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Significant Amendment to the Business Corporations Act – A Summary of the Most Important Points with Recommended Steps

Significant Amendment to the Business Corporations Act

Czech Republic
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The most substantial changes to the BCA (effective as of 1.01.2021) will be:

  • Introduction of a special type of share/stock with a so-called “dismissal” right (i.e. the right to appoint a certain member of the statutory body).
  • Cancellation of the position of statutory director in a joint stock company with a monistic structure.
  • Different concept of non-competition by members of the bodies of the company.
  • Changes in the consequences if an executive service agreement is not approved.
  • Stricter liability of members of the statutory body for causing the bankruptcy of the corporation.
  • Changes in convening general meetings (for instance in the area of per rollam decision-making, participation of the members, limitations in exercising one’s voting rights, rules for filing a protest against the decisions of the general meeting, etc.).
  • Some changes regarding the payment of dividends.

As regards the BCA amendment, we recommend:

  • Revising the Articles of Incorporation, or if needed the corporate bylaws, in order to check for essential changes and to identify possible opportunities for improving the current version.
  • Revising the shareholders’ and partnership agreements in order to identify possible opportunities for improving the current versions.
  • Acquainting oneself with the impact of the BCA amendment on the liability of the members of the statutory body and with respect to this revise the corporation’s compliance program if needed.

A substantial amendment to Act No. 90/2012 Coll., on Commercial Companies and Cooperatives (Business Corporations Act), as amended (hereinafter referred to as the BCA), should come into force on the 1st of January 2021. The amendment will bring about significant changes, particularly for joint stock companies with a monistic structure [1]. However, all business companies should take careful note of the amendment.

The BCA amendment firstly enshrines the principle derived from case law (27 Cdo 3885/2017), that profit or other resources can be distributed on the basis of financial statements until the end of the accounting period that follows the accounting period for which the financial statements were compiled. [2] The amendment also introduces a restriction according to which the profit of stock companies [3] or cooperatives cannot be paid if after that the equity of this corporation would fall below the aggregate of the registered capital and the amount of the corporation’s stock, which cannot be distributed according to the law.

After the BCA amendment comes into force, there would also be other consequences if an agreement to execute the function of member of an elected body in the corporation were not approved. Currently, relative invalidity is the only consequence, but after the BCA amendment comes into effect, the legal consequences will be that such contract will never become effective, which is much more serious in terms of legal consequences.

Further changes concern the liability of members of the statutory body, and among other things they will include:

  • The decision to dismiss a member of the statutory body from executing a function in a business corporation can be made in cases of significant infringement of due managerial care or recurring infringement of obligations; the novelty here is that the conditions no longer need to be fulfilled cumulatively.
  • If the members of the statutory body contributed to the bankruptcy of a business corporation by not fulfilling their obligations, they can be among other things obliged to contribute to the company’s bankruptcy estate up to an amount equal to the difference between the total of the debt and assets of the company.

The liability and extent of obligations of members of the statutory body are also affected by some further obligations introduced or amended in the BCA amendment. Among these are changes regarding the organization of general meetings, payments of profit and other resources, the content of the report on related parties, the prohibition on competitive conduct, the regulation of conflicts of interest, regulations concerning the moment of resignation from office etc.

The amendment also introduces the member’s, or the shareholder’s right to invite other persons to a general meeting. That person must, like members, pledge confidentiality, but nothing prevents the shareholder of a company from participating in the general meeting for instance with his legal advisor. Still, this right can be abolished by the Articles of Incorporation, or the corporate bylaws. As for the general meetings of stock companies, there will also be a change in provisions regulating the organization of their general meetings. More precisely, there will be a change in the competence of the general meeting in limited liability companies and joint stock companies. Furthermore, a change should occur in the conditions for decision-making per rollam in joint stock companies and limited liability companies, or in the rules for filing protests against decisions of the general meeting (e.g. a member or shareholder will no longer have to explicitly request the registration of their protest), or there should also be a change in the prohibition on executing one’s voting rights (the last one mainly concerns limited liability companies).

