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News

Summary of the amendment to the corporate law and specific recommendations

14.10.2020
Company: DELTA legal, advokátní kancelář s.r.o.

An amendment to the Business Corporations Act will become effective from 1 January 2021. The new regulation brings fundamental changes to corporate law, introduces new institutes and options, tries to clarify practical problems of interpretation, and approves – but also refutes – some conclusions reached by the case law during the past six years. Finally, the amendment eliminates some legislative-technical shortcomings.

The most fundamental changes introduced by the amendment are:

1. The possibility to incorporate a limited liability company without needing to set up a special bank account for the cash contribution into the company if the final amount of all contributions does not exceed CZK 20,000. This will substantially simplify and speed up the process of incorporating limited liability companies.

2. Clarification of some rules as well as stricter rules related to the distribution and pay-out of profit, advance payments of profit and other equity payments. Mainly:

  • Incorporation of a rule which was already adjudicated by the courts, i.e. ordinary financial statements prepared for the previous accounting period can serve as the basis for the distribution of profit up until the end of the following accounting period;

  • Extension of the balance sheet test to other equity payments (could be important in case of returning of contribution outside the registered capital); originally, the balance sheet test was used only for profit distributions;

  • Extension of the equity test even for limited liability companies; originally, it was used only for joint-stock companies;

  • Termination of the right to the profit, if it was not paid-out until the end of the accounting period due to noncompliance with the rules of the insolvency test;

  • Number of clarifications and stricter rules on advance profit payments ;

  • A rule stipulating that the profit does not need to be returned if accepted by the shareholder in good faith will no longer be applicable in case of limited liability companies;

  • Prohibition of the free-of-charge performance/payments for the shareholder or a person close to them except for specified and restrictive exceptions;

  • Obligation to file in the Collection of Deeds not only the profit distribution proposals and their final form, but also those concerning other equity.

3. It is clarified that it is possible to establish (and how to establish) rights in rem other than the pledge on share not represented by a common certificate. Typically, these will include a pre-emptive right, a ban on disposal or encumbrance (so-called negative pledge) and so on. Such a right then arises by registering it in the Commercial Register with a constitutive effect. Unfortunately, probably due to a mistake by the legislator in the accompanying amendment of the Act on Public Registers, it will not be possible to establish a ban on disposal or encumbrance (so-called negative pledge) as a right in rem to the share represented by a security (typically shares) since from 1 January 2021 this fact can no longer be registered in the Commercial Register.

4. Impossibility to register a legal person in the Commercial Register as a member of a statutory body without registering a natural person as its representative as well. In addition, if the representative is not registered within the three-month period from the date of the appointment of the legal person as the member of the statutory body, the office of the legal person expires.

5. Clarification of the Conflict of Interest rules and, conversely, the relaxation of rules for companies within the same group of companies.

6. Change in the consequences of non-approval of the director’s service agreement by the supreme body of the company. So far, the lack of approval of the agreement or its amendments (e.g. increase of the director’s remuneration) resulted in the possibility to invoke the invalidity of the agreement, i.e. the agreement was considered to be valid until the authorized person invoked the invalidity. Newly, an agreement without approval will be directly ineffective; therefore, the office will be performed free of charge up until approval.

7. Performance in favour of a close person to the statutory body will no longer need the approval of the supreme body of the company (typically part-time job performed by the director’s child).

8. Stricter rules are adopted for the liability of members of the statutory bodies, especially:

  • Extension of the possibilities to exclude a member of the statutory body from the performance of the office; and

  • Obligation of members of the statutory bodies of a company whose assets have been declared bankrupt to replenish the assets of the company, if the member of the statutory body contributed to the company’s bankruptcy by violating their duties.

9. Explicit adjustment of the limit for the modification of the rights and obligations associated with the business share and the right associated with the share, where at least one business share must be joined with a voting right, and shares which are not joined with voting rights can be issued only if their par value does not exceed 90% of the registered capital.

10. A possibility to incorporate into the articles of association or bylaws a special rule on how the company’s bodies are established, i.e. a possibility to join with a certain business share the right to name or recall “his/her” member of the board of directors, supervisory board or administrative board without an agreement with the other shareholders.

11. Changes regarding the general meetings, their competence and decision-making:

  • Articles of association of private limited liability companies cannot be changed without the form of a notarial deed (it was and still will be possible until the day of effectiveness of the amendment in the form of a decision made by letter (per rollam) with officially verified signatures of the shareholders);

  • Contrary to the recent case law, the general meeting will have to approve the transfer or pledge of an undertaking or a part of the assets constituting a substantial change of the actual subject of business or activity of the company; furthermore, according to the explanatory memorandum, the transfer should be approved by the general meetings of both the transferor and the transferee (depending on the specific circumstances). Original case law only required approval when transferring a “separate organizational unit” and on condition that it would mean a substantial change in the current structure of the undertaking, the subject of business or activity of the company. In reality, this will significantly increase the number of cases that will be affected by this provision, as well as the uncertainty as to whether the material conditions of “substantiality” are met;

  • Possibility to adjust other reasons in the articles of association or bylaws for which the shareholders will have restricted voting rights;

  • Shareholders will be able to invite a third person to the general meeting (e.g. their attorney);

  • Shareholders will be able to hold a general meeting without meeting the requirements for its convention, even if the bylaws of the joint-stock company do not expressly allow it;

  • Agreements stipulating the right to a profit or other company equity will need to be approved by the general meeting; in case of remuneration of the members of bodies, this will generally not be a problem as they are approved anyway, but it must be kept in mind in cases of financial transactions;

  • Specification and extension of the scope of the general meeting in other areas (e.g. approving the final liquidation report and the proposal on the use of the liquidation balance).

12. Within joint-stock companies with a monistic system, the statutory body will newly be an administrative board elected by the general meeting and can have only a single member. The original statutory body, which was the statutory director named by the administrative board, is being cancelled without any replacement.

13. If the bylaws do not state the term of office of the member of the board of directors or administrative board, it will now be three years, instead of the original one year.

14. Joint-stock companies that compulsorily prepare annual reports, i.e. companies whose annual reports must be approved by an auditor, will newly not have to prepare a report on their business activities and the state of their assets, as similar information is already included in the annual report. Other joint-stock companies are still obliged to prepare the report on their business activities and the state of their assets together with the obligation to file these documents in the Collection of Deeds.

As a part of the transitional provisions, the amendment stipulates the obligation of companies to harmonize their articles of association or bylaws within one year of the effectiveness of the amendment or register the facts in the Commercial Register and submit them to the Collection of Deeds within six months of the effectiveness of the amendment. However, we remind you that some changes will take effect as soon as the amendment enters into force. Therefore, it is more practical to harmonize the articles of association or bylaws before the end of this year.

With regards to the adopted amendment, we recommend doing the following well in advance:

  • Review the articles of association, bylaws or other related documents (e.g. procedural rules of bodies, election rules for the election of members of the board of directors) to reflect the necessary changes or possible improvements.

  • Review the entries in the Commercial Register and submit the necessary documents into the Collection of Deeds.

  • Review the shareholders agreements, agreements between partners, joint-ventures and other related documents to reflect the necessary changes or possible improvements.

  • Reflect the amended Business Corporations Act in ongoing and planned transactions as well as planned profit share pay-outs and other equity.

  • Consider establishing a ban on disposals or encumbrances (so-called negative pledge) as a right in rem to the share represented by a security (typically shares) since from 1 January 2021 this fact can no longer be registered in the Commercial Register.

  • Consider the effects of the conflict of interest rules and their relaxation for companies within the concern.

Tags: Law | Education |

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