MAJOR AMENDMENT TO THE BUSINESS CORPORATIONS ACT - FURTHER SUBSTANTIAL CHANGES

Author: Mgr. Zuzana Burdová, 17. 12. 2020

MAJOR AMENDMENT TO THE BUSINESS CORPORATIONS ACT - FURTHER SUBSTANTIAL CHANGES

In our first article in a series of articles on the major amendment to the Business Corporations Act, we provided you with an overview of 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. In our second article, we helped you understand selected significant changes in the functioning of companies in general, and in the third, we explained how the amendment will affect the functioning of the corporate bodies themselves.

Today, we will take a final look at the Amendment No. 33/2020, and talk about some other significant changes that your company will face.

Pledge and other rights in rem over share

Until the end of the year, the same rules apply to the pledged share in a company as to the transfer of the share itself. The general rule on the transfer of the share in a limited liability company is that it can only be transferred to entities other than shareholders with the consent of the general meeting, unless the articles of association provide that the consent of the general meeting is not required. The mechanism required for the transfer of the interest was then followed for the pledged interest.

From the beginning of 2021, the same will apply in principle, but with the difference that the pledge of a share may be prohibited or restricted more than the transfer of the share. It will therefore be possible for the articles of association to provide that the transfer of a share may be effected without the consent of the general meeting, but at the same time prohibit the pledge of the share altogether or at least require the consent of the general meeting. However, there must never be a situation where the transfer is more restricted than the pledge. Thus, even now, it will not be possible to provide in the articles of association that a share is transferable with the consent of the general meeting, but the consent of the general meeting is not required for the pledge of the share.

The same rules as for the pledge will then newly apply to the establishment of other rights in rem, typically pre-emption rights, reservation of repurchase, etc., which can also be entered in the commercial register.

It is also newly expressly specified what facts about the right of pledge and other rights in rem are entered in the commercial register. Specifically, name of the pledged share in the corporation, name and registered office or address of the place of residence or, where applicable, place of residence of the pledgee, name and registered office or address of the place of residence or, where applicable, place of residence of the shareholder whose share is subject to the pledge, if he is not registered in the commercial register, and the details of the secured debt shall be entered in the commercial register. In case of other rights in rem, the right shall be entered in the commercial register with the name and registered office or the address of the place of residence or, where appropriate, the domicile of the shareholder whose share is subject to the other right in rem, if he is not entered in the commercial register. This information must be completed for already registered pledges by 1 July 2021.

The transfer, pledge of a business share and the establishment of other rights in rem are very important matters so it is essential to be cautious. We will be happy to prepare or revise an agreement on the transfer of a business share, an agreement on the establishment of a pledge or other right in rem over the share, as well as the relevant motion for the commercial register.

Pay-outs of the profit and other own resources

Until now, the amendment regulated in detail only the distribution of profit as one of the components of own resources, but in relation to other own resources it was silent and the rules had to be imported by case law. Therefore, it will now be established by law that the same rules that govern the profit pay-outs will also govern the reduction of the registered capital with payment to shareholders, the distribution of reserve funds, social funds, other capital funds and the contribution premium, which is created, for example, in case of non-cash contributions to a limited liability company. The contribution premium is the difference between the value of this contribution determined by an expert and the amount of this contribution to the registered capital.

Thus, from 1 January 2021, the share of other own resources is also determined on the basis of the ordinary or extraordinary financial statements approved by the supreme body of the corporation, on the basis of which other own resources may be distributed by the end of the financial year following the financial year for which the financial statements were drawn up. Profits and other own funds may be distributed only to shareholders, unless the articles of incorporation provide otherwise.

However, there are many more rules for the profits and other own funds pay-outs, so if any of the above situations apply to you, please do not hesitate to contact us.

Changes in the so-called proceedings to remove a subscriber (exclusion of a shareholder for failure to meet the contribution obligation)

The Business Corporations Act currently provides for the possibility for the general meeting of a limited liability company to exclude a shareholder who has failed to meet a contribution or surcharge obligation despite a call of the general meeting.

From the New Year onwards, the shareholder will have to be duly advised of the possibility of exclusion in the notice.

Therefore, if you have a shareholder in your company who has not fulfilled his/her contribution obligation, we are fully at your disposal for the preparation of the notice in question with all the essential elements, the arrangement of the general meeting, the notarial entry and the draft of the relevant proposal in the commercial register.

Action by a member

In addition to the aforementioned proceedings to remove a subscriber, the Business Corporations Act offers the possibility for a shareholder to file a so-called member´s action, by which the shareholder can claim on behalf of the LLC the fulfilment of the contribution obligation by the shareholder who is in default in fulfilling the contribution obligation.

