The Amendment to the Business Corporations Act

We would like to inform you that, on 13 February 2020, the biggest amendment to the Business Corporations Act (Act No. 90/2012 Coll.) (the “Business Corporations Act”) amended by Act No. 486/2016 Coll. (the „Amendment“) since 2012, entered into force. Amendment, in general, is entering into effect on 1 January 2021.

In this way, we would like to inform you about the most fundamental changes that the Amendment brings. If you are interested in a more detailed overview, do not hesitate to contact us.

Between the main goals of the Amendment belongs reduction of the administrative and regulatory burden on business corporations, the regulation of mandatory provisions, the adjustment of the monistic internal structure of the joint-stock companies and others.

With the effectiveness of the Amendment, arises for the business corporations obligation to adjust their articles of association or their founding acts into the mandatory provisions of the Amendment and filed their consolidated version to the collection of deeds of the Czech Commercial Register on 1 January 2022 at the latest. Unless otherwise is stipulated by the Amendment, the business corporation must within 6 months from the effective date of the Amendment, to register in the Czech Commercial Register facts which have not been registered so far. If the business corporation fails to do so, the consequence ultimately could be even liquidation.

The reduction of the administrative burden establishment of Ltd.

The new legislation removes some administrative burdens related to the establishment of business corporations, which will ease the establishment of “low-cap” companies Ltd. Newly from 1 January 2021 for limited liability companies whose amount of the financial contribution of a shareholder in the capital corporations not exceed CZK 20,000, it will be possible to deposit the contribution in cash and directly into the hands of the administrator of the deposit and not only to a special bank account. Given the fact that the administrator of the deposit can be for example, a notary, this gives the shareholders of the business companies possibility to establish a limited liability company within one visit of a notary.

Regulation of the monistic internal structure of the joint-stock company

Part of the Amendment is also the adjustment of the setting of the monistic model of the joint-stock company´s management, which, as it turned out, does not correspond to the monistic internal system of joint-stock companies known from the legal systems of other European countries, which the model should reflect. Pursuant to the Amendment, the provision of the Business Corporations Act, which stipulates the obligation to establish the statutory director within the monistic internal structure of the joint-stock company, should be repealed. Therefore, from the efficiency of the Amendment, only obligatory bodies would be General Meeting and the Administrative Board. Administrative Board would have competence for the company´s business management and at the same time competence to control the company´s activities. This change should bring clarification in the matter of the distribution of the powers in the joint-stock company body in the monistic model structure. Both executive and supervisory powers would be concentrated in the scope of power of a single body, the Administrative Board will be thus empowered to manage and decide about all common company’s business activities.

The number of members of the Administrative Board will be maintained at 3 members, unless the Statute of the company set out a higher number, except for the admissibility of a one-member or two-member Administrative Board, in s situation where a joint-stock company has only sole shareholder. However, this possibility of a lower number of members of the Administrative Board must be regulated in the Statute of the company.

Transfer of a share in a private partnership

The Amendment breaks the mandatory provision of the current Business Corporations Act regulation, which ban the transfer of partners’ shares in a private partnership. This ban is established in the current legislation due to the personal nature of the private partnership, where the partners are jointly and severally liable for the company´s obligations. However, the legislator by this change does not want to interfere with the personal nature of the private partnership, for this reason, the ban is only broken, when the condition of the consent of all other partners to the transfer of the share, is fulfilled. Without the consent in question, the Partnership Agreement will not be efficient.

Change for legal entities in elected bodies

In accordance with Section 154 of Act No. 89/2012 Coll., The Civil Code (the “Civil Code”), it is possible, that a function in elected bodies of a legal entity perform another legal entity if this other legal entity appoints a natural person to represent her; otherwise, the legal person is represented by a member of its statutory body. Here, however, a problem arises. The mentioned statutory body may be a legal entity, then it is necessary to proceed again according to Section 154 of the Civil Code, but the same situation may occur again, and the whole process will be so-called chaining.

The Amendment newly sets out the obligation of a legal entity, who performs the function of an elected body in a capital corporation or cooperative to authorize a natural person who meets the legal prerequisites and requirements for the performance of the given function. Without the election of such a natural person, it will not be possible to register a legal entity as a member of the elected body of the legal entity in the Czech Commercial Register. The legal entity has 3 months to register the authorized representative or new authorized representative in cases when the authorized representative of the legal entity expires. If the legal entity does not fulfil this obligation, her function as a member of the elected body shall expire, ex lege.

