A foreign investor contributes EUR 2 million to a Turkish startup and receives 20% of the company.

One year later, the founders decide that the company needs additional capital.

New shares are issued.

The foreign investor does not participate.

Its ownership falls from:

20% to 12%.

Has the investor been unlawfully diluted?

Not necessarily.

Share dilution is a normal part of startup financing.

Almost every venture-backed company eventually issues:

• new shares;
• employee equity;
• convertible securities;
• or other equity-linked instruments.

When this happens, existing shareholders may own a smaller percentage of the company.

However, dilution becomes legally problematic where founders use corporate mechanisms to:

• intentionally reduce a foreign investor’s percentage;
• transfer control to themselves or related parties;
• exclude the investor from a capital increase;
• remove or restrict pre-emption rights without proper legal justification;
• issue shares at an artificially low value;
• or circumvent contractual anti-dilution protections.

Turkish law provides several mechanisms that can protect investors against abusive dilution.

For joint stock companies, one of the most important is Article 461 of the Turkish Commercial Code, which generally grants shareholders a pre-emptive right to subscribe for newly issued shares in proportion to their existing ownership. The Ministry of Trade also confirms that this right may be restricted or removed only where justified reasons exist and the required statutory voting threshold is satisfied.

Foreign investors can also protect themselves contractually through:

• investor consent rights;
• anti-dilution clauses;
• pro rata participation rights;
• board representation;
• reserved matters;
• information rights;
• and remedies for breach of the Shareholders’ Agreement.

The key issue is therefore not simply whether dilution occurred.

The real question is:

Was the dilution legally and contractually permissible?

1. What Does Share Dilution Mean?

Dilution occurs when a company issues additional equity and an existing shareholder’s percentage decreases.

Example:

Startup has:

1,000 shares.

Foreign Investor owns:

200 shares = 20%.

The company issues:

1,000 new shares

to another investor.

Foreign Investor still owns:

200 shares.

But the total number of shares is now:

2,000.

Its ownership therefore becomes:

10%.

The investor has not lost its existing 200 shares.

Instead, those shares now represent a smaller percentage of the enlarged share capital.

This is ordinary mathematical dilution.

2. Dilution Is Not Automatically Unlawful

Foreign investors should understand that Turkish law does not generally guarantee that a shareholder’s percentage will remain unchanged forever.

Companies need additional financing.

A startup may legitimately issue shares to:

• new investors;
• existing investors;
• strategic partners;
• employees;
• or other shareholders.

If the foreign investor chooses not to participate in a lawful capital increase, dilution may be the natural consequence.

For example:

Investor owns 20%.

Company needs EUR 5 million.

All shareholders are given a fair opportunity to participate proportionately.

Investor refuses to invest additional capital.

Its percentage decreases.

That result is fundamentally different from founders structuring a capital increase specifically to push the investor out.

3. Turkish Law Gives Shareholders Pre-Emption Rights

The principal statutory protection against dilution in a Turkish joint stock company is the pre-emptive subscription right — rüçhan hakkı.

Under Article 461 of the Turkish Commercial Code, each shareholder generally has the right to acquire newly issued shares in proportion to its existing participation in the company.

Example:

Foreign Investor owns:

25%.

Company issues:

400 new shares.

Investor should generally have the opportunity to subscribe for:

100 shares

and therefore preserve its 25% ownership.

If the investor exercises this right fully, ordinary dilution can generally be avoided.

4. How Does the Pre-Emption Right Protect a Foreign Investor?

Consider:

Founder A: 50%

Founder B: 30%

Foreign Investor: 20%.

The company wants to double its capital.

Without a pre-emption right, the founders might subscribe for all new shares.

Foreign Investor’s ownership could fall substantially.

Article 461’s basic principle gives the foreign investor an opportunity to participate proportionately.

The investor can therefore maintain:

• percentage ownership;
• voting power;
• economic participation;
• and potentially governance thresholds.

This is why statutory pre-emption rights are among the most important protections for minority shareholders in Turkish companies.

5. The Investor Usually Has to Invest Additional Money to Avoid Dilution

A pre-emption right is generally a right to participate, not free shares.

Suppose:

Investor initially paid:

EUR 1 million.

The company later raises:

EUR 5 million.

The investor cannot normally say:

“I want to remain at 20%, but I do not want to contribute any additional capital.”

To maintain the percentage, the investor may need to subscribe for its proportional share of the new issuance.

This distinction is important.

Pre-emption protects against exclusion.

