TOP 10 (English version): Joint-stock company in the Czech Republic

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A joint-stock company after the 1st of January 2014

1)     The obligatory revision of the foundation documents

2)     The foundation of the joint-stock company

3)     The shares

4)     The general meeting

5)     A dualistic system

6)     A monistic system

7)     The modification of the reward system of the members of the organs of the company

8)     A divergence from the rule incorporated in the Section 196a of the Commercial Code

9)     The duty of the company to establish the Web site of the company

10)   The duty of the shareholder to open a bank account in a state which is a member of the OECD

1)    The obligatory revision of the foundation documents

The legislation concerning companies which was in effect until the 31st of December 2013 was concentrated in the 513/1991 Coll. Act, Commercial Code (hereinafter referred to as the “Commercial code”).

Since the 1st of January 2014 it has been replaced by the 90/2012 Coll. Act, on Companies and Cooperatives (Act on Business Corporations) (hereinafter referred to as the “ABC”) and also the 89/2012 Coll. Act, Civil Code (hereinafter referred to as the “NCC” or “New civil code”), which contains the general provisions concerning legal entities.

Joint-stock companies are entitled to choose from two options:

a)     They can either abide by the up to now existing, “old” legislation, then their agreements of association (or else deeds of association) concluded before the 1st of January 2014 will be governed from now by the Commercial code. However, if some provisions of their agreements of association (or else deeds of association) are to be incompatible with the mandatory provisions of the new legislation, such provisions are automatically annulled since the 1st of January 2014.

b)     Joint-stock companies are allowed to actively follow the rules of the new legislation. The general assembly of the company should then decide on this assumption of new rules covered in the ABC by the company as a whole. Such decision is to be made no later than two years from the day the ABC comes into effect and is effective from the day of the registration in the Commercial Register.

At all events, joint-stock companies are obliged to adjust the aforementioned documents within six months from the day the ABC comes into effect in order to prevent possible discrepancy with the mandatory provisions of the ABC and to deliver them to the Collection of Documents. Provided they do not comply with this obligation, the register court is about to appeal them to fulfil their duties and provides them with reasonable period to do so. After the vain expiration of this period, the court is allowed to wide up the company and order its liquidation.

2)    The foundation of the joint-stock company

From this point on, it is possible to found a joint-stock company just by one legal action as the foundation based on a public offering of shares has been abandoned. The value of the registered capital thus stays unchanged and amounts to two million Czech crowns. Newly it is allowed to express the registered capital in euros, however only on condition that the company administrates its accounting in euros. Next change falls on the reserve fund which will no longer be mandatory.

The new legislation explicitly enables a single natural person to found a company which was not the case under the Commercial code even though this interdiction was plentifully circumvented.

In order to found a joint stock company, only the approval of the company´s articles of association will be required, however in the past it was necessary to approve a memorandum of association or a deed of association. The rule that the company enters into existence upon the day it is registered (incorporated) in the Commercial Register still applies. The ABC offers joint-stock companies the possibility to erase the information concerning the foundation of the company from its articles of association upon its incorporation and therefore to make its articles of association clearly arranged.

3)    The shares

The registered capital rests divided into a specified number of shares. The ABC explicitly regulates unpaid registered shares and unissued shares and the possibility of their transfer.

The ABC defines the basic principle according to which the joint-stock company must treat all shareholders equally under the same conditions. Legal acts which would constitute any unreasonable advantage to a shareholder to the detriment of the company or other companies are to be reputed null and void.

We can still differentiate between registered and bearer shares. However, from the 30th of June 2013, the latter can only exist as a book-entered bearer security.

Apart from common shares and priority shares which are already broadly used, the company would be allowed to issue other types of shares. These other types of shares can bear special rights such as a right to a share in the company´s profit or a right to a share in the liquidation balance or a different weight of voting power while voting during the general meeting.

The ABC newly introduces unit shares which do not have nominal value and represent equal shares on the registered capital of the company. Their book value can be ascertained by dividing the amount of the registered capital with the number of unit shares. Every unit share thus has the same book value as other unit shares of the same company. The nominal value is not stated on the share and therefore these shares needn´t be exchanged while increasing or reducing the registered capital of the company, which can truly be regarded as a great advantage. The company can issue either just unit shares or only shares with nominal value. The unit shares must be denominated unit shares.

4)    The general meeting

The supreme body of the joint-stock company is the general meeting through which shareholders participate in the company´s management. The ABC expressly allows making the decisions “per rollam, which means voting by correspondence without the shareholder having to be present at the venue of the general meeting, should the articles of association stipulate so.

Moreover, the new legislation sets out requirements which the invitation to the general meeting must meet. It ought to be published on the Web site of the company and the articles of association can regulate different but still appropriate means of delivery instead of post (for example via e-mail).

Contrary to the current legislation, it is newly possible to establish different demands on the number of votes required for the general meeting to have a quorum and a different value of votes by which the general meeting decides over fundamental issues. Unless the articles of association provide otherwise, the general meeting has a quorum if shareholders are present who hold shares whose nominal value or number surpass thirty percent of the registered capital and, at the same time, the general meeting decides by a simple majority of votes of the present shareholders. Nevertheless, cardinal decisions according to Section 416 and 417 of the ABC (for example the modification of the articles of association, increase of the registered capital, change of shares) still require the approval of at least two thirds of votes (three quarters of votes respectively) of the present shareholders and those mandatory provisions cannot be modified by the articles of association.

