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Important Changes in Czech Corporate Law Introduced by the New Czech Business Corporations Act

As of January 1, 2014 the Czech Commercial Code, Act No. 513/1991 Coll. (the "former Czech Commercial Code"), will cease to exist; some areas which are currently regulated by the former Czech Commercial Code will newly be governed by the new Czech Civil Code, Act. No. 89/2012 Coll. (the "new Czech Civil Code"), while other parts will simply be abolished. The new Czech Act on Business Corporations, Act No. 90/2012 Coll. (the "new Czech Act on Business Corporations" or "Corporations Act" for short) will step in to govern those areas which are specifically concerned with trading companies and cooperatives. Matters related to the Czech Commercial Register will be governed by Act No. 304/2013 Coll., on public registers of legal entities and individuals. The new Czech Act on Business Corporations introduces substantial changes to Czech corporate law - we therefore recommend that companies in the Czech Republic begin to adapt to the new legal framework with its new requirements before it comes into force, so as to make sure that the transition will be as smooth as possible. In the following, we would like to provide you with a brief summary of the major changes. The summary is divided into three sections: general aspects of the new law, rules governing the Czech limited liability company in the Czech Republic, and rules governing the Czech joint-stock company in the Czech Republic.


1. THE NEW CZECH ACT ON BUSINESS CORPORATIONS - GENERAL PROVISIONS

1.1 Foundation Deeds of Czech Companies

The new Czech Act on Business Corporations introduces new requirements for the 'founding deeds' (a new term introduced by the Corporations Act for the founding documents of a company); all founding deeds of corporations must comply with the provisions set out by the Corporations Act no later than as of July 1, 2014. Any provision which is not in conformity with the mandatory provisions of the Corporations Act will automatically become void by act of law as of January 1, 2014. For the rest, companies are obliged to amend their founding deeds to bring them into compliance with the Corporations Act and file the amended version with the Czech Commercial Register within six months from the date on which the Corporations Act comes into force. If a company fails to do so, the register court will grant an additional respite for the necessary amendment, but continued failure to comply with the requirements even within this additional time period will expose the company to the risk of being wound up and liquidated by the court.


1.2 Power of Attorney

Under the new Czech Civil Code, if an attorney engages in a legal transaction on behalf of their client which requires a special form (i.e., a notarial record, as is the case for amendments to a Memorandum of Association or of Articles of Association), then the power of attorney has to be granted in the same form (i.e., in the form of a notarial record). Furthermore, pursuant to a strict interpretation of this provision, the notarial record would always have to be drawn up by a Czech notary public (and Czech notaries public may only draw up notarial records within the territory of the Czech Republic). Therefore, it is highly advisable to take the necessary steps towards compliance with the new Corporations Act before the New Civil Code comes into effect. Only then will no notarial record be required for the power of attorney.


1.3 Reserve Fund of Czech Corporations

The obligation to establish a statutory reserve fund for Czech companies from net profit will be cancelled. Unless the given Czech company establishes the creation of such a reserve fund in the Memorandum/Articles of Association, it may release the capital which it was previously obligated to retain. If the reserve fund was established in the Memorandum/Articles of Association, then the respective provisions need to be changed before the capital may be released.


1.4 Opt-In

The new Corporations Act allows existing Czech companies to choose between remaining governed by the former Czech Commercial Code and opting into the scope of application of the new Corporations Act, but the choice must be made by January 1, 2016. After this two-year transition period, opting in will no longer be possible. At this point, it is important to note that even if a company chooses to stay governed by the former Czech Commercial Code, it must still follow the mandatory provisions of the Corporations Act and bring its founding deed in line with the latter. In any case, we highly recommend to opt in, as it is hard to say which specific provisions of either law will apply to what extent to companies which choose to submit to the 'hybrid' regime of both the former Czech Commercial Code and the new Corporations Act. For instance, it is far from obvious whether and how a joint-stock company would have to abide by Sec. 196a of the Commercial Code - restrictions on transactions between related parties - or by Section 193 (2) of the Commercial Code, stipulating the need to obtain the consent of the supervisory board before entering into contracts whose value exceeds a certain statutory threshold (for the record, in the case of these particular two sections, we concur with the opinion of the Ministry of Justice that these will still be applicable to companies which decided against the opt-in). Another reason to opt in is to increase the company's 'desirability' for a potential buyer fully operating under the new Czech Corporations Act, considering the impossibility of opting into the Corporations Act after the two-year transition period (which also means the impossibility of unifying the legal regime of one's group of companies after the target has been acquired).