It does not necessarily protect the investor from every economic consequence of future fundraising.

6. Can Founders Remove the Investor’s Pre-Emption Right?

Not freely.

For joint stock companies, Article 461 allows pre-emption rights to be restricted or removed only where justified reasons exist.

The decision also requires affirmative votes representing at least 60% of the share capital.

The law further prohibits using the restriction or removal of pre-emption rights to unjustifiably benefit or disadvantage particular persons.

The Ministry of Trade specifically explains that where pre-emption rights are restricted or removed, the board must prepare a report explaining:

• the reasons for the restriction or removal;
• why new shares are issued with or without premium;
• and how any premium was calculated.

The report is registered and announced.

These requirements can become critically important where a minority investor alleges abusive dilution.

7. What Is a “Justified Reason” for Restricting Pre-Emption Rights?

Turkish law does not allow founders to remove the investor’s pre-emption rights merely because they would prefer the investor to own less of the company.

Article 461 gives examples of circumstances that may constitute justified reasons, including situations such as:

• acquisition of businesses;
• acquisition of business units;
• acquisition of participations;
• and employee participation in the company.

Other situations may potentially qualify depending on the facts.

The fundamental principle is that the decision must serve a legitimate corporate purpose rather than operate primarily as a mechanism for unfairly harming an existing shareholder.

8. Example of Potentially Abusive Dilution

Consider the following scenario.

Foreign Investor owns:

30%.

Founders own:

70%.

Company’s genuine market value is approximately:

EUR 20 million.

The founders approve a capital increase and arrange for newly issued shares to be acquired by a founder-controlled company at an extremely low valuation.

Foreign Investor’s pre-emption right is restricted.

After the transaction:

Foreign Investor falls from:

30%

to:

8%.

Founder-controlled entities now hold:

92%.

This transaction would require careful legal examination.

Questions would include:

• Was there a genuine financing need?
• Why were pre-emption rights removed?
• Was a justified reason identified?
• Was the statutory voting threshold satisfied?
• Was the issue price commercially defensible?
• Did the transaction unfairly benefit founders?
• Was the board report accurate?
• Did the transaction violate the Articles?
• Did it breach the Shareholders’ Agreement?
• Was the equal-treatment principle violated?

Calling the transaction a “capital increase” does not automatically make every dilution lawful.

9. Equal Treatment of Shareholders Is Also Relevant

Article 357 of the Turkish Commercial Code establishes the principle that:

shareholders under equal conditions must be treated equally.

This principle can become important where founders manipulate capital increases in a manner that selectively disadvantages a foreign investor.

For example, management should not ordinarily structure a financing round merely to:

• benefit founder-controlled entities;
• punish a dissenting investor;
• destroy a minority shareholder’s governance rights;
• or transfer value from one shareholder group to another without legitimate justification.

Not every difference in treatment violates Article 357.

Different share classes and lawful privileges may exist.

But arbitrary discriminatory treatment can create legal risk.

10. Dilution Can Affect More Than Economic Ownership

A reduction from 20% to 8% is not simply a financial issue.

It may also cause the investor to lose important legal rights.

For example, the investor may lose:

• statutory minority thresholds;
• board appointment rights;
• veto thresholds;
• ability to block specific resolutions;
• special audit rights;
• rights linked to a minimum ownership percentage;
• or contractual consent rights.

This makes strategic dilution significantly more dangerous than ordinary investment dilution.

A founder may not merely be reducing the investor’s economic share.

It may be reducing the investor’s governance power.

11. The 10% Minority Threshold Can Be Particularly Important

Several minority rights in a non-public Turkish joint stock company are connected to ownership of at least:

10% of the capital.

For example, Article 411 gives shareholders satisfying the statutory minority threshold rights relating to calling the general assembly and adding matters to its agenda.

If a foreign investor is diluted from:

12%

to:

8%,

it may therefore lose access to certain statutory minority mechanisms unless the Articles of Association provide a lower threshold.

This is one reason why investors close to statutory thresholds should negotiate additional contractual and corporate protection before investing.

12. Contractual Pro Rata Rights Can Be Broader Than TCC Article 461

A sophisticated investor should normally not rely only on statutory pre-emption.

The Shareholders’ Agreement may provide a broader Pro Rata Participation Right.

For example:

“The Investor shall have the right to participate in all future issuances of Equity Securities to the extent necessary to maintain its Fully Diluted Ownership Percentage.”

The term Equity Securities may then include:

• ordinary shares;
• preferred shares;
• convertible loans;
• SAFEs;
• warrants;
• options;
• or other equity-linked instruments.

