TOP 10 (English version): Limited liability company in the Czech Republic

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A limited liability company in the Czech Republic after the 1st of January 2014

  1. The obligatory revision of an agreement of association (a deed of association)
  2. A registered capital and a shareholder´s investment contribution
  3. A counterfoil
  4. Various kinds of shares
  5. A pending share and a settlement share in the company
  6. The abolition of a ban on chaining. The adjustment of the ban on competition
  7. The responsibility of an executive officer and due managerial care
  8. The modification of a reward system
  9. The withdrawal of a shareholder from the company
  10. The Web site of the company

1.      The obligatory revision of an agreement of association (a deed of association)

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Since the 1st of January 2014 the aforementioned Act has been replaced by the 90/2012 Coll.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 by 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.

Limited liability 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 still 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)     Limited liability companies are allowed to actively follow the rules of the new legislation. The general meeting of the company should then decide on this assumption of the 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, limited liability companies are obliged to adjust the aforementioned documents within six months from the day the ABC comes into effect in order to prevent potential 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 fulfill 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.      A registered capital and a shareholder´s investment contribution

From the 1st of January 2014 the minimum amount of the shareholder´s investment contribution must be at least one Czech crown, which suggests that even the amount of the registered capital can comprise just one Czech crown, provided that the company has just one shareholder.

This concept introduces a crucial change in the conception of the registered capital as compared to the previous legislation, which was in effect until the 31st of December 2013 and which required the amount of the registered capital to be not less than two hundred thousand Czech crowns. The limited liability company is now more open to sole traders as the up to now existing condition of the deposition of such a high amount of the registered capital might have constituted a financial burden.

Nevertheless at the same time, the notion of the registered capital has thus lost its (not that big) function as a guarantee, which is now replaced by other means of the protection of creditors, the perfect example being the test of insolvency or more strict rules applying to the administration. The above mentioned should contribute to higher protection of creditors primarily thanks to stricter responsibility of executive officers.

As far as the shareholder´s investment contributions are concerned, some changes are also present. The shareholder´s investment contribution can be both monetary and non-monetary, unless the non-monetary investment contribution is deposed in the form of work, service or claim of the shareholder against the company. However, the expert charged with the determination of the value of non-monetary contribution needn´t be appointed by a court since he or she will be appointed by the founders during the process of the foundation of the company, otherwise by the executive officer.

3.      A counterfoil

From the 1st of January 2014 the business share can be represented by a counterfoil, which is a security transferable to order. Such option thus newly draws the limited liability company nearer to the legislation in effect until the 31st of December 2013 governing the joint-stock company and the possibility to embody a business share into a security. However, in contrast to shares, it will not be possible to trade with counterfoils neither on the European registered market, nor any other public market.

The issuance of counterfoils is not obligatory and thus rest within the discretion of the shareholders to provide for the issuance in the agreement of association. Nevertheless, it should be noted that the counterfoil can be issued only for a business share whose transferability is not restricted, nor conditioned. The business share is then transferrable to order (then it can be transferred by endorsement and handed over to the new acquirer). It basically means that the limited liability company loses its supervision over the transfer of these business shares, therefore it is advised to thoroughly consider the issuance of counterfoils. As opposed to the share which is not represented by the counterfoil, in the case of counterfoils it will no longer be necessary to conclude written agreement with officially verified signature, as the oral agreement would be sufficient.

In order to the transfer of the counterfoil to be effective, it is required to announce the change in the person of the shareholder as well as the submission of the counterfoil to the company.

4.      Various types of shares

With the intention to raise the attractiveness of conducting a business by means of the limited liability company, the legislator introduces higher chances of the use of types of shares. It means that the company can allow the occurrence of various types of shares, whilst the shares to which are connected the same rights and obligations constitute one type, and a share bearing no special rights and obligations is considered a basic share. And should the shareholders provide for it in the agreement of association, all the shares of a single shareholder will not merge together, but on the other hand these shares will be allowed to stand side by side independently of each other.

Shares can thus be qualitatively distinguished (the example being a share without voting rights bearing the right to share in the company´s profit, or we may find different rights and obligations connected with the share of a shareholder who has invested monetary capital from those connected with the share of a shareholder who has invested a non-monetary capital, who is thus for example helping the company to undertake a business) and should the agreement of association provide so, each shareholder can own more shares and every share can be of a different type. It is also worth noticing that pursuant to the legal definition, we will no longer speak about a business share, but only about a “share”, nevertheless we can still find this term in many parts of the ABC.