2. FUNDAMENTAL CHANGES IN REGULATIONS CONCERNING CZECH LIMITED LIABILITY COMPANIES

2.1 Registered Capital of the Czech Limited Liability Company

The new Czech Corporations Act introduces much less stringent minimum capital requirements: the minimum capital deposit will be only CZK 1, in contrast to the current situation in which the minimum registered capital is CZK 200'000 (approx. EUR 8'000).


2.2 Abolished Provisions

The new Corporations Act does not uphold the rule set out in Section 196a of the former Czech Commercial Code according to which an expert opinion must be procured in the event of a transfer of property from a shareholder to their Czech company. The prohibition of 'chaining' will also cease to exist. The current rule that one and the same individual may not be the sole shareholder of more than three limited liability companies, and the current rule that a limited liability company may not have more than 50 shareholders will not be applicable under the new Corporations Act.


2.3 Ownership Interest

The new Corporations Act will also allow companies to have more than one type of ownership interest, with different rights and obligations attached to each of them, such as e.g. a fixed share in the company's profit, or an obligation to work for or provide services to the company. It will be possible to acquire ownership interest from the non-owner, provided that the purchaser acted in good faith.


2.4 Common Certificate of the Czech Limited Liability Company

The Memorandum of Association may permit the representation of ownership interest in the form of certified security called a common certificate (in Czech "kmenový list"). This common certificate may only be issued 'to order' and only for unconditional transfer. A common certificate cannot be issued for book-entry securities and for public offerings. For the transfer of such a common certificate, an oral agreement plus endorsement and hand-over are sufficient.


2.5 Transferability of Ownership Interest and Vacant Ownership Interest of the Czech Limited Liability Company

The new Corporations Act strengthens the principle of transferability of ownership interest among existing shareholders without the intervention of the General Meeting. The new Corporations Act does not establish the concept of a pre-emptive right of the existing shareholders to purchase the ownership interest of a selling shareholder (as is the case under the former Czech Commercial Code); however, the shareholders may still agree on such an arrangement. A new approach towards 'vacant' ownership interest applies, according to which such ownership interest does not automatically fall to the company, but the company will act as a proxy and will have to sell it without unnecessary delay (unless it is being agreed that the ownership interest will be realized as a proportional part of the equity or real value of the company).


2.6 Exiting Czech Limited Liability Companies

The new Czech Corporations Act is listing more reasons for exiting the company than the former Czech Commercial Code; the Memorandum of Association may rule out certain of these reasons, but cannot add any new ones.


2.7 Contributions Outside the Registered Capital

The Memorandum of Association may stipulate that the shareholder has to make a contribution outside the registered capital; the Corporations Act does not limit the size of such a contribution, but a limit must be given in the Memorandum of Association. Under the former Czech Commercial Code, the size of such contributions could reach a maximum of one half of the registered capital.


2.8 In-Kind (non-monetary) Contribution

As of January 1, 2014 the expert for the valuation of in-kind contributions will not have to be appointed by the court. The new Corporations Act does not require in-kind contributions to consist necessarily of property which the company can use for its economic activity; nevertheless, the ban of in-kind contributions in the form of work or services for the company remains in force (with the exception of limited partnerships - "komanditní společnost", in Czech - where in-kind contributions in the form of work or services are allowed).


2.9 General Meeting of the Czech Limited Liability Company

The new Corporations Act allows a company to lower the statutory quorum (of one half of all votes) in the Memorandum of Association. Invitations to the general meeting will have to list each and every proposed decision. Topics not listed in the invitation may be discussed only if all shareholders are present and all of them agree. Shareholders may only challenge the validity of a decision adopted by the General Meeting if they formally protested at the general meeting (challenge without protest will only be possible if the shareholder did not attend the relevant meeting, if the protest was not recorded by the clerk in charge of recording the minutes of the meeting, or if the grounds for invalidity of the given decision could not have been discovered during the general meeting).