This matters because economic dilution can occur before a formal capital increase.

13. SAFEs Can Dilute a Foreign Investor Even Before Conversion

Suppose:

Foreign Investor owns:

20%.

Startup then signs several SAFEs with new investors.

No new shares are issued immediately.

The foreign investor still legally owns 20%.

But once the SAFEs convert, its percentage may fall dramatically.

If the Shareholders’ Agreement protects the investor only against ordinary share issuances, SAFE financing may fall outside the protection.

The reserved-matters and anti-dilution clauses should therefore address:

equity-linked securities

rather than shares alone.

14. Convertible Loans Can Create the Same Problem

A convertible loan is initially debt.

But once it converts, new shares may be issued.

If the company borrows:

EUR 5 million

through convertible instruments without investor approval, the foreign shareholder may face substantial future dilution.

Accordingly, institutional investment agreements commonly treat:

• SAFEs;
• convertible notes;
• warrants;
• employee options;
• and similar instruments

as part of the company’s fully diluted capitalization.

15. Employee Share Option Pools Can Also Cause Dilution

Not all dilution is investor-related.

A startup may establish an:

ESOP — Employee Stock Option Plan.

Suppose:

Foreign Investor owns:

20%.

The company creates a:

15% employee option pool.

Depending on how the pool is structured, the investor’s fully diluted percentage can decrease.

This may be commercially justified because talented employees are essential to startup growth.

But the agreement should answer:

Who bears the dilution?

The pool may be created:

• before the investment;
• after the investment;
• or as part of the next financing round.

The timing can materially affect investor economics.

16. “Fully Diluted Ownership” Should Be Defined

Foreign investors should pay careful attention to the denominator used when calculating ownership.

Does 20% mean:

20% of currently issued shares?

Or:

20% on a fully diluted basis including:

• options;
• reserved ESOP;
• SAFEs;
• warrants;
• convertible loans;
• and other future equity rights?

The difference can be substantial.

A term sheet stating:

“Investor receives 20%.”

is incomplete unless capitalization is clearly defined.

17. What Is Contractual Anti-Dilution Protection?

Contractual anti-dilution goes beyond ordinary pre-emption.

It is designed particularly to protect investors where the company later issues shares at a lower valuation.

Suppose:

Foreign Investor invests at:

EUR 20 million valuation.

Two years later, the company raises financing at:

EUR 8 million valuation.

This is known as a:

Down Round.

The investor may negotiate an adjustment designed to compensate for the lower-priced issuance.

18. Weighted Average Anti-Dilution

One common international method is weighted average anti-dilution.

Instead of fully repricing the investor’s original investment, the adjustment considers factors such as:

• number of newly issued shares;
• new issue price;
• existing capitalization;
• and original conversion price.

The investor receives partial economic adjustment.

This approach usually produces a more balanced result between:

• founders;
• earlier investors;
• and new investors.

19. Full Ratchet Anti-Dilution

A more aggressive investor protection is full ratchet.

Under a simplified full-ratchet concept, if new shares are issued at a lower price, the earlier investor’s effective conversion price is adjusted to that lower price regardless of the size of the new financing.

Example:

Investor originally invests at:

EUR 10 per share.

Company later issues a small number of shares at:

EUR 5 per share.

Full ratchet may adjust the investor as though the original investment had also been made at EUR 5.

This can create substantial founder dilution.

For this reason, full ratchet provisions can become heavily negotiated.

20. International Anti-Dilution Clauses Must Be Adapted to Turkish Law

An investor should not simply insert a Delaware venture-capital clause into a Turkish Shareholders’ Agreement.

The intended adjustment must be compatible with:

• Turkish capital-maintenance principles;
• nominal share value;
• shareholder equality;
• Articles of Association;
• statutory capital-increase procedures;
• and the actual share class structure.

A clause may be economically clear but corporately impossible to implement exactly as written.

The legal documents should therefore explain how the anti-dilution adjustment will actually be delivered.

Possible mechanisms may involve:

• additional share issuance where legally possible;
• founder share transfers;
• conversion-price adjustment;
• contractual compensation;
• or another properly structured arrangement.

21. Founder Share Transfers Can Sometimes Be Used for Economic Adjustment

Suppose a contractual anti-dilution formula entitles the foreign investor to an economic adjustment.

Instead of issuing additional company shares, the founders might undertake to transfer a specified number of existing founder shares.

This can sometimes reduce corporate implementation problems.