5.      A released share and a settlement share in the company

A released share is described by the ABC as a share whose existence is the result of the expiry of the shareholder´s participation in the company on condition that the expiry was due to the fact different from the transfer of the share. Pursuant to the ABC, a released share will not pass to the company, which was the case until the 31st of December 2013, yet the company will act with regard to the share as a commissioner and will dispose of it within these limits. The company is obliged to sell the released share for at least a reasonable price without undue delay, and at the same time shareholders are entitled to preemption rights to this released share. Should more shareholders use their preemption rights to the released share simultaneously, the released share will be divided amongst those shareholders in proportion to their shares in the company.

The proceeds from this sale is incorporated in a settlement share which is consequently paid to an entitled person, but only after the deduction of effectively spent expenses and the offsetting of due receivables towards the shareholder whose participation in the company expired. If the above-mentioned offsetting does not induce the expiry of duty of the investment contribution of the shareholder, whose participation in the company expired, this shareholder is bound to liability for the liberation of the investment contribution of the acquirer of that share.

The ABC does not ignore the option that the sale of the released share of the company was not successful from some objective reasons (not for instance because of the company´s default to sell it and the like) within the limit of three months. In such a case, the amount of the settlement share is determined according to the amount of the equity established from interim, annual or extraordinary financial statements produced upon the day of termination of the shareholder´s participation in the company. Ascertained amount shall be due upon the lapse of one month after the expiry of the deadline designated to the sale of the released share which was not successful.

Subsequently, at least within one month from the day of the payment of the settlement share according to the rules described in the preceding paragraph, the company shall decide on the transfer of the released share to remaining shareholders (in proportion to their shares) in exchange of the consideration amounting to the value of the paid settlement share. Should the hereinabove not occur, the company must therefore reduce the registered capital by the contribution of the shareholder whose participation in the company expired. Otherwise the court may wind up the company even without a petition to that effect and order its liquidation.

6.      The abolition of the ban on chaining. The adjustment of the ban on competition.

Until the 31st of December 2013, the so called ban on chaining, which was highly unpopular among the entrepreneurs, was in effect. This concept was regulated in the provision which stipulated that the limited liability company with one shareholder is not allowed to be the only founder or the only shareholder in another limited liability company. Moreover, it applied that one natural person may be a shareholder of not more than three limited liability companies.

From the day the ABC came into effect, all these prohibitions have been abandoned and from the 1st of January 2014 it applies that one and the same person can be a single shareholder or founder of an unlimited number of limited liability companies and at the same time a limited liability company can be henceforward a single shareholder or founder of another limited liability company.

As far as the provisions on the ban on competition in the limited liability company are concerned, the ABC lays down significant changes as well. Pursuant to the legislation in force, it was only allowed to extend the ban on competition through the articles of association or the agreement of association. According to the new legislation, it will be possible to set out in the other direction and fully exclude the ban on competition via the consent of all shareholders.

7.      The responsibility of an executive officer and a due managerial care

The ABC introduces increased responsibility of executive officers.

Pursuant to Section 68 subsection 1 of the ABC, a court is allowed to stipulate on the proposal of the insolvency trustee or creditor of the limited liability company that the executive officer (or even a former executive officer) is liable for performance of the obligations of the company on condition that the following requirements are met: 1) it was held that the limited liability company is bankrupt and 2) the executive officer or the former executive officer of the limited liability company has known or was supposed to know that the limited liability company is in imminent danger of bankruptcy, and contrary to his or her duty of due managerial care, he or she has not undertaken all the possible and reasonable measures to avert such damage. The aforementioned does not apply on executive officers, nor former executive officers who were provably appointed to their office in order to avert the bankruptcy or any other unfavorable economic situation of the limited liability company and performed their duties with due managerial care.

The ABC then specifies in more details in its Section 52 the concept of the due managerial care. While assessing whether the member of an organ of the company paid the due managerial care, we must primarily take into consideration the degree of care, which another reasonable person who is a member of an organ of the company, would pay to the company. Should the court proceedings commence and the question of the responsibility for undue managerial care arises, the burden of proof rests with this member of the company and thus he or she will be obliged to prove that he or she truly proceeded with the due managerial care. The burden of proof would not fall upon the member of the organ if the court rules that this cannot be justly demanded of him or her.

