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News 18/2020

Major Amendment to the Business Corporations Act

An amendment to the Act No. 90/2012 Coll., on business corporations (hereinafter referred to as the „BCA“) was published in the Collection of Laws in February this year. Introducing numerous significant changes and amendments to business corporations issues, the amendment is referred to as the “Major Amendment“. Along with this act, some related laws were amended, such as the Public Register Act, the Civil Code, etc. Most of the amendments shall come into effect on 1 January 2021.

The amendment shall remove the conflicts between the Czech law and the EU law, terminological inexactitudes that caused certain problems in implementing the laws in practice as well as an excessive regulatory burden on entrepreneurs. At the same time, the BCA Amendment shall improve transparency of organisational structures of limited companies. Last but not least, the amendment will affect numerous “inactive” companies, providing for procedures public administration authorities shall follow when becoming aware of the existence of such an inactive company.

In this context, it should be particularly noted that business corporations are required to bring the provisions of their memoranda or articles of association in line with mandatory provisions of the new version of the act.

Business corporations are obliged to meet most of the new requirements within one year of the amendment coming into effect, i.e. no later than by 1 January 2022, depositing the amended founding documents in the collection of deeds of the competent registration courts.

Where companies fail to do so or do not file an application for entry of facts that were not previously subject to registration in the commercial register by 30 June 2021, or fail to deposit a document that was not previously subject to depositing, the registration court orders the company to fulfil this obligation within a set reasonable additional period of time. If the additional period expires, the court will dissolve the business corporation on the proposal of the registration court or another person who can prove a legal interest in it, ordering liquidation of the company.

Please find below a brief overview of some of the issues affected by the amendment:

Payment of the registered capital of low-capital companies

According to the current wording of Section 23 (1) BCA, shareholders shall pay their monetary contributions to limited companies to a special account kept with a bank or a credit union to be opened by the contribution administrator. The BCA Amendment maintains the original principle according to which monetary contributions are to be paid solely to a special bank account; providing, however, for an exception for contributions (to the registered capital) not exceeding CZK 20,000. In such a case, contributions may be paid in cash, to the contribution administrator which may be one of the shareholders.

Legal entities in elected bodies of business corporations

According to Section 154 of the Act No. 89/2012 Coll., Civil Code (the “Civil Code“), a legal entity may perform the duties as a member of supervisory or statutory bodies of another legal entity. According to the Civil Code, there are two options: either the legal entity that performs such duties authorises a natural person (or persons) to represent it in performing its duties, or it is represented by a member of its statutory body. In practice, it may happen that since there is a chain of legal entities, it is extremely difficult to find out who is actually acting on behalf of these entities.

Under the BCA Amendment, legal entities that perform duties in elected bodies of limited companies or cooperatives are obliged, without undue delay after being appointed, to authorize one single natural person who meets the statutory requirements and conditions for the performance of the relevant duties. If the legal entity appointed as a member of an elected body in a limited company fails to authorize a natural person, it may not be entered in the commercial register as a member of this body. Also, the amendment provides for termination of office of the legal entity in elected bodies where no natural person is authorised and entered in the commercial register within three months of the legal entity becoming a member of the statutory body in the limited company.

Then, the duties terminate and the legal entity is removed from the commercial register by operation of law, i.e. completely beyond the control of the business corporation itself. Similarly, where the authorisation of the legal entity’s representative expires, the new representative should be entered in the commercial register within three months of the date the authorization of the previous representative expired; otherwise, the legal entity ceases to be a member of the elected body by operation of law.

Deletion of “redundant“ information from the memoranda or articles of association of limited companies

The current provisions of the BCA allow for deletion of data from memoranda or articles of association where such data were stated solely for the purposes of founding limited companies. These data become redundant after the company was established and the contribution obligation was met (such as the conditions for fulfilling the contribution obligation, appointment of the first statutory body members, appointment of the contribution administrator or valuation of an in-kind contribution). Henceforth, deletion of these data is not considered a change of the memorandum or articles of association. Also, under the amendment, memoranda or articles of association may entrust decisions to delete these data from the memorandum or articles of association to statutory bodies.