However, the transfer must comply with:

• the company’s legal form;
• Articles of Association;
• share-transfer restrictions;
• existing SHA provisions;
• and applicable formalities.

A Turkish Ltd. Şti. in particular has stricter share-transfer formalities than an A.Ş.

22. Investors Should Negotiate Consent Rights Over Capital Increases

One of the strongest preventive protections is simple:

Do not allow a major capital increase without investor consent.

The Shareholders’ Agreement may classify as Reserved Matters:

• any capital increase;
• issuance of new shares;
• creation of new share classes;
• issuance of convertible securities;
• restriction of pre-emption rights;
• and expansion of the ESOP pool.

The investor then receives a contractual veto over dilution-producing events.

However, the right should be coordinated with the Articles of Association and Turkish corporate rules.

23. Registered Capital Companies Require Special Attention

A non-public Turkish joint stock company can, where the statutory conditions are satisfied, use a registered capital system.

Under Article 460, the Articles may authorize the board of directors for a maximum statutory period to increase capital up to the registered capital ceiling.

The board may also be authorized under the Articles to restrict shareholders’ pre-emption rights.

This can materially change investor risk.

In an ordinary capital increase, the general assembly may be the principal decision-maker.

In a registered-capital structure, the board may possess significant authority.

Foreign investors should therefore review:

• the registered capital ceiling;
• the scope of board authority;
• whether the board can restrict pre-emption;
• whether investor directors have veto rights;
• and when the authorization expires.

24. Board Capital Increase Decisions Can Be Challenged

Article 460 also provides an important remedy.

Where the board adopts a capital-increase decision under the registered capital system, shareholders and board members can seek annulment where the grounds under Article 445 exist.

The action must generally be filed within:

one month from announcement of the board decision.

This is a much shorter period than the ordinary three-month period commonly associated with general assembly annulment actions.

Foreign investors should therefore react quickly when they discover a potentially abusive registered-capital increase.

25. Challenge an Unlawful General Assembly Capital Increase

If an allegedly abusive dilution is approved by the general assembly, the investor should analyse an annulment action under Article 445 of the Turkish Commercial Code.

Article 445 permits challenges to general assembly resolutions that violate:

• the law;
• the Articles of Association;
• or especially good-faith principles.

The ordinary statutory period is generally:

three months from the date of the resolution.

This deadline can become decisive.

An investor who notices the dilution six months later may have lost an important remedy.

26. Record Opposition at the General Assembly

Where the foreign shareholder attends the meeting, procedural protection is important.

Under Article 446, a shareholder relying on the ordinary attendance-based ground should:

• attend;
• vote against the resolution;
• and ensure the dissent is recorded in the meeting minutes.

Additional grounds exist in circumstances involving matters such as improper participation or voting irregularities.

A foreign investor should therefore never leave a disputed capital-increase meeting with only an informal email saying:

“We object.”

The objection should be formally recorded.

27. Immediate Legal Review Is Essential

A capital increase moves quickly.

Once the transaction is:

• approved;
• subscribed;
• paid;
• registered;
• and reflected in the cap table,

the dispute can become significantly more complicated.

When a foreign investor learns about a suspicious capital increase, counsel should immediately determine:

1. Who approved it?
2. Was the investor properly notified?
3. Was the general assembly validly called?
4. Was the required quorum satisfied?
5. Was the investor allowed to vote?
6. Were pre-emption rights offered?
7. If they were removed, what was the justification?
8. What was the issue price?
9. Who acquired the new shares?
10. Was the purchaser related to founders?
11. Was the board report prepared?
12. What does the SHA provide?
13. What does the Articles of Association provide?
14. Has the resolution already been registered?
15. What litigation deadline applies?

Time matters.

28. Artificially Low Share Pricing Can Transfer Value Between Shareholders

Dilution is not only about percentage ownership.

The price of the new shares can transfer economic value.

Suppose:

Company is genuinely worth:

EUR 10 million.

Founder-controlled entity is permitted to subscribe for substantial new equity based on an implied value of only:

EUR 1 million.

The founder-controlled entity may receive a disproportionately valuable position.

Even if the capital increase is formally documented, the transaction may require examination for:

• legitimate corporate purpose;
• equal treatment;
• abuse of majority power;
• pre-emption compliance;
• contractual breach;
• and possible director responsibility.

Foreign investors should therefore review pricing, not only the number of shares issued.

29. Share Premium Can Be Important

Shares in a capital increase may be issued above nominal value.

