Czech Republic: Major Amendment to Business Corporations Act
On 1 January 2021 an extensive amendment to the Czech Business Corporations Act will enter into force. The amendment brings simplifications, but also new sanctions, the most serious of which is the possible involuntary dissolution of companies that do not file financial statements in the Collection of Deeds of the Commercial Register.
The most fundamental changes are summarized briefly below.
1. Companies - founding simplified
When founding a limited liability company with registered capital of less than CZK 20,000, it will no longer be necessary to open a designated bank account for making contributions. Cash contributions of no more than CZK 20,000 can thus be made via the deposit manager directly in cash, without the administrative burden associated with setting up a designated account. The aim of this is to make it less expensive and time-consuming to establish a new company with a small amount of registered capital. The amendment will not change the position of contribution administrator; it can still be anyone - for example a founding member or an authorized lawyer.
Also thanks to this amendment, it will be possible to establish companies with a simple structure and a small amount of share capital, ideally even in a single day.
2. Dissolution of inactive businesses
The amendment to the Business Corporations Act sets out the conditions under which a court may dissolve inactive companies, even without any petition by a third party.
The courts will be able to dissolve an inactive company, for example, if it violates its obligation to file regular or extraordinary financial statements in the Collection of Deeds of the Commercial Register for at least two consecutive accounting periods, and it has not been possible to deliver a warning to the company to rectify deficiencies. If both of the above mentioned conditions are met, the court will initiate proceedings on the dissolution of the company without any motion and enter this information into the Commercial Register. The company will be dissolved no earlier than one year after the entry of this information into the Commercial Register.
Existing companies are therefore advised not to underestimate the importance of fulfilling their obligation to file financial statements in a Collection of Deeds, usually by 31 December (twelve months after the balance sheet date). If a company does not file its financial statements, but it is possible to deliver a warning to it to fulfil such obligation, the company will "only" be fined up to CZK 100,000.
3. A legal entity as a member of the board of another company
In order to ensure greater transparency in companies' management structure, a new obligation will be introduced for legal entities that perform the function of a statutory governing instance in another company (applies only to limited liability companies and joint stock companies) or a cooperative.
Such legal entity has the obligation to authorize a single natural person to act on its behalf in the board of the company without undue delay upon its appointment. If it does not do so, it will not be able to register the legal entity in the Commercial Register as a member of the elected board. If the representative is not registered in the Commercial Register within three months from the commencement of the legal entity's office in a company's board, the legal entity's term of office automatically expires by law.
4. Alteration in management of joint-stock companies
The amendment brings a fundamental change concerning joint-stock companies with monistic internal structures.
Companies with a monistic structure will no longer have a chairman of the administrative board and statutory manager. The only board will thus continue to be the administrative board, which will be the governing body. The members of the administrative board are appointed by the general meeting. According to the law, the administrative board has three members, but the memorandum of association may deviate from the legal regulation and establish a higher or lower number of members.
The aim of the regulation is to further simplify the management of joint-stock companies by introducing a minimalist version with the option of a one-member joint-stock company, the sole shareholder of which is also the only member of the administrative board.
5. Restrictions on the transferability of registered shares upon entry into the commercial register
From 2021, restrictions on the transferability of registered shares will only take effect if they are registered in the Commercial Register.
Therefore we recommend that companies with registered shares enter restrictions on the transfer of shares into the Commercial Register.
6. Applicability of financial statements to distribution of profit and other resources
Companies will now be able to distribute profits and their other resources at any time until the end of the accounting period following the accounting period for which the profit is paid, based on the financial statements for that period. The rules for profit distribution will also apply to the distribution of the company's other resources.
However, this does not release the board from the obligation to carry out an insolvency test before paying out any share of the profits.
7. Memorandum of association of a partnership
Up to now, it has only been possible to modify the memorandum of association of an unlimited partnership or a limited partnership with the consent of all partners. The amendment will make it possible to deviate from this, making partnerships able to modify the memorandum of association by only a majority vote of the partners.
8. Invitation to a meeting of a joint-stock company to modify the memorandum of association
An invitation to a meeting to modify the memorandum of association will now have to contain a description of and justification for the modifications to the memorandum of association. The full text of the proposed modifications to the memorandum of association must be published on the company's website, and shareholders must be able to familiarize themselves with the proposal at the company's registered office.
9. Action for liability for insufficient assets
The amendment introduces the option to sue a member of a board who, by committing a breach of duty, has contributed to the insolvency of the company. The insolvency court will thus be able to decide, on the proposal of the insolvency administrator, that a person who has contributed to the insolvency and subsequent bankruptcy of the company by violating the duty of due care will be obliged to provide compensation up to the difference between debts and company assets. Therefore higher demands will be placed on the members of boards in terms of the duty of due care, and it will be in their interest to consider taking out liability insurance.
10. Other changes
In addition to the above, the amendment also brings other changes concerning, for example, remuneration of employees who are closely related to a member of a company's board, abolition of the rule prohibiting a member of a board to resign at an inappropriate time for the company, the requirement that the transfer of an enterprise is subject to the approval of the general meeting of both the buyer and the seller (under penalty of invalidity), the option to omit classified information from the management report, the authorization of the general meeting to give strategic instructions to the board and the introduction of various types of shares in a limited liability company.