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The Great Amendment To Corporate Law In The Czech Republic

The Great Amendment To Corporate Law In The Czech Republic

Czech Republic
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On January 1, 2021, an amendment to the Czech Companies Act came into effect, which brought many minor and major changes to the current life of business companies in the Czech Republic.

The amendment gives companies an opportunity to revise their memoranda and articles of association to comply with the new regulations, within one year of the effective date. Nevertheless, some changes are applicable to companies immediately upon the amendment coming into force.

Besides correcting some ambiguities and inaccuracies in the law applicable until the end of 2020, the amendment introduced some new concepts of corporate law, while changing and amending others already firmly fixed in practice today. In this respect, we would like to introduce you to the major changes affecting corporate life, that companies operating in the Czech Republic must be aware of.

Distribution of Profit and Other Equity Funds

On the distribution of profit and other equity funds, the legislature has granted the requirements stemming from legal practice and reflected some conclusions from judicial decisions. As a result, the amendment permits the distribution of profit and other equity funds throughout the entire accounting period. At the same time, the rules governing the limits on the distribution of profit and equity funds payments have been unified and tightened.

One-Tier Joint-Stock Companies

The most visible changes include those affecting joint-stock companies with a one-tier corporate governance structure. Under the new rules, the management board is the only mandatorily established body, combining the powers of the statutory director and the management board. In this context, as of January 1, 2021, the function of statutory director ceased to exist, and all executive powers were passed to the management board. If there is no relevant provision in the company’s articles of association, each member of the management board is, therefore, entitled to represent the company on their own.

Changes in the Concept of a Business

Until the end of 2020, the transfer of a business enterprise or a part thereof, that would constitute a change in the current structure of the business or the company’s scope of business or activities, required the approval of the general meeting. At the same time, a concept has recently prevailed in court practice that such a part of a company’s business must be deemed to mean a branch. The amendment has diverted from these conclusions and expressly requires consent to be granted for the transfer of a material part of a company’s assets and liabilities, irrespective of whether or not these formally constitute a branch.

Restrictions on the Transferability of Shares and Interests

The amendment permits creating a pre-emptive right, a buyback right, and other rights with similar effects to rights in rem – these should be of a similar nature to easements made in the case of immovable assets.

Status of Members of Elected Bodies and Other Persons in a Similar Position

The changes also affect the rules governing the execution of service agreements and resignations. The amendment has expanded the liability for a breach of the duty of due care and diligence to apply to persons acting as members of an elected body, without being appointed as such – shadow directors. Material changes have been made to the rules governing executive body members’ exclusion from office by the court.

Legal Entity as a Member of the Executive Body

The amendment also imposes an obligation on legal entities that are members of a company’s elected body to appoint a specific individual as their representative to perform the function. Otherwise, the legal entity cannot be entered in the Commercial Register as a member of the elected body or, alternatively, the office of the member will cease to exist if a representative fails to be appointed within 3 months of the appointment or expiry of the office of the previous representative.

By Ondrej Florian, Partner, and Radek Wejmelka, Associate, Havel & Partners

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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PRK Partners, one of the leading Central European law firms, has been helping clients achieve their business objectives almost 30 years. Our team of lawyers, based in our Prague, Ostrava, and Bratislava offices, has a unique knowledge of Czech and Slovak law and of the business environment. Our lawyers studied at top law schools in the United States, United Kingdom, Switzerland and elsewhere. They also have experience working for leading international and domestic law firms in a number of jurisdictions. We speak your language, too. Our legal team is fluent in more than 15 languages, including all the key languages of the region.

PRK Partners has one of the most experienced legal teams on the market. We are consistently rated as one of the leading law firms in the region. We have received many significant honours and awards for our work. We represent the interests of international clients operating in the Czech Republic in an efficient way, combining local knowledge with an understanding of their global requirements in a business-friendly approach. We are one of the largest law firms in the Czech Republic and Slovakia. Our specialised teams of lawyers and tax advisors advise major global corporations as well as local companies. We provide comprehensive legal advice drawing on our profound knowledge of local law and markets.

Our legal advice delivers tangible results – as proven by our strong track record. We are the only Czech member firm of Lex Mundi, the world's leading network of independent law firms. As one of the leading law firms in the region, we have received many national and international awards, in some cases several years in a row. Honours include the Chambers Europe Award for Excellence, The Lawyer and Czech and Slovak Law Firm of the Year. Thanks to our close cooperation with leading international law firms and strong local players, we can serve clients in multiple jurisdictions around the globe. Our strong network means that we can meet your needs, wherever you do business.

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