The Ministry of Trade specifically notes that where pre-emption rights are restricted or removed, the board’s report should explain:

• whether new shares are issued with or without premium;
• why;
• and how the premium was calculated.

For startups, this is particularly significant.

The nominal capital of a technology company may be relatively low even though its market value is millions of euros.

Issuing new shares merely at nominal value to selected insiders can create a substantial economic transfer.

The correct pricing structure therefore deserves careful review.

30. Founder-Controlled Financing Is a Major Red Flag

A capital increase should receive additional scrutiny where the new subscriber is:

• a founder;
• founder-owned company;
• family member;
• affiliated business;
• existing controlling shareholder;
• or another related person.

Related-party involvement does not automatically make the financing unlawful.

A founder may legitimately rescue a distressed company when nobody else is willing to invest.

But the transaction should be commercially explainable.

Questions include:

• Was funding genuinely necessary?
• Was the foreign investor invited to participate?
• Was the price fair?
• Was third-party financing attempted?
• Why were pre-emption rights limited?
• Did management act in the company’s interests?

31. Financial Distress Can Make Dilution Commercially Justifiable

Suppose a startup needs:

EUR 3 million

within 30 days or it will fail.

The foreign investor refuses to contribute.

No external investor will invest.

The founder agrees to provide the entire EUR 3 million but requires substantial new equity.

The investor may be heavily diluted.

That does not automatically make the transaction abusive.

The company needed capital and the investor declined to participate.

The legal analysis would consider:

• genuine financing need;
• valuation;
• process;
• investor opportunity to participate;
• and statutory compliance.

Turkish law does not require founders to allow a startup to become insolvent merely to preserve a minority investor’s percentage.

32. Investor Failure to Participate Can Have Contractual Consequences

Shareholders’ Agreements sometimes contain pay-to-play provisions.

These may provide that investors who fail to participate in future financing lose particular preferential rights.

Possible consequences may include:

• reduced anti-dilution protection;
• conversion of preferred shares;
• loss of certain contractual privileges;
• or other agreed consequences.

Such provisions should be carefully adapted to Turkish law.

The investor should understand before signing whether future funding is:

optional

or commercially tied to maintaining special rights.

33. Never Agree to an Unlimited Future Funding Obligation Without Understanding It

Founders may request language such as:

“Each shareholder shall provide all future capital required by the Company pro rata.”

This can create an open-ended funding obligation.

A foreign investor intending to invest only:

EUR 2 million

may later be asked for:

EUR 5 million more.

If it refuses, founders may argue that the investor breached the SHA.

Future funding provisions should therefore specify:

• whether participation is voluntary;
• maximum commitment;
• financing period;
• financing instruments;
• approval mechanism;
• and consequences of non-participation.

34. Protect Ownership Threshold-Dependent Rights

Investor rights should not always disappear automatically because the percentage falls slightly.

Suppose:

Investor initially owns:

15%.

It receives one board seat while owning at least:

10%.

A financing round unexpectedly reduces it to:

9.8%.

Does the board right immediately disappear?

The agreement can use appropriate thresholds and protection mechanisms.

For example, rights may continue where dilution results from:

• an approved ESOP;
• investor’s own participation in financing;
• or another specified event.

The drafting should avoid accidental loss of important governance rights.

35. Pre-Emption Does Not Protect Against Every Form of Economic Dilution

Founders can affect investor economics through transactions other than a formal capital increase.

Examples include:

• excessive founder compensation;
• related-party consulting fees;
• transfer of IP to another company;
• below-market asset sales;
• excessive shareholder loans;
• granting cheap options;
• or shifting customers to founder-controlled businesses.

The investor still owns the same percentage.

But the company itself has become less valuable.

This is sometimes described commercially as value dilution rather than mathematical share dilution.

Minority protection should therefore extend beyond capital increases.

36. Reserved Matters Should Cover Value Leakage

A foreign investor should consider approval rights over:

• founder remuneration above thresholds;
• related-party transactions;
• asset transfers;
• IP licensing;
• guarantees for affiliates;
• major loans;
• dividends;
• acquisition or disposal of businesses;
• and material changes to employee equity.

These provisions prevent founders from reducing the economic value underlying the investor’s shares without technically changing the ownership percentage.

37. Board Members Can Face Liability for Improper Dilution Transactions

If directors participate in a transaction that unlawfully harms the company, shareholders or creditors through culpable breach of their duties, director liability under Article 553 of the Turkish Commercial Code may become relevant.

A dilution dispute should therefore not always be analysed solely as:

Investor vs Founders.