Circular resolutions (per rollam decision)

The current regulation of circular resolutions (decision making outside the general meeting) may represent a relatively costly and cumbersome solution in a situation where the resulting resolution of the general meeting should take the form of a public deed (notarial deed). In such a case, the opinion of each particular shareholder must take the form of a notarial deed as well, which represents significant costs and administrative burden where a company has a greater number of shareholders.

Under the BCA Amendment, it is sufficient that a copy of the notarial deed on the draft resolution is sent out to all shareholders, which eliminates the obligation to draw up notarial deeds on the opinion of each particular shareholder. However, the signature under the opinion must still be certified.

Service Contract

Also, the amendment introduces some significant changes in the field of service contracts. First of all, the consequences of failure of the supreme body of a limited company to approve a service contract shall change. The current version of Sec. 59 (2) of the BCA does not expressly provide for the consequences of failure to approve a service contract. Henceforth, under the amendment, a service contract shall not come into effect without being approved by the supreme body.

Once the service contract is approved, it becomes effective on the date of conclusion, or the date of the beginning of the office, whichever comes later. The BCA Amendment clearly stipulates that until the service contract is duly approved by the supreme body, the performance of duties shall be gratuitous, subject to certain exceptions.

Furthermore, the BCA Amendment expressly provides for cases of conflict between the service contract and the memorandum of association. If there is any discrepancy between the rules laid down in the memorandum of association and the provisions of the service contract, the provisions of the memorandum of association shall take precedence. If, however, the service contract was approved by the majority of shareholders required for an amendment of the memorandum of association, the relevant provisions of the service contract shall have priority.

Monistic system of internal structure in a joint stock company

Perhaps the most significant change introduced by the BCA Amendment shall concern the existing monistic management model in a joint stock company, which entailed considerable interpretation difficulties.

The amendment abolished the provisions on statutory directors as elected bodies in monistic joint stock companies.

The provisions concerning chairs of management boards were likewise abolished. In general, only one elected body shall remain, namely the management board as itself. Its competence shall cover both business management, which in dualistic systems the board of directors is charged with, and supervisory roles, entrusted, in dualistic systems, to the supervisory board. Having centralized supervisory and executive roles with one single body, the amendment should definitely clarify the previous interpretation issues regarding the division of duties of the management board and the statutory director.

The amendment made it explicit that the management board shall exercise the competence of the statutory body of a limited company. Thus, its competence as a whole shall entail the entire business management, not only setting and supervising the principal focus of business management, as was previously the case according to the BCA. Under the amendment, the management board shall henceforth manage any normal business activities, particularly decisions on the business operation and related internal affairs of the company.

The management board must have at least three members, except for a single member joint stock company.

Election of supervisory board members by employees

In joint stock companies with dualistic model of management with more than 500 employees, one third of the members of the supervisory board shall be elected by the employees. Only workers with an employment contract, and not workers employed under an agreement to complete a job (in Czech “dohoda o provedení práce”) or an agreement to perform work (in Czech “dohoda o pracovní činnosti”), shall have the right to elect and remove supervisory board members.

The election shall be in line with electoral rules to govern a detailed procedure of the election and removal of employee-elected supervisory board members. Under the BCA Amendment, the board of directors shall draw up electoral rules and discuss their wording, before approving them, with the trade union, where available, or with the works council.

Members of supervisory board shall be elected and removed upon request for the election or removal of an employee-elected supervisory board member, filed by the board of directors, the trade union, the works council or collectively by at least 10 % of the employees. Only employees of the company may become employee-elected board members.

Related Parties Report

Contrary to the established case law, the amendment specifies that a related parties report for the previous financial year does not have to contain information that is protected or classified under other laws. Where a company draws up a report that contains such information, it should explicitly state that this is an incomplete report, giving reasons for omitting such information.