As of 1 January 2021, a shareholder of a limited liability company will be able to request the court to expel a shareholder who is in breach of his/her obligation in a particularly serious manner, despite the fact that he/she has been requested to fulfil this obligation and has been warned of the possibility of expulsion.

If you would like to claim the fulfilment of the contribution obligation against another shareholder of the LLC or you feel that the shareholder is in breach of his/her obligation in a particularly serious manner, we will be happy to advise you on the further procedure, prepare an appropriate summons or a member´s action and represent you in the entire proceedings before the court.

Extension of the grounds for not exercising the right to vote

The Business Corporations Act now defines 4 reasons for which a shareholder cannot exercise his/her voting right at a general meeting. This is in the event that the general meeting decides on his/her non-cash contribution, on his/her expulsion or on the filing of a motion for his/her expulsion by the court, on whether he/she should be excused from fulfilling his/her obligation or whether he/she should be removed from his/her position as a member of the company's body for breach of duties in the performance of his/her duties, or in the event that he/she is in default in fulfilling his/her contribution obligation, to the extent of the default.

In addition to these reasons, from 1 January 2021, the articles of association may specify other important reasons for which a shareholder may not exercise his or her voting rights. Should you wish to include these other important reasons in your articles of association, we will provide you with everything you need to amend your articles of association.

Report on relations

From now on, you will be able to better keep your company's confidential information under wraps. In fact, the amendment newly stipulates that information that is subject to protection and confidentiality need not to be included in the report on relations that is prepared on relations between related parties, and that information that is subject to business secrets may be generalized (to a reasonable extent).

The statutory body of a company that is a controlled person, i.e. the statutory body of a company over which another company exercises decisive influence (typically the statutory body of a so-called subsidiary), is obliged to prepare the report on relations. The statutory body should prepare the report within 3 months of the end of the financial year and in writing. If you are not sure how to prepare a report on relations or do not know what to do next, we will take care of it for you.

News on the ban on competition

Have you heard about the ban on competition? It applies especially to the managing director of a limited liability company, a member of the board of directors and a member of the supervisory board of a joint stock company. In case of a limited liability company, it is possible to extend the ban on competition to shareholders in the articles of association.

In principle, the aim is simply to avoid conflicts of interest. Under the current legislation, in case of a limited liability company, the managing director (or a shareholder) needs a consent of all shareholders in order to conduct a business within the same target object of the company, to be a member of the statutory body of another legal person (except for a group) or to be a shareholder with unlimited liability or a controlling person of another person with the same or similar business. For members of the Management Board and the Supervisory Board, the ban on competition applies without exception.

The articles of association of an LLC may further tighten the non-competition clause if all shareholders agree. In case of members of the board of directors and the supervisory board of a joint stock company, further restrictions may be laid down either in the articles of association or by resolution of the general meeting.

So what will change from 1 January 2021?

Firstly, the ban on competition will be enshrined for the Management Board in the same form as above. This will occur due to the abolition of the statutory director function in joint stock companies, which you can read more about in our second article on the amendment to the Business Corporations Act.

Secondly, the amendment allows the articles of association or the articles of association to regulate the ban on competition in a completely different way, i.e., for example, to abolish or narrow it for certain functions altogether.

Now think about it for a second. Does your company have a proper ban on competition? If the answer is that you are not sure, or if you know that you do not have it set up correctly, contact us and we can discuss it or arrange for an amendment to the articles of association or articles of association. This is definitely not to be underestimated.

Salary and other benefits to an employee who is a member of the statutory body or a person close to him/her

Do you have a managing director, board member, supervisory board member or statutory director who are also employees of the company? According to the current legislation, remuneration can only be granted to these persons with the consent of the person who approves their contract of office, i.e. the general meeting in the case of both LLC and JSC. This rule also applied to the remuneration of persons close to the member of the statutory body who are in an employment or other relation to the company.

As of 1 January 2021, this rule will be abolished and the consent of the company's supreme body will not be required at all to grant remuneration to such persons. It is therefore sufficient if the statutory body, acting on behalf of the company, enters into an employment or other contract with the named persons. If this situation concerns you, our law firm can tailor the contracts in question for you.

Conclusion

So we made it together. This was the last of our series of four articles on the subject of the major amendment to the Business Corporations Act, and it is hopefully clearer to you what specific substantive changes await you and your company, and most importantly what they will mean for you in practice. Now there is only one thing to do - to give these changes a qualified legal form. And don't worry, you have us for that. Together we can do it.

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