Depending on the transaction, potential claims may also concern:

• board members;
• managers;
• or other responsible persons.

The precise claim depends on who suffered the direct loss and how the challenged transaction was structured.

38. Special Audit May Help Investigate Suspicious Dilution

A foreign investor may suspect that:

• valuation information was manipulated;
• founders secretly financed the new investor;
• related parties acquired shares;
• or information was withheld.

In appropriate circumstances, the statutory special audit mechanism under Articles 438–439 can become relevant.

A shareholder can first use statutory information rights and seek clarification concerning specific company matters.

Qualifying minority shareholders may then seek court appointment of a special auditor where the statutory conditions are met.

This can provide an important evidentiary tool where management controls most company documentation.

39. Information Rights Should Include the Cap Table

A foreign investor should contractually require the company to provide an updated capitalization table showing:

• issued shares;
• share classes;
• shareholders;
• options;
• ESOP pool;
• SAFEs;
• convertible notes;
• warrants;
• and other equity-linked rights.

The investor should receive an updated cap table after every material financing transaction.

A founder should not be able to say at Series B:

“We forgot to mention three SAFEs signed last year.”

40. Require Advance Notice of New Equity Issuances

An effective Shareholders’ Agreement may require written notice before the company issues:

• shares;
• options;
• SAFEs;
• warrants;
• convertible debt;
• or other equity instruments.

The notice can specify:

• amount;
• investor identity;
• valuation;
• price;
• principal terms;
• dilution effect;
• and expected closing date.

The foreign investor then has time to decide whether to:

• participate;
• exercise consent rights;
• negotiate;
• or challenge the transaction.

41. Drag-Along and Tag-Along Percentages Can Also Be Affected by Dilution

Suppose the investor originally owns:

25%.

The SHA provides that a drag requires:

75% approval.

The investor can therefore effectively prevent a drag by itself.

After dilution, the investor owns:

15%.

The founders now own more than the required 75%.

The investor has lost an important practical protection.

Similarly, the definition of:

Major Investor

may depend on ownership thresholds.

The effect of dilution on all contractual rights should therefore be modelled.

42. Minority Rights Should Be Calculated on the Correct Basis

An investment agreement may refer to:

• issued capital;
• voting rights;
• fully diluted capital;
• preferred shares;
• or outstanding securities.

These are not interchangeable.

For example:

Investor owns:

12% of issued shares

but

9% fully diluted.

Does a contractual 10% threshold apply?

The document should specify the calculation basis.

Ambiguity can create disputes over:

• board seats;
• veto rights;
• information rights;
• and exit protections.

43. Can a Foreign Investor Demand Its Original Percentage Back?

Not automatically.

If lawful financing caused dilution and the investor chose not to participate, there is generally no automatic right to demand restoration of the old percentage.

The position may be different where:

• the capital increase was unlawful;
• pre-emption rights were improperly restricted;
• the resolution is annulled;
• contractual anti-dilution protection applies;
• founders breached voting undertakings;
• or another legal remedy exists.

The appropriate remedy depends on the legal source of the investor’s protection.

44. Can the Investor Claim Damages?

Potentially.

If founders or other contractual parties breach the Shareholders’ Agreement by implementing prohibited dilution, the investor may have a contractual claim.

Possible relief may include, depending on the agreement and circumstances:

• damages;
• contractual penalties;
• specific performance where legally available;
• put-option rights;
• additional share-transfer obligations;
• or other contractual remedies.

Separate corporate-law remedies may also be available.

The investor should distinguish:

breach of contract

from

invalid or voidable corporate action.

The two claims are not necessarily the same.

45. Arbitration Does Not Replace Urgent Corporate Remedies

The SHA may contain an arbitration clause.

That can be useful for contractual disputes.

But if the company has just adopted an allegedly unlawful capital increase, the investor should immediately determine whether a Turkish statutory corporate action is necessary.

For example:

• ordinary general assembly annulment claims;
• registered-capital board decision challenges;
• and other statutory proceedings

are subject to specific legal deadlines.

The investor should not wait for lengthy contractual discussions while those periods expire.

46. Foreign Investors Should Monitor MERSİS and Trade Registry Developments

A foreign investor should not depend exclusively on founders voluntarily disclosing capital changes.

Corporate monitoring should include:

• trade registry announcements;
• general assembly notices;
• board notices;
• MERSİS-related corporate documentation where accessible through proper channels;
• company books;
• and investor reporting.

Early detection is essential.

