INTRODUCTION
Capital increase with emission premium provides funding to venture capital companies that have a technology-based commercializable business idea or product by meeting their financial needs. In this way, the investor will be one of the shareholders in the venture capital company for three to ten years while making profit from the process and promoting growth and development at the same time. However, investment processes that are not well-structured and legally grounded may face setbacks and lead to long-lasting and costly disputes and finally, there will be a risk of a failure to achieve the expected return on investment.
In this article, we addressed the common challenges that an investment process struggle with and examined the capital increase with emission premium that frequently applied in investment rounds. Additionally, we examined subsidiary agreements that regulate the investment process, and shareholders' agreements that manage the relationship between shareholders. Finally, we explained practical approaches in the light of the legal regulations.
The conclusion of the article indicates our evaluations and suggestions regarding the process and legal documentation to ensure a safe investment environment with the umbrella of legal protection for the parties, i.e. investors, the target company (refers to venture capital company), and its shareholders who intend to have economic growth and development during and after the investment process have been indicated in the conclusion of the article.
A. CAPITAL INCREASE WITH EMISSION PREMIUM
Pursuant to Article 347 of the Turkish Commercial Code, the shares of the joint-stock companies cannot be issued at a price lower than their nominal value. However, issuing shares at a price higher than the nominal value is permitted. Shares with a price exceeding their nominal value are considered as shares with premium and the exceeding part will be the premium price.
Shares with premiums in venture capital companies, typically structured as joint-stock companies, generally occur after the establishment phase with capital increases; however, it is also possible to issue shares with premium in the establishment. The main reason for issuing shares with premiums through a capital increase is to provide funding to the company by issuing shares above nominal value, while maintaining the balance in the company's shareholder structure after the capital increase of joint-stock companies whose actual value is more than their capital. Thus, the company uses the premium amounts transferred to the capital reserves account to conduct and develop its operations. The investor's goal is not to stay in the venture capital company for long but to sell their shares after promoting the company's value. However, it should be noted that the investors are interested in the company's future rather than quick exits and support the company and collaborate with other shareholders.
The main expectations of investors are to control risks through direct mentoring and achieve high returns with such early-stage investments via participation of the company rather than just the financial boost.
B. SUBSIDIARY AGREEMENTS AND THEIR PURPOSE
Subsidiary agreements regulate the terms and conditions of the capital increase of the target company. The parties to the subsidiary agreement are, mostly, the investor and the target company. However, scenarios where the current shareholders are also parties to the agreement without the target company's participation may be structured. The investor pays the nominal value and premium amount of the shares issued through the capital increase to the target company. The investment amount is based on the value of the target company. The target company uses the premium amounts added to the capital reserves to develop its business and activities. The subsidiary agreement may also specifies how the target company will use the investment amount.
According to Article 456 of the Turkish Commercial Code, the capital cannot be increased unless the cash value of the shares is fully paid to the company. In cash capital increases, according to Article 344, at least twenty-five percent of the shares committed in cash must be paid before registration, and the rest must be paid within twenty-four months following registration. Additionally, as per Article 344, the entire premiums of premium shares must also be paid before registration.
C. MANAGING OF THE RELATIONSHIP BETWEEN CURRENT AND NEW SHAREHOLDERS: SHAREHOLDERS' AGREEMENT
Specific rules related to the management and ownership structure of the target company need to be regulated even though the capital increases with emission premiums prevent the dilution of the shares belonging to the current shareholders and simultaneously ensure a balance between current and new shareholders. Typically, the effect of the investors on general assembly decisions will not be decisive after the investment process through capital increase with emission premium, since the investor shall not acquire a majority of the shares. The investor cannot meet the desired outcomes solely through the company's articles of association relying on the basic principles of the Turkish Commercial Code and corporate law. Therefore, a shareholders' agreement must be drafted between the investor and the company's existing shareholders.
The shareholders' agreement, is defined as “an agreement executed by all or some of the shareholders of a joint-stock company to regulate their legal relationships with each other, their relationships with the partnership, or the regime they wish the partnership to be subject to,” governs the management of the company, rights, privileges obligations of the shareholders, and the procedures to be followed in case of exit.
Drafting a shareholders' agreement would be suitable since it maintains confidentiality without a registration process and it also provides parties with freedom of will while regulating conditions not specified in the articles of association as long as they do not breach mandatory legal regulations.
D. CONCLUSION
The prices of the share with emission premium to be issued by the invested company should align and comply with its value. By doing so, a fair financial balance between the investor, the target company, and its shareholders can be ensured.
In the context of the Subscription Agreement, in cases where the existing shareholders are not parties, a clarification must be made regarding specific issues, such as to whom the investor can apply for its damages and the extent of potential losses they can demand. Additionally, the responsibilities, representations, and warranties undertaken by the target company, along with the sanctions for non-compliance with its undertakings, as well as the closing conditions, should also be clearly defined. If necessary, it is also possible to consider having to have the existing shareholders to become parties to the agreement as well.
It should be noted that while drafting shareholders' agreements, even though the parties act in relation to the freedom of contract, the boundaries of the mandatory rules of commercial law should be taken into consideration, and the rights and obligations of the parties, the company's management principles, financial matters, shareholders exit procedures, and share transfer restrictions should be drafted at a level that maximally meets the parties' expectations and minimizes potential disputes.
In conclusion, capital increase with the emission premium strengthens companies' financial structure and allows investors to partakein the company's growth. By properly structuring the processes within the boundaries of law and systematizing them through well-addressed legal documents, the interests of the target company, its shareholders, and the investors, are given a chance to be protected. Thereby, this establishes a safer and more stable investment environment for both investors, target companies, and shareholders.
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.