Furthermore, one of the most fundamental changes will be the introduction of a so-called “dismissal” right. The Articles of Incorporation, or the corporate bylaws can determine that a certain share, or certain stock is connected to a dismissal right, on the basis of which a partner, or a shareholder, will be authorized to appoint/dismiss one or more members of the statutory body of the company. This should be a highly fundamental change thanks to which it will be possible to give a certain majority partner of the limited liability company the authority to appoint an executive director without agreement with the other partners. The dismissal right will be introduced for both limited liability companies and joint stock companies with a dualistic and monistic structure.

Another change will consist in the possibility of removing the legal prohibition on competition by members of an elected body from the Articles of Incorporation of a limited liability company or from the corporate bylaws of a joint stock company. The exact content of the prohibition on competition and its notification to the members or shareholders after the BCA amendment could therefore be regulated differently by each company (as opposed to the current situation in which a single version of the prohibition on competition is stipulated by the BCA for both limited liability companies and joint stock companies.)

As was mentioned above, the BCA amendment implies a great change for joint stock companies with a monistic structure. After the amendment comes into force, the position of statutory director will be completely dissolved and the competence of the statutory and controlling authority will be executed by the administrative board of the company. Of course, connected to this considerable change in conception is the important question of how the competence of the administrative board should be regulated in the corporate bylaws of the company.

These and many other changes will be brought about by the BCA amendment that will come into force in just a few months. Therefore, close attention should be paid to the amendment, and companies should prepare before the amendment comes into effect and thoroughly consider amending some parts of their Articles of Incorporation, corporate bylaws or other related documents. Many of the abovementioned changes can be at least partly regulated in the Articles or corporate bylaws.

By Ondrej Krizek, Managing Associate, Irena Kolarova, Senior Associate, and Pavel Visek, Junior Lawyer, Rowan Legal

Czech Republic Knowledge Partner

HAVEL & PARTNERS, attorneys-at-law, with offices in Prague, Brno, Bratislava, Pilsen, Olomouc, and Ostrava, has a team of 220 lawyers, tax advisors and 500 employees in total, is the largest independent law firm in Central Europe.

Our clients include large international companies, leading Czech and Slovak firms, including strategic state-owned companies and public sector authorities, as well as medium-size businesses, individual entrepreneurs, and investors. We advise approximately 100 of the Fortune 500 companies, and almost 50 of the Czech Top 100 companies. HAVEL & PARTNERS currently provides its services to a total of 2,000 clients. We have the most comprehensive international support available to both Czech and Slovak law firms. We provide legal and tax advice in 12 world languages in more than 90 countries around the globe. Up to 70 % of the transactions we deal with involve an international aspect.

HAVEL & PARTNERS was named the best law firm operating in the Czech Republic by the prestigious British rating agencies Chambers and Partners (2020) and Who’s Who Legal (2018, 2019). It is also the most successful law firm, providing the most comprehensive legal services in the Czech Republic and Slovakia, based on the total number of all nominations and awards in all years of the Law Firm of the Year awards. The firm became the absolute winner of this competition four times in the last six years, receiving the main award Domestic Law Firm of the Year in the Czech Republic (2015, 2017, 2018, 2020) and ranking as one of the most recommended law firms in all categories of law. Our company is also a three-time winner of the Law Firm of the Year award for Best Client Services (2015, 2016, 2019). In the field of M&A, HAVEL & PARTNERS is the best law firm in the Czech Republic based on the annual International Advisory Experts awards (2018, 2019). In Slovakia, it also won the prestigious global M&A Today Awards (2013–2018) for Mergers & Acquisitions six times in a row, and repeatedly won first place in the ranking by Lawyer International Legal 100 (2017, 2018). Prestigious international rating agencies EMIS DealWatch and Mergermarket have ranked HAVEL & PARTNERS among the leading law firms by the number of transactions completed in the entire CEE region since 2009. Based on annual awards of the Acquisition International magazine, HAVEL & PARTNERS has become the Law Firm of the Year 2019 in the M&A category in the CEE region.

Firm's website: https://www.havelpartners.cz/en/

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