By the time the investor sees a revised cap table months later, some legal deadlines may already have expired.

47. The Best Anti-Dilution Protection Is Negotiated Before Investing

Before investment, the founder wants:

the investor’s money.

This is when the foreign investor has the greatest commercial leverage.

A robust investment package may include:

Statutory Protection

Preservation of applicable pre-emption rights.

Contractual Pro Rata Right

Right to participate in future equity and equity-linked financing.

Reserved Matter

No capital increase without investor approval.

Anti-Dilution

Adjustment if shares are issued below the protected investment price.

ESOP Rules

Maximum approved employee pool.

Convertible Restrictions

No SAFE or convertible financing beyond agreed limits without consent.

Board Representation

Investor director participates in financing decisions.

Information Rights

Advance notice and cap-table reporting.

Founder Undertakings

Founders agree not to vote for prohibited dilution.

Remedies

Contractual penalty, put right or other remedy for serious breach.

Corporate Alignment

Relevant protections reflected in the Articles where legally appropriate.

This combination provides far stronger protection than simply relying on the phrase:

“Investor shall not be diluted.”

Practical Example: Foreign Investor Diluted From 20% to 8%

Assume:

Foreign Investor owns:

20%.

Investment amount:

EUR 3 million.

Founders own:

80%.

Two years later, founders approve a major capital increase.

The investor’s pre-emption right is restricted.

Founder-controlled Holding Company subscribes for most new shares.

Foreign Investor falls to:

8%.

The investor should immediately investigate:

Step 1 — Review Corporate Resolution

Who approved the increase?

General assembly or board?

Step 2 — Check Notice

Was the investor properly called to the meeting?

Step 3 — Check Pre-Emption Rights

Were they restricted or removed?

Step 4 — Check Justification

What corporate reason was provided?

Step 5 — Check Voting Threshold

Was the statutory majority satisfied?

Step 6 — Review Board Report

How was the new issue price and premium determined?

Step 7 — Check Subscriber

Is the new shareholder related to founders?

Step 8 — Review Valuation

Was the subscription price commercially reasonable?

Step 9 — Review SHA

Was investor consent required?

Step 10 — Review Articles

Were investor privileges or governance protections violated?

Step 11 — Check Litigation Deadline

Is the decision a general assembly decision or a registered-capital board decision?

Step 12 — Consider Remedies

Possible claims may concern:

• annulment;
• contractual breach;
• damages;
• special audit;
• director liability;
• or other transaction-specific remedies.

The investor should not simply accept:

“You were diluted because you are a minority shareholder.”

Minority status does not authorize unlawful dilution.

Common Dilution Mistakes Foreign Investors Make

1. Assuming the ownership percentage can never change.
2. Failing to negotiate pro rata participation rights.
3. Relying only on statutory pre-emption rights.
4. Failing to include SAFEs and convertible notes in dilution protection.
5. Ignoring the ESOP pool.
6. Not defining fully diluted capitalization.
7. Failing to reserve investor consent over capital increases.
8. Allowing founders to restrict pre-emption rights without contractual consequences.
9. Failing to control below-market issuances.
10. Not monitoring share premiums.
11. Ignoring founder-related subscribers.
12. Failing to secure board representation.
13. Allowing investor rights to disappear automatically at arbitrary percentage thresholds.
14. Failing to understand down-round economics.
15. Copying U.S. anti-dilution formulas without Turkish-law implementation mechanics.
16. Failing to control future convertible financing.
17. Ignoring value leakage through related-party transactions.
18. Failing to formally object at the general assembly.
19. Missing the three-month annulment period.
20. Missing the shorter one-month challenge period applicable to certain registered-capital board decisions.
21. Assuming arbitration permits the investor to ignore Turkish statutory remedies.
22. Reviewing the cap table only once a year.
23. Waiting until after registration of the capital increase to seek legal advice.

Frequently Asked Questions

Can Turkish founders legally dilute a foreign investor?

Yes, a foreign investor may be diluted through a lawful capital increase or other equity issuance.

Dilution itself is not automatically unlawful.

The key questions are whether:

• statutory procedures were followed;
• pre-emption rights were respected;
• any restriction was justified;
• contractual investor protections were honored;
• and the transaction was not structured to unfairly prejudice the investor.

Does a foreign investor have a right to maintain its ownership percentage?

Turkish Commercial Code Article 461 generally provides shareholders with proportional pre-emption rights when new shares are issued.

The investor must normally exercise the right and contribute the required subscription amount.

Contractual rights can provide additional protection.