Section 354 and subsequent of the ABC enables the articles of association to introduce a cumulative voting for the election of the members of the organs of the company. This particular way of voting aims for the improvement of the position of minority shareholders.

Besides, according to the ABC, if shareholders wanted to contest the validity of the resolution of the general meeting, they would have to make protest against this resolution of the general meeting. The only exception represents the cases when the protest was not recorded due to a mistake of a minutes clerk or a chairperson, or if the petitioner was not present at the general meeting, or alternatively if it was not possible to ascertain the facts causing the invalidity of the general meeting´s resolution.

A very important change is introduced with regard to the modification of the articles of association. In order to allow the general meeting to alter the articles of association, such authorization must be expressly stated in the articles of association. Otherwise, the modification of the articles of association shall be submitted to and sanctioned by all the shareholders.

5)    A dualistic system

The articles of association of the joint-stock company shall include the reference as for the system of the corporate governance it has opted for as well as the rules for the determination of the number of the members of the board of directors and supervisory board.

Should the company opt for the dualistic system, the board of directors would hold the position of the statutory body, and the supervisory board would stand by it as a controlling body. From now, the articles of association can provide for a different number of members of those organs from the one fixed by law. However, the incompatibility of functions in this system of corporate governance still remains, and therefore, a merge of functions in one person is not permitted. On the other hand, the rule relating to the companies having more than fifty employees stating that one third of the supervisory board of the company is elected by the company´s employees has been surpassed. Other novelty is represented by the possibility to establish different length of the term of office of the members of these organs.

6)    A monistic system

Should the company opt for this system of the corporate governance, the statutory body would be embodied in the office of the managing director who is to be responsible for the management of the business of the company. Furthermore, the fundamental course of the business management of the company shall be determined by the administrative board which is also charged with the supervision over the performance of the business management of the company. The number of the members of the administrative board is set in non-mandatory way, therefore the company is allowed to establish a different number of the members from the one fixed by law (which envisages three-member administrative board). Thus, in practice, we might encounter a single-membered administrative board while this person will be also charged with the office of the managing director therefore there will be just one person to lead the whole joint-stock company. Such a system would be appropriate for those companies, in which there is no need for the business management being under control of another person, the perfect example being the company with just one shareholder who is simultaneously the chairman of the administrative board and the managing director.

7)    The modification of the reward system of the members of the organs of the company

A very important rule in Section 777 Subsection 3 of the ABC stipulates that it is necessary to adjust the provisions of agreements on performance of an office and payment within the limit of six months from the day the ABC comes into effect, otherwise the performance of the office is considered gratuitous.

The agreement on the performance of an office in the capital companies (that is the limited liability company and the joint-stock company) should be concluded in writing and afterwards it should be approved by the supreme organ of the company.

Nevertheless, two major exceptions are covered:

a)     Provided that the members of the board of directors are elected by the supervisory board pursuant to Section 438 Subsection 2 of the ABC, the supervisory board is authorized to approve agreements on the performance of an office with respective members of the board of directors.

b)     The agreement on the performance of an office of the managing director in the monistic system shall be approved by the administrative board.

If members of the organ of the company perform their office for a fee, the agreement on the performance of an office should provide for the particulars of the remuneration specified in Section 60 of the ABC.

8)    A divergence from the rule incorporated in the Section 196a of the Commercial code

A feared provision in Section 196a of the Commercial code treated agreements between the company and the shareholder, the member of the board of directors, the supervisory board, a proxy or other person who is authorized to conclude such agreements on behalf of the company, or alternatively close person of the aforementioned persons. Newly, these situations are regulated in Section 255 of the ABC, pursuant to which any restrictions will last only for two years from the foundation of the company. Should the company acquire assets from the founder or shareholder for a counter-value equal to at least ten percent of the subscribed registered capital, the value of these assets must be stipulated based on an assessment by a court-appointed expert. The acquisition and the value must be approved by the general meeting. Such restriction shall not apply for example to the acquisition within the framework of standard business transactions. The liability for the breach of such duty rests with the members of the board of directors who voted for the acquisition of the assets and the founder or the shareholder are obliged to even up the difference between the paid sum and the value assessed by the expert.

Another provision aiming the protection against similar trades is included in Section 54 through Section 58 of the ABC regulating the conflicts between the interests. Pursuant to those provisions, the general meeting is allowed to prohibit the conclusion of an agreement between the company and the member of the organ of the company, the close person or a person who is influenced or controlled by this member, and the proxy. The aforementioned is therefore linked with the duty of those persons to inform the relevant organ of the company.

9)    The duty of the company to establish the Web site of the company

From the 1st of January 2014, joint-stock companies are obliged to establish the Web site of the company where they shall provide relevant information on the business name, registered office, identity number, details on the entry in the Commercial Register, but also the invitation to the general meeting as well as other pieces of information required by the ABC.

10)  The duty of the shareholder to open a bank account in a state which is a member of the OECD

Pursuant to Section 264 Subsection 2 of the ABC, the list of shareholder should include the number of the bank account kept by a person authorized to provide services in a state which is a full member of the Organization for Economic Co-operation and Development. A profit share can be paid only via a non-cash transfer to this account. Aforementioned changes were introduced due to adoption of the 134/2013 Coll. Act, on Some Measures to Increase the Transparency of Joint-stock Companies and the Modification of Other Acts, which is in effect from the 30th of June 2013.

Author: Martina Cinkova,attorney-at-law, Prague, the Czech Republic