As 31 December 2024, the end of the financial year for many companies, approaches, this guide aims to remind companies of the reviews they need to conduct on their equity position and to shed light on the roadmap to be followed in preparation for the general assembly meeting to be held following the end of the financial year.
The coming period will be critical for the initiation of preliminary preparations for reporting before the annual general assembly meeting, multifaceted assessments of financial statements and equity position, preparation of documents to be submitted to shareholders for review and necessary planning.
- Duties of board of directors and managers
The nontransferable duties and authorities of the board of directors include preparing and submitting the annual activity report and corporate governance statements to the general assembly, preparing for the general assembly meetings and performing the resolutions obtained during the general assembly meeting.
Within the scope of its activities, the board of directors should act by considering that it is obliged to make the financial statements, consolidated financial statements, annual activity report of the board of directors, audit reports and the dividend distribution proposal of the board of directors available for the shareholders’ review at least 15 days before the general shareholders’ meeting.
- Control of the company’s equity position
It is a rule that the board members and executives are liable for the damages they cause to the company, shareholders and creditors of the company if they negligently breach their obligations arising from the law and the articles of association. As regulated under Article 376 of Turkish Commercial Code No. 6102 (“TCC“) and the Communiqué on Procedures and Principles Regarding the Implementation of Article 376 of Turkish Commercial Code No. 6102 (“Communiqué on Technical Bankruptcy“), if there is a possible technical insolvency or negative equity situation, it will undoubtedly play a key role in preventing the damage that may arise from these liabilities if the board members take action for necessary remedial measures in a timely manner to protect the claims or receivables of third parties by making an accurate assessment of the company’s financial statements with a prudent merchant’s perspective.
It would be beneficial for the board of directors to meet with the accounting and finance teams to review the cash flows and balance sheet with respect to control of equity position, especially as the financial year-end approaches.
If preliminary examinations reveal that the capital is not sufficient or the equity of the company is negative, as defined in the TCC and the Communiqué on Technical Bankruptcy, it would be appropriate to make a detailed assessment of the position by preparing an interim balance sheet based on the continuity of the business principle and considering probable sales prices of the assets.
Recognizably, the Communiqué on Technical Bankruptcy aims to pave the way for companies experiencing capital loss or negative equity to operate with fewer resources, and undoubtedly its most noteworthy provisions are those granting certain flexibilities to these companies experiencing foreign exchange losses and the possibility to disregard certain expenses in the calculations made regarding capital loss or technical insolvency.
Please see our legal alert explaining the applications and calculations under the Communiqué on Technical Bankruptcy in detail here, and our legal alert regarding the changes made to the Communiqué on Technical Bankruptcy on 26 December 2020 here.
- Review of the company’s cash flow and payment plans
If it is determined that the company is in capital loss or a technical insolvency position, this should not be interpreted as a negative result itself or as a reason for bankruptcy filing, either based on the interim balance sheet or within the framework of the provisions of the Communiqué on Technical Bankruptcy. Reviews should be carried as to whether the negative equity position in the company’s financial statements has led to a disruption in its ability to pay short- or long-term debts; whether there are any outstanding public debts or third-party creditors, and whether the company is expected to receive any cash resources in the near future.
- Formulation of an action plan by the board of directors in light of the received financial data
Following a timely review of the company’s financial position, it would be in line with corporate governance principles for the board of directors to adopt a written resolution that includes its findings on the company’s equity position and determines the actions to be taken in response. The board resolution in this respect will provide documentation showing that the board is actively working in accordance with its nontransferable duties and responsibilities imposed by law within the scope of capital loss.
The action plan to be determined by the board of directors and the right steps to be taken to minimize the possible damage will be an important factor in protecting the rights of creditors and shareholders.
- Creation of general assembly agenda with awareness of financial analysis and equity control
After the above-mentioned reviews, the board of directors will be in a position to identify the issues that will be beneficial for adding to the agenda of the general assembly meeting.
For example, in the presence of a loss of equity, it may be necessary to take some remedial measures at the general assembly level. In such cases, the board of directors may propose the agenda to be discussed at the general assembly, based on the detailed analysis, for capital increase, capital decrease, settlement for one-third of the capital, capital reduction by offsetting previous year losses, capitalization of intra-group shareholder loans / leaving the same behind other receivables or usage of the capital completion fund method. Taking these measures before the end of the financial year will ensure that the company will close the financial year with a clean balance sheet. Thus, based on such closing balance sheet,, the board of directors will be able to decide whether to propose dividend distribution to the general shareholders’ meeting, how to use distributable profit, if any, or whether it is necessary to set aside reserves above the minimum level stipulated in the law with more realistic table.
In order to be able to discuss issues such as setting aside voluntary legal reserves to meet social and environmental commitments within the scope of ESG, which is on the agenda of the whole world in terms of corporate sustainability, it is essential to first establish a strong equity position and thus balance the interests of the shareholders and all stakeholders.
- Careful preparation of the annual activity report
While preparing the annual activity report, the board of directors should ensure that the financial situation is reflected accurately, completely, straightforwardly, truthfully and honestly in all aspects, and that the possible risks to be encountered are included. For this purpose, the Regulation on Determining the Minimum Content of the Annual Report of Companies stipulates that the annual report prepared by the board of directors at the end of each financial year should evaluate the financial performance of the company, the general characteristics of its financial position and the main risks it faces.
Including the financial position of the company and, if necessary, plans for the improvement of the equity in the annual activity report will enable the board of directors to fulfill its duty imposed on it by the legislation.
Under the financial status section of the annual activity report, it is expected to include the determinations and assessments of the board of directors regarding whether the company’s capital is covered or whether the company is solvent. Including the remedial measures taken or planned by the board of directors against the negative equity and technical insolvency of the company in the relevant section of the annual activity report will demonstrate that the position is under control of the board of directors.
The discussion of the annual activity report of the board of directors is among the mandatory agenda items of the annual general assembly meeting. These meticulous studies to be carried out by the board of directors on the equity position of the company before the general assembly meeting will ensure that the board of directors is prepared for the possible questions that may be asked by the shareholders during the discussion of the agenda items related to the annual activity report or the financial situation of the company especially in general assembly meetings with multi-shareholder structures or where different share groups are represented.
We also suggest that even companies that are not subject to mandatory reporting obligations within the scope of ESG, they should add a new section to their annual reports on a voluntary basis to show that they address their responsibilities from a global perspective by taking into account benefits of all their stakeholders and write the actions they have taken regarding their social and environmental commitments, actions and if a voluntary legal reserve fund is considered for this purpose under main headings.
- Regular monitoring of the process by the board of directors
In 2024, it will also be important for the board of directors to regularly monitor the progress and the remedial measures planned as a result of the audits to be conducted in the last period of 2024.
Conclusion
Before the end of the 2024 financial year, we recommend that the boards of directors and executives of the companies should check the companies’ equity positions by considering the issues we have summarized above and determine the roadmap regarding the actions to be taken in case of capital loss or technical insolvency.
As assessed in this guide, it would be beneficial for the boards of directors to take the necessary steps and start controlling the equity before the end of the financial year, during the course of December, to manage the annual general assembly process, which will be held within a few months after the end of the financial year, in a controlled manner.