Executive contract with the member of the statutory body

The Amendment also introduces several relatively fundamental changes in the area of the executive contracts with the member of the statutory body. The Amendment supplement a legislative “gap” in the issue of approving executive contracts with the member of the statutory body. The current legislation does not explicitly solve the consequences of omission to approve of an executive contract with a member of the statutory body by the supreme body of capital companies. However, the interpretation infers relative nullity (the agreement is valid until the entitled person invokes its invalidity). In practice, this means, that can appear a situation, where the statutory body executes his function for several years based on an agreement, which latter, based on an appeal by the entitled person, declare invalid ex tunc. This would mean that already paid remuneration would be unjust enrichment of the statutory body. The Amendment thus newly establishes, that without the approval of the supreme body, the executive contract with the member of the statutory body does not take effect. The agreement becomes effective, even retroactively to the date of its conclusion, when it is approved, but this rule is dispositive, so it is left to the discretion of the supreme body of the capital company.

Another situation and problem that will newly be explicitly regulated, in the area of the executive contract with the member of the statutory body, by the Amendment is adversarial of the executive contract with the member of the statutory body and
memorandum of association. If there will be a conflict between these two documents, the rules set out in the memorandum of association shall apply, except in the event, when executive contract with the member of the statutory body is approved by the majority of shareholders required to amend the memorandum of association, then executive contract with the member of the statutory body will apply.

Decisions per rollam

The regulation of the institute of decision-making per rollam (decision-making outside the General Meeting) is one of the parts of the Amendment that is aiming to simplification the administrative burden of companies.

The current legal regulation set out that the decision per rollam of the General Meeting of a capital company must be in the form of a public document, i.e. notarial deed. This rule means that each separate statement of a shareholder or partner must be in the form of a notarial deed. That fact entails considerable administrative costs for larger capital companies. The Amendment adjust this procedure. Therefore, it will no longer be necessary for each individual statement of a shareholder or partner to be made in the form of a notarial deed. Newly the draft itself will be in the form of a notarial deed, then this draft in question will be copied, and this copied draft will be sent to all shareholders or partners, who submit their statements on this copy of the notarial deed with an officially certified signature. The whole process will then be verified by a notarial deed of decision-making per rollam.

Distribution and payment of profits and another capital

Due to the recent case law developments in the field of distribution and payment of profits and another capital, it was appropriate to respond to these developments at the legislative level and at the same time correct the imperfect transposition of European legislation into the relevant provisions of the Business Corporations Act.

The current legal regulation brings in the area payment of the other capital large debates, due to its vagueness, because in practice this leads to a different approach, this is caused by a fact, that on the contrary, the rules for distribution and payment of profits are strictly regulated. The Amendment is trying to the mentioned vagueness in the payment of another capital fix and adding in places, where current legal regulations mention profit postscript “and another capital”. It will be possible to make a payment from another capital in the same way as a profit payment only on the basis of regular or extraordinary financial statements.

In connection to the relevant case law, according to the Amendment, it will be possible to use regular or extraordinary financial statements approved by the body of a business corporation for the distribution of resources until the end of the accounting period following the accounting period for which they were prepared.

Sets out the so-called balance test in the Amendment legislator transposes the EU legislation (Directive (EU) 2017/1132 of the European Parliament and of the Council). The balance test is already included in the current legislation, but it is not mandatory for all types of business corporations, newly it is becoming mandatory for all business corporations. This will unify the calculation for the maximum amount which is paid for all types of business corporations. At the same time, the Amendment set outs the obligation to perform a balance test before the General Meeting decides about the distributions of the profits and that under the threat of nullity of this decision.

The Amendment further obliges all types of business corporations to apply the so-called test of the equity, which should secure a telling overview of the company´s capital.

Furthermore, the rules for the return of the distributed profits will be stricter. The protection of good faith will no longer apply in relation to the distributed profits. In other words, the partners or shareholders will have to repay the profits distributed to them, in the case where the distributions of the profit were in breach of legal rules, even though they did not know about this fact. From the logical point of view, there will be an exception for shareholders, for whom the protection of good faith in relation to the distributions of profits will be retained.

End

The full wording of government proposal amendment of the Act No. 90/2012 Coll. may be found here: https://www.psp.cz/sqw/text/tiskt.sqw?O=6&CT=363&CT1=0.

In case of any questions, please do not hesitate to contact us via email info@kastnerpies.cz.