transaction after the balance sheet is the preparation of the articles of association ("AoA") of the new company. According to the TCC, "the provisions regarding the incorporation of the new company must be applied in the process of conversion" (Art. 184/1 TCC). What is meant by the term "incorporation" in the Law is not the incorporation of a new type of company, but the amendment of the AoA of the existing company in order to change it into the AoA of the new type of company.2 However, it should be noted that since the minimum capital of a joint stock company is TRY 50.000,00, this amount should be taken into consideration during the change from limited company to joint stock company.
  4. The next stage is the preparation of the change of type plan ("Plan"). The Plan shall be prepared by the authorised managing body. The condition for validity of the Plan is that it must be in writing. The Plan, which is prepared and signed by the managing body, is submitted to the approval of the general assembly (Art. 185 TCC).
  5. In addition to the Plan, a change of type report ("Report") shall be prepared by the managing body. In this Report, the purpose and results of the change of type; the process of the incorporation provisions regarding the new company; the new AoA; the rate of change regarding the shares to be held by the shareholders after the change of type; if any, the additional payment and other personal performance obligations and personal liabilities arising from the change of type in relation to the shareholders; and the obligations arising for the shareholders shall be explained in legal and economic terms and their justifications shall be shown (Art. 186 TCC). These are the minimum mandatory records that must be included in the Report.
  6. The Law grants shareholders the right to review all these processes in order to ensure that they are managed transparently, to prevent any loss of rights or unfair advantage, and to provide information. In this context, the company is obliged to submit the relevant documents such the Plan and the Report to the review of the shareholders thirty days prior to the general assembly resolution (TCC Art. 188).
  7. Another issue to be considered is to determine whether the capital company to be converted is subject to any regulatory and supervisory authority in the line of business in which it operates. Th reason is that, in order for the amendments of the AoA of the new company to be valid, the company will need to obtain authorisation from the authority(s) to which it is subject.
  8. The managing body submits the Plan for the approval of the general assembly thirty days after the above-mentioned procedures are completed and the shareholders are given the right to examine it (Article 189 of the TCC). According to the Law, the plan not approved by the general assembly is not binding. In the Law, the quorums for the decision on change of type are regulated. According to Article 189/1-c of the TCC, in order for a limited company to be changed into a joint stock company, three-fourths of the shareholders must approve this decision, provided that they hold at least three-fourths of the capital.
  9. Lastly, all documents which are prepared until this phase must be registered at the Trade Registry Office.

After all these procedures, the change of type decision is announced in the Turkish Trade Registry Gazette and has legal consequences for third parties (Art. 189/2 of the TCC).

The Legal Responsibility and The Situation of Receivables in Change of Type

The General Assembly of Civil Chambers of the Court of Cassation clarified this issue in detail (E:2017/247, D:2018/229, T:14.02.2018). Briefly, the followings have been reached in the decision:

  1. The company changed into a new type is the continuation of the old one;
  2. The rights, receivables, debts and obligations of the partnership changed into a new type shall continue in the new type without any change in the rights, receivables, debts and obligations of the partnership at the time of the old one. Here, the legal entity is single and the same legal entity, i.e., a commercial partnership, is transformed into another commercial partnership. Since there is only one legal entity, there is no transfer of assets in the change of type. The former legal partnership is neither dissolved nor dissolved, nor is it subject to liquidation. At the end of the transactions, a commercial partnership is only transformed into another type;
  3. Since the change of type is an amendment to the AoA, the legal personality and legal relations of the company do not change, and all rights and obligations of the old company are transferred to the new company.

As a result, it can be said that the liability of the legal entity against its receivables will continue.

Another issue regarding the protection of receivables is regulated by Article 190 of the TCC, which stipulates that Article 158 of the TCC shall apply to the personal liability of the shareholders. In this context, according to Article 158 of the TCC, at least one of the following two conditions must be met:

  1. The debt in the company must have arisen before the announcement of the conversion decision; or
  2. The reasons giving rise to the debt must have occurred before the date of the conversion. This condition is valid for debts arising from contracts, unjust enrichment, acting without authority, and torts.

In the following of the Article, the Law regulates a special three-year statute of limitations for the liability. The commencement of the statute of limitations is the date of the announcement of the conversion decision. The said term does not in any way add a new period to the claims that have already expired.

In conclusion, the Law requires a certain procedure to followed. Especially, the provisions regarding the incorporation of the new company must be applied in the process of conversion. Additionally, the Law sets out certain provisions to protect the rights of receivables. In this regard, it is clearly emphasised that the liability for debts will continue after the conversion to the new type, especially in the change of type of commercial companies where personal liability is in question.

BIBLIOGRAPHY

Çaglar Dogu Aras, (2008), "Sermaye Sirketlerinde Tür Degistirme" (Doktora Tezi), Istanbul Kültür Üniversitesi Sosyal Bilimler Enstitüsü.

Hasan Pulasli, (2022), "Sirketler Hukuku Genel Esaslar", (8. bs.), Ankara: Adalet Yayinevi.

Mehmet Bahtiyar, (2017), "Ortakliklar Hukuku", (12. bs.), Istanbul: Beta Yayincilik.

Necmettin Gündüz, (2022), "Tüm Yönleriyle Sermaye Sirketlerinde Birlesme, Bölünme ve Tür Degistirme", (1. bs.), Ankara: Seçkin Yayincilik.

  1. Poroy, Ü. Tekinalp ve E. Çamoglu, (2021), "Ortakliklar Hukuku I", (15. bs.), Istanbul: Vedat Kitapçilik.

Footnote

1. Çaglar Dogu Aras, (2008), "Sermaye Sirketlerinde Tür Degistirme" (Doktora Tezi), Istanbul Kültür Üniversitesi Sosyal Bilimler Enstitüsü, s. 3-33.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.