Can founders cancel the foreign investor’s pre-emption right?

Pre-emption rights cannot simply be removed at will.

For a Turkish A.Ş., Article 461 requires justified reasons and the applicable statutory majority, and the restriction cannot be used to unjustifiably benefit or disadvantage particular persons.

How long must shareholders be given to exercise pre-emption rights?

The Ministry of Trade explains that shareholders must be given at least 15 days to exercise their new share subscription rights.

Can a 20% investor fall to 10%?

Yes.

If the company issues significant new equity and the investor does not participate, its percentage can fall mathematically.

Whether the dilution is lawful depends on how the issuance was structured.

Can the investor challenge an abusive capital increase?

Potentially, yes.

General assembly decisions violating the law, Articles of Association or relevant good-faith principles may potentially be challenged under Article 445, subject to the applicable statutory requirements and deadlines.

What is the deadline for challenging a general assembly resolution?

The ordinary Article 445 annulment period is generally three months from the resolution date.

What if the board increased capital under the registered capital system?

Article 460 provides a specific challenge mechanism for qualifying board decisions, generally requiring an action within one month from announcement.

Can the investor sue if founders violated the Shareholders’ Agreement?

Potentially, yes.

Contractual remedies depend on the SHA and may include damages, contractual penalties, options or other agreed remedies.

Corporate remedies should be analysed separately.

Does anti-dilution mean the investor never has to invest again?

No.

Ordinary pre-emption generally requires the investor to contribute additional capital if it wants to maintain its percentage.

Economic anti-dilution clauses can provide further protection for specified down rounds, depending on their terms.

Can employee options dilute foreign investors?

Yes.

ESOPs and other employee equity programs can reduce an investor’s fully diluted percentage.

The size and timing of the employee pool should therefore be negotiated during the investment round.

Can SAFEs dilute an existing foreign investor?

Yes.

Even though a SAFE may not issue shares immediately, future conversion can produce substantial dilution.

The investor’s contractual protections should therefore cover future equity instruments.

Can founders issue shares to their own company?

A related-party subscription is not automatically unlawful, but it deserves careful scrutiny, particularly where:

• pre-emption rights are restricted;
• pricing appears artificial;
• or the transaction materially shifts control.

Can the investor demand the original 20% back after lawful dilution?

Generally not merely because its percentage decreased.

A separate statutory or contractual basis would be needed.

Conclusion

A foreign investor’s shares in a Turkish startup can be diluted.

But the statement:

“Majority shareholders can dilute minority investors whenever they want”

is incorrect.

Turkish law provides important statutory safeguards.

For joint stock companies, Article 461 generally grants existing shareholders a proportional right to subscribe for newly issued shares.

Restriction or removal of that right requires justified reasons and the applicable statutory majority, and it cannot be used to provide unjustified benefits or losses.

Article 357 also requires shareholders under equal circumstances to be treated equally.

Where an unlawful general assembly resolution is involved, Article 445 may provide an annulment remedy subject to a strict three-month period.

Where a non-public A.Ş. uses the registered capital system, Article 460 can allow the board to exercise significant capital-increase powers, but qualifying board resolutions may be challenged within the shorter statutory one-month period.

Statutory rights alone, however, are rarely sufficient for a sophisticated startup investment.

Foreign investors should normally negotiate:

Pro rata participation rights

Anti-dilution protection

Investor approval for capital increases

Control over SAFE and convertible issuances

ESOP limits

Board representation

Advance financing notices

Fully diluted cap-table reporting

Protection against related-party issuances

Tag-along and exit rights

and

effective contractual remedies.

The investor should also understand that there are two very different kinds of dilution.

The first is legitimate commercial dilution:

The company needs capital, all investors receive a fair opportunity to participate, and a shareholder chooses not to invest.

The second is abusive dilution:

Corporate powers are used primarily to reduce the minority investor’s ownership, governance rights or economic value for the benefit of founders or related parties.

The legal consequences can be very different.

For foreign investors, the most effective strategy is therefore not to wait until the cap table has already changed.

Dilution protection should be negotiated when the original investment is made.

Because once ownership falls from 20% to 8%, the discussion is no longer simply about financing.

It may become a dispute about control of the company itself.

This article provides general information regarding Turkish corporate and investment law and does not constitute legal advice. Dilution disputes should be evaluated according to the company’s legal form, Articles of Association, Shareholders’ Agreement, capital increase documents, shareholder resolutions, valuation, pre-emption rights and the specific circumstances of the transaction.