2.10 Adopting Decisions Outside the General Meeting

Generally, adopting decisions 'per rollam' is permissible unless agreed otherwise in the Memorandum of Association, but only in the written form. The new Corporations Act allows limited liability companies to use technical means only if this is explicitly stated in the Memorandum of Association.


3. FUNDAMENTAL CHANGES IN THE REGULATIONS CONCERNING CZECH JOINT-STOCK COMPANIES

3.1 Monistic and Dualistic Model

The new Corporations Act newly makes it possible to choose between a 'monistic' and 'dualistic' model of corporate governance. Previously, the dualistic model was the only permissible model. The monistic model is based on a single body known as the Management Board, in which the powers of both the Board of Directors and of the Supervisory Board are vested. The Management Board elects a chairman from among its members and appoints a Statutory Director (who may be an individual outside the Management Board). The Statutory Director acts on the company's behalf towards third parties. The chairman of the Management Board may be the same individual as the Statutory Director.


3.2 Establishment of the Czech Joint-Stock Company

Joint-stock companies can no longer be set up through a public offer of shares, so that the previous two-stage incorporation process will not be applicable anymore; Articles of Incorporation will be sufficient. The new Corporations Act introduces the possibility that the joint-stock company is established by a sole founder.


3.3 General Meeting of the Czech Joint-Stock Company

A new requirement which applies to all joint-stock companies is that they must have their own website; among the information which must be posted there is the invitation to the general meeting. This invitation shall remain on the website until the actual meeting has taken place. The invitation will have to contain drafts of all proposed resolutions, along with the reasons for the same; it must include also the names of those individuals who have been proposed as members of corporate bodies.


3.4 Shares of the Czech Joint-Stock Company

The new Corporations Act allows joint-stock companies to issue various classes of shares with special rights attached to them, e.g. a fixed share in the company's profit or special voting rights. In comparison to the former Czech Commercial Code, the new Corporations Act does not provide an exhaustive list of the various classes of shares. The only ban which remains in place in this area is a prohibition of shares which would entitle the shareholder to interest irrespective of the company's financial results.


3.5 Bearer Shares in Czech Joint-Stock Companies

As of January 1, 2014, bearer shares must be immobilized, or book-entered. If immobilization is not completed by 1 January 2014, the shares will be automatically converted to registered shares. A shareholder holding shares which have been changed to registered shares has to hand in his or her share certificates by 30 June 2014 in order to have additional data inserted (i.e., in particular, the shareholder's identity), or to have the shares replaced by new ones. Shareholders who fail to submit their shares in this manner will not be able to exercise shareholder's rights during the period of default and will not be eligible to receive a dividend.


3.6 Other Changes regarding the Czech Joint-Stock Company

The new Corporations Act does not set any limits to the terms of members of corporate bodies (under the former Czech Commercial Code, membership was limited to five years). Also, companies with a workforce of more than 50 employees will no longer have to appoint a compulsory employees' representative to the Supervisory Board.


3.7 Expert Evidence in the Case of Transfer of Property to the Czech Company

The new Czech Corporations Act does not uphold Section 196a (3) of the former Czech Commercial Code. The only case in which expert evidence is still necessary is that of acquisition for consideration from a founder or shareholder within the first two years of the company's existence, and this only if the value of the acquired property exceeds 10% of the nominal registered capital. The expert does not have to be appointed by a court. The consent of the general meeting must be obtained for such transfers, also as regards the consideration paid for such transfer. If the general meeting is convening before the expert evidence (appraisal) has been procured, then the general meeting may stipulate a maximum price instead. If the general meeting did not give consent, then the company may invoke the nullity of contract within six months from acknowledgement (though in any case no later than within ten years from the conclusion of such a contract).


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About rutland ježek:
The Prague-based law firm rutland ježek focuses mainly on commercial law, real estate law, litigation, finance and banking law; with its competent and comprehensive range of advisory services, it offers an attractive, full-value alternative to clients of international law firms. Its history of successful cooperation with leading law firms in most European countries, the U.S., and other jurisdictions guarantees that thorough care will be taken of the international dimension of each engagement. The Czech lawyers among rutland ježek's team have a solid track record in providing legal advice to transnational corporations, large Czech companies, medium-size firms, and individuals, built upon years of experience acquired at leading international law and tax firms. More on  www.rutlandjezek.com/gb/