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.