Other new duties regarding the members of the company are incorporated in Section 159 of the New civil code. It stipulates that who shall accept the office of an elected organ is bound to proceed with the necessary loyalty and the needed knowledge and thoroughness. If the member of the company violates these obligations while exercising his or her office and damage arose from that breach, he or she would be held liable to compensate the damage. Provided that he or she does not compensate such damage, he or she is liable towards a creditor of the company for its debt to the extent in which he or she failed to compensate the damage, if a creditor was not successful in enforcing the fulfilment of the company´s obligations. The ABC then determines in its Section 51 conditions under which an action can be considered thorough and exercised with the needed knowledge. Therefore, a person who should have, while making business decisions, reasonably presumed that he or she acted with sufficient amount of information and in the defensible interest of the company, he or she is thus to be considered as proceeding thoroughly and with the needed knowledge. Nevertheless, even such action cannot be considered as thorough if it was not exercised with the necessary loyalty.

The new legislation places great demands on executive officers. If the executive officer executes his or her office in compliance with all the legal requirements, namely with the necessary loyalty, the needed knowledge and the thoroughness and due managerial care, the new liability towards the creditors does not apply to him or her and thus he or she could only be held liable for debts of the company up to the amount of the unpaid parts of his or her contribution. Should the executive officer infringe some of these obligations, he or she answers for the consequences in person.

Executive officers should primarily pay attention if the company is both in debt and threatened by the imminent danger of bankruptcy since they could be held liable for the debts with all of their property if they do not undertake reasonable measures to prevent the bankruptcy. The situation might get even more complicated for the executive officer, as he or she will bear the burden of proof to establish that he or she has not breached any duty.

8.      The modification of the reward system

A very important rule in Section 777 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 this Act comes into effect, otherwise the performance of the office is considered gratuitous.

The agreement on the performance of an office should be concluded in writing and afterwards it should be approved by the supreme organ of the company.

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.

Rights and obligations arising between the limited liability company and a member of its organ are governed as appropriate according to the provisions of the New civil code regulating the so called mandate, unless the agreement on performance of an office, if concluded, or the ABC stipulate otherwise. But it is advised to keep in mind that the provisions of the Civil code regulating the administration of someone else´s property will not be applied.

9.      The withdrawal of a shareholder from the company

From the 1st of January 2014 the ABC counts with the following possibilities regarding the withdrawal of a shareholder from the company:

The first category falls on situations when the member of the company does not acquiesce in the general meeting´s decision which radically modifies conditions under which the company was founded. The shareholder would thus be allowed to withdraw from the company only if the general meeting decided on the modification of the prevailing nature of business or on the prolongation of the duration of the existence of the company. The shareholder would also be allowed to withdraw from the company if the general meeting decided on payment of additional contributions by a resolution and the shareholder had not voted for such obligation. Regarding the fact that the ABC permits the creation of various types of shares, it is easily imaginable that shareholders who own more shares would vote for the imposition of the duty of payment of additional contributions only in relation to some of their shares, whereas they would vote reversely as for their remaining shares.

The second category targets the fact that shareholders are not obliged to stay in the company against their will and may take advantage of the possibility to transfer their share to a third party or other shareholder with the consent of the authorized organ. Should this consent not be awarded within the limit of six months from the day on which the agreement on the transfer of the share was concluded due to the inaction of this authorized organ or due to the refusal to consent without justifiable reasons, the shareholder is allowed at this moment to withdraw from the company within the limit of one month from the day of the termination of the agreement.

10. The Web site of the company

If the limited liability company disposes of its own web site, a new duty rises with the arrival of the 1st of January 2014. Pursuant to the legislation, on condition that the limited liability company has its own web site, it will be obliged to provide not only the information, which is compulsorily stated on commercial documents produced by the company, but also other information laid down by law. In connection with the aforementioned, the New civil code stipulates that entrepreneurs must state on their commercial papers (and thus consequently also on their web site if the company has one) their business name, or name or designation, registered office, details in the entry in the Commercial Register, including the section and the respective file number of the entry, and also an identity number if any. On the other hand, if the company does not own its own web site, it is exempt from such duty.

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