Data that constitute a trade secret shall be reasonably generalized in a related parties report taking into account the purpose for which the report is prepared; accordingly, the report shall describe acts and transactions performed by the controlled entity that have been affected by specific relationships resulting from the entity’s participation in a group of companies.

Also, the amendment has responded to contradictory approaches to whether a related parties report is to be audited by an auditor. The amended wording of the BCA makes it explicit that if the financial statements of the controlled entity is subject to audit by an auditor, and the controlled entity is thus required to prepare an annual report, the related parties report shall be audited as part of the annual report. The auditor shall assess whether the related parties report significantly contradicts the other information the auditor obtained during the audit (such as in auditing the financial statements) or whether the related parties report contains significant distortions of certain facts compared to the other information available to the auditor. The results of the audit of the related parties report shall be included in the auditor’s report on financial statements in accordance with the relevant provisions of the Auditors Act.

Inactive business corporations

The amended BCA also aims at eliminating the existence of inactive business corporations, or at least significantly reducing their number. Effective measures against inactive business corporations, resulting, in most cases, in deletion of the business corporation concerned from the commercial register, are expected to increase the transparency in the business environment.

The Ministry of Justice also expects that business corporations will in general pay more attention to strict compliance with their legal obligations and deposit their financial statements in the collection of deeds on a regular basis when facing effective sanctions for failure to do so.

Under the new arrangement, sanctions against inactive business corporations may be applied if two conditions are met cumulatively. Firstly, a business corporation must be in breach of its duty to deposit its ordinary or extraordinary financial statements (or annual report containing the financial statements) for at least two consecutive financial years in the collection of deeds kept by the commercial register, and secondly, it is impossible to contact the business corporation.

The impossibility of contacting business corporations aims at virtual offices that are used by many business corporations on a long-term basis, that is not only for a transitional period of time. Thus, such business corporations cannot be contacted at the address of their registered office since these offices are not their actual place of business. A business corporation can be considered uncontactable if the call for submission of missing financial statements to the collection of deeds cannot be served.

In serving the call, the court has to follow the rules for service laid down in the Code of Civil Procedure, i.e. the call shall be primarily delivered to the business corporation’s data box. If the company fails to log in to the data box within ten days, there is no fiction of service as any substitute service of the call is – considering the severity of the consequence – excluded. The court thus has to deliver the call using one of the other methods of service provided for in the Code of Civil Procedure.

Where a business corporation fails to deposit its ordinary or extraordinary financial statements in the collection of deeds, but it is possible to deliver the call, it faces a fine of up to CZK 100,000.

If both of the above conditions are met, the court initiates proceedings to dissolve the business corporation; this fact shall be entered in the commercial register. Entering this fact is to ensure protection of third parties as a business corporation may be dissolved without liquidation at the earliest after one year of the information on the initiation of proceedings being entered in the commercial register.

If, during this one-year period, an interested person is identified who proves to the court that the business corporation has assets exceeding the costs related to the liquidation, the court shall decide to dissolve the business corporation with liquidation, removing the company from the commercial register after the liquidation is completed.

If no one applies to the court claiming the existence of the business corporation’s assets, it can be assumed that the inactive business corporation has no assets. After considering that dissolution of the business corporation without liquidation will not substantially affect the rights of third parties, the court may dissolve the business corporation without liquidation and may remove the business corporation from the commercial register on its own motion. Should assets of the business corporation be identified after the company was removed from the commercial register, the procedure described in Section 209 of the Civil Code shall apply: the court shall cancel the removal of the business corporation and decide on its liquidation.

Conclusion

The “major amendment“ to the BCA introduces further significant changes (such as regarding the conditions for payment of shares in profit and other own resources of companies, new shares related to the right to appoint and remove board members, change in the scope of authority of statutory bodies, new definition of a part of a business, etc.). These major changes to the BCA will affect virtually all legal forms of business corporations. Taking into account the number and importance of the changes for the operation of companies, we will prepare a presentation that will clearly describe and explain the amendments.