MAJOR AMENDMENT TO THE BUSINESS CORPORATIONS ACT – SIGNIFICANT CHANGES IN THE FUNCTIONING OF COMPANIES

Last week, in our article Major Amendment to the Business Corporations Act – Introduction, we introduced you the changes that companies will face in connection with the so-called Major Amendment to the Business Corporations Act and related laws, which will come into force on 1 January 2021, and we promised to help you understand selected significant changes in the functioning of companies that the amendment will bring. So how will the amendment affect the operation of your existing company or the dream company you are planning to set up? And what do these changes mean for you?

Easier establishment of so-called low-capital companies

This change will affect those of you who are planning to start their own business in 2021 and want to set up a limited liability company to do so.

You may remember that previously (before 2014) it was possible to set up a limited liability company (LLC)with a minimum registered capital of CZK 200,000. This changed with the effect of the Business Corporations Act, and today it is sufficient if the limited liability company has a registered capital consisting of cash and non-cash contributions of at least a symbolic CZK 1. However, even such a low registered capital could only be paid up to the end of 2020 to a special account maintained by a bank established by the contribution administrator. Typically, therefore, one of the founders, who was appointed as the contribution administrator in the foundation legal act, had to go to the bank and set up a special account for the CZK 1.

In this respect, the amendment brings substantial relief to the contribution administrators of those companies, whose cash deposits in total do not exceed CZK 20,000 (so-called low-capital companies). The contribution obligation may be met in any way, including cash deposit to the hands of the contribution administrator. The contribution administrator should then only confirm in writing to the depositor how and in what amount the contribution was paid in connection with the establishment of the company.

The change should, at least partially, make your life easier. However, there is much more to be done for the establishment and formation of a company, in particular the preparation of the founding legal acts, i.e. the articles of association or a deed of foundation, sworn statements of the managing directors, the consent of the location of the registered office property owner, etc. We will be happy to help you with the preparation of these documents.

Deletion of certain elements of the foundation legal acts of incorporation after the formation of a commercial company

The Business Corporations Act provides for certain elements of the founding legal acts that may be omitted after the formation of a LLC or a JSC and after the fulfilment of the contribution obligation. In case of a limited liability company, these include in particular the contribution obligation of the founders, information on the executive directors and other elected bodies, the designation of a contribution administrator and information on non-cash contributions. In case of a joint stock company, this includes in particular the number of shares to be subscribed for and the issue price, the amount of the registered capital to be paid up, the price of the non-cash contributions, the appointment of a contribution administrator, the approximate amount of the costs to be incurred in connection with the establishment of the company and the elected bodies.

So far, there has been disagreement about the form in which these elements can be omitted. The prevailing opinion was that the deletion was an amendment of the foundation legal act, which required a resolution of the general meeting certified by notarial deed, which meant additional unnecessary costs for companies.

As of 1 January 2021, it has been expressly provided that this decision is not considered to be a decision to change the constituent act, and therefore a notarial deed will no longer be required. For the deletion, it is sufficient to convene a general meeting and to draw up a record that the general meeting has adopted a decision to delete the relevant elements of the foundation act, or it is already possible to specify in the foundation act that the decision to delete falls within the competence of the managing director in an limited liability company or within the competence of the board of directors or the management board in an joint stock company.

We are ready to provide you with the preparation of the foundation legal acts or minutes of general meetings.

Obligation to authorize a natural person as a representative of a legal person who is a member of an elected body of a commercial company

It sounds complicated, but it is not. Commercial companies are limited liability companies and joint stock companies. These companies elect their bodies, which may also elect another legal person. In case of a limited company, these elected bodies are the managing director, the supervisory board if it has been established by the articles of association or the liquidator if the articles of association so provide.

In case of a joint stock company, the elected bodies are the members of the board of directors (until 31 December 2020 also the statutory director, however, this function will cease as of 1 January 2021, which we will discuss in the next point below), the supervisory board, the board of directors and the liquidator, if so determined by the articles of association, or other bodies determined by the articles of association of the joint stock company. All the appointed bodies are elected by the general meeting (in case of an LLC, it is composed of all the shareholders and in case of a JSC, it is composed of all the shareholders). The general meeting may therefore elect natural or legal persons as such bodies.

