Corporate / M&A

Czech Republic: Limited liability company after re-codification

Miroslav Pokorný
Miroslav Pokorný
On 1 January 2014, the re-codification of Czech private law should come into force. One of the institutes that will be changed is acting on behalf of a company.

The re-codification of private law in the Czech Republic became effective on 1 January 2014, introducing significant changes to corporate matters as well.
As of 1 January 2014 the re-codification of private law was introduced in the Czech Republic. The new regulation is based on the New Civil Code (Act No. 89/2012 Coll.) (the NCC) and the Act on Business Corporations (Act No. 90/2012 Coll.) (the ABC). Whereas the former creates a general basis for all private law related matters, among other things by setting the basic principles of private law and interpreting criteria, the latter only regulates issues connected with business corporations and related matters.

The changes introduced relate to newly established companies (i.e., after 1 January 2014) as well as to existing entities. The aim of this article is to briefly overview the new regulation and to highlight some of the main points and risks for existing companies, their shareholders and statutory bodies.

Newly established companies

The new regulation of limited liability companies introduces more flexibility, particularly with regard to the position of shareholders. But greater flexibility may create unpleasant situations for shareholders as it is connected with less legal regulation and restrictions than under the old Commercial Code (Act No. 513/1991 Coll.). For example, the limitation of the maximum amount of additional contribution of the shareholder that can be imposed under the current Commercial Code amounting to one half of the registered capital has ceased to exist. Now, the shareholder might be obliged to provide an even higher contribution, even against its will. The shareholder’s only defence is to exit the company within one month of the adoption of such a resolution. It is therefore necessary to be aware of all the risks connected with the ABC and if possible provide for different regulation within the articles of association.

Registered capital

Unlike the Commercial Code, the ABC does not provide for any minimum registered capital of the limited liability company. The only financial requirement is that the minimum contribution of each shareholder must amount to at least CZK 1 (ca EUR 0.04). Therefore, a solely owned limited liability company may have registered capital of only CZK 1. This is not advisable, however, as it does not provide the company with sufficient capital and the company may be insolvent under the Czech insolvency regulation, which might negatively impact all persons involved in the company.

Shares

The ABC also provides wider flexibility with regard to company shares. The articles of association may regulate different types of shares. For example, the ABC explicitly provides for a type of share connected to a fixed portion of profit. Shares can also newly take the form of a security whose transferability cannot be limited.

End of the chaining prohibition

Under the ABC, the burdensome chaining prohibition, which made it impossible for a solely owned limited liability company to hold 100% of shares in a Czech limited liability company, has been abolished. This was frequently an issue within groups having mother companies in tax-favourable destinations and managing the group through intermediary companies.

Existing companies

Transitional rules play the most significant role with respect to existing companies. Any rights or duties originating after the effectiveness of the ABC (i.e. since 1 January 2014) shall be governed by the ABC regulation. There are several exemptions to this rule, which will be described below.

From the practical perspective, the impact of the ABC on the articles of association plays the most important role. Firstly, any provisions of the articles of association that do not comply with the mandatory rules of the ABC ceased to exist upon the effectiveness of the ABC. Secondly, limited liability companies must bring their articles of association in compliance with the regulations of the ABC within six months as of its effectiveness, i.e., by 30 June 2014. The company also has to submit amended articles of association into the Collection of Deeds of the respective Commercial Register. If the company fails to do so, the court will require it and set an additional deadline. The ABC imposes strict penalties on companies that do not comply with the court’s summons, as based on the proposal of the Register Court or a person who proves their legal interest the court may wind up the company and order its liquidation.

The previous regulation of the Commercial Code, which is consistent with the new mandatory regulation of the ABC, forms an integral part of the articles of association as of 1 January 2014, unless otherwise provided by the articles of association. This means that the previous legal regulation has been included into the articles of association by virtue of law. This might create a confusing situation, as the rights and duties of the shareholders shall now be governed by several regulations: (i) the mandatory provisions of the ABC; (ii) the current content of the articles of association that complies with the ABC; (iii) the regulations of the old Commercial Code; (iv) the new regulations of the ABC consistent with the aforementioned; and (v) the NCC, which is a subsidiary regulation to the ABC.

Shareholders can avoid this chaotic situation by opting into the new regulation of the ABC. Based on the transitional provisions, the shareholders can decide within two years as of the effectiveness of the ABC to change the articles of association and subrogate them as a whole to the new ABC. This requires prior acquaintance with the new rules and possibilities of the ABC, which is almost impossible without qualified legal counsel.

The ABC’s transitional provisions are also important for companies’ statutory bodies. Agreements on performance of function of the statutory bodies must be brought in line with the ABC within six months, otherwise the performance of their activity for the company will be considered as for no remuneration.

The new regulation of limited liability companies has introduced more flexibility, particularly with regard to the position of shareholders. But greater flexibility may create unpleasant surprises.