However, particularly in case of the statutory bodies of companies (managing directors, members of the board of directors or members of the management board), which were elected by legal persons, significant problems arose in practice in determining who specifically acts for these legal persons. In fact, there was a chain of chains, where legal person A was acted for by legal person B, for which legal person C acted, and in the worst case this chain was concluded by legal person C being acted for by legal person A. Thus, in practice, there could be a situation where it was absolutely impossible to determine who was authorized to act and who was also responsible for that act.

According to the amendment, it is therefore necessary to authorize a specific natural person to act on behalf of such a legal person who is a member of an elected body of another legal person. The authorized person must be fully capable of exercising his or her legal capacity, be of good character and must not be prevented from carrying on his or her trade. The specific agent must be entered in the commercial register by 1 April 2021 for companies already operating in this way or, as from 1 January 2021, within 3 months of the legal person’s creation. If the registration is not made within the prescribed period, the legal entity’s function in the elected body will cease by law and a completely new election will have to be made, i.e. a general meeting will have to be reconvened, etc.

In addition to the power of attorney, it will be necessary to submit a motion for the registration of this fact in the Commercial Register. These should be submitted along with an affidavit of the agent on the fulfilment of the conditions for the exercise of the function and the consent of the agent to the registration in the Commercial Register with officially certified signatures on these documents. We will be happy to prepare all the documents for you with professional care.

Dissolution of “inactive” companies by the court

The amendment states, the registry court will be able to dissolve a company with or without liquidation if the company fails to submit ordinary or extraordinary financial statements to the collection of documents for at least two consecutive accounting periods, fails to do so even within an additional reasonable period granted by the registry court in the summons and the summons will be impossible to deliver.

In practice, this change will have a particular impact on inactive companies that have a fictitious registered office and are largely used as white horses for tax fraud.

We therefore recommend that you check the commercial register of your company and, if necessary, ensure the publication of your financial statements, otherwise you risk having your company dissolved by the court.

Dissolution of the statutory director post in joint stock companies

And we save the most interesting for last. From 1 January 2021, there will be a fundamental change in the functioning of joint stock companies. Until now, joint stock companies could operate on a dualistic system headed by a board of directors and a supervisory board or on a monistic system with a board of directors and a statutory director.

In practice, interpretative problems often arose regarding the monistic system, specifically the relative positions of the statutory director, who was to be in charge of the company’s business management, and the board of directors, which was to determine the basic direction of the company’s business management. The boundaries of the powers of the two bodies were not clear. The institution of the statutory director was therefore removed from the Business Corporations Act by the amendment and the board of directors remains the sole statutory body of a joint stock company in a monistic system.

This means major changes for joint-stock companies in which the statutory director has so far been present, as this function will simply cease to exist on 1 January 2021 and the statutory director will be automatically deleted from the Commercial Register by the Registry Court on that date. From the effective date of the amendment, i.e. from 1 January 2021, JSC have a period of 1 year within which they are obliged to bring their articles of association into compliance with the amendment.

Regarding the above amendment, the practice so far is that it is not required to convene a general meeting and remove the statutory director from office and amend the articles of association by way of a notarial deed. Therefore, according to the established practice, in order to bring the articles of association into compliance with the amendment, it is sufficient if a new version of the articles of association is filed in the collection of documents by 1 January 2022, which must reflect the removal of the statutory director’s office.

As these are very substantial changes, we recommend that you consult it with us and professionally prepare the structural changes and the new wording of the articles of association so that the new structure of the company and its functioning are properly legally regulated.

Conclusion

If any of the above mentioned changes apply to you, please do not hesitate to contact us for advice on the specific action to be taken. And if the above changes don’t apply to you, then please be aware, that they are far from an exhaustive list of what is and is not ahead for commercial companies. You can look forward to the next batch of changes next week in our article “The Major Amendment to the Business Corporations Act – Significant Changes to Company Bodies”.