Overview of changes in the amendment to the Commercial Corporations Act I

Dear Clients,

following an amendment to the Business Corporations Act (BCA) effective since 1 January 2021, we would like to help you stay up to date with our brief overview of the changes that the extensive amendment brings. The extent of the amendment is reflected in the number of sections of the amendment – there are a total of 719. Many of the changes are major, significantly amending the previous legislation. First, we will look at the changes affecting provisions relating to multiple business corporations. Below, we will inform you about changes concerning limited liability companies (s.r.o.) and joint-stock companies (a.s.).

Paying out shares in profit and other own resources

The amendment largely unifies the conditions for pay-outs of shareholders’ shares in profit and other own resources. The option to distribute profit and other own resources until the end of the accounting period following the accounting period, for which the ordinary or extraordinary financial statements were prepared, which provide a basis for such distribution, was expressly addressed. That means that the financial statements for 2020 can be used to decide to distribute profit or other own resources until the end of 2021. In practice, this option had previous been permitted by case-law.

The amendment clarified the conditions under which profits can be distributed in capital business corporations, consequences of non-compliance with the conditions, and the due date for payment of shares in profit.

Business corporations are not allowed:

1. to distribute shares in profit or own resources if this would result in their bankruptcy;

2. to distribute funds, the creation, change or termination of which is addressed by a legal regulation or a memorandum of association in a manner that does not allow such distribution (such as a reserve fund created upon the acquisition of the company’s own shares)

As regards capital companies and associations, the following conditions must be also met:

1. They must not distribute shares in profit exceeding the sum of the profit/loss of the last completed accounting period, the accumulated profit/loss of previous years and other funds that may be used by business corporations at their own discretion reduced by contributions to reserve and other funds in accordance with law and the founding legal act.

2. The equity shown in ordinary or extraordinary financial statements as of the end date of the last accounting period and the equity after the distribution must not drop below the subscribed capital stock plus funds not eligible for distribution as stipulated by law or the memorandum of association.

3. If development expenses are reported as assets, the capital company or the cooperative is not allowed to distribute profits or other own resources to the extent of not yet written-off development expenses.

The act makes decisions of the supreme body made in contravention of these rules legally ineffective. Shares in profit cannot be paid out based on such a decision. If that were the case, the governing body would be acting in violation of its duty to act with due diligence.

Shares in profit and other own sources are due within three months of the date when the decision on distribution was made by the supreme body of the company unless the law, the founding legal act or the supreme body determine otherwise.

The amendment stipulates that an advance payment of the share in profits may be paid out only based on interim financial statements showing that the business corporation has sufficient resources to distribute profits. The sum of advance payments of shares in profit must not exceed the sum of the profit/loss of the current accounting period, the accumulated profit/loss of previous years and other funds generated from profit that may be used by the business corporation at its own discretion reduced by contributions to reserve and other funds in accordance with law and the founding legal act. The advance payment of shares in profit must be repaid within three months of the date on which the ordinary or extraordinary financial statements were or could have been approved unless the amount of profit for distribution reaches at least the sum of advance payments of shares in profit paid out in accordance with law and the supreme body decides to distribute the amount. That means that shareholders are required to repay advance payments of shares in profit to the extent to which the distribution of shares in profit is eventually not approved.

Gratuitous performances

The amendment further prohibits providing gratuitous performances to shareholders or persons close to shareholders. That means that it is prohibited to grant interest-free loans to shareholders.

However, gifts are not prohibited. In addition, gratuitous performances provided by a shareholder to the company are not restricted, meaning that the shareholder can for example, provide an interest-free loan to the company.

Representative of the legal entity in an elected body

The amendment unambiguously stipulates that the representative of a legal entity as a member of an elected body of a business corporation must be a natural person. Each legal entity may only have one representative.

A legal entity cannot be registered in the Commercial Register as a member of an elected body without nominating a representative.

If the representative’s office ends, a new representative must be nominated and registered in the Commercial Register within three months, failing which the legal entity’s office ends.

Resignation

Resignations of members of bodies are subject to completely new rules as their office will not end 1 month after the delivery of the resignation notice to the electing body but once the resignation has been discussed by the body that elected the member of the elected body.

The body is obliged to discuss the resignation without undue delay but no later than at its following meeting. If the powers of the general meeting are exercised by a sole shareholder, the term of office will end 2 months after the resignation notice unless the sole shareholder approves immediate termination of office at the resigning member’s request. However, different arrangements may be agreed in the memorandum of association stipulating that the resignation does not require more than to be discussed by the body, of which the resigning member is a member.

If the member of the elected body was not elected by a body of the business corporation (this is commonly seen in co-determination, i.e., when part of the elected body is elected by the company’s employees), the resignation will be notified to the body, of which they are a member.

If, however, the resignation is announced at the meeting of the body, of which the resigning person is a member, the term of office will end 2 months after the announcement unless a different term end date is approved by the body.

Contract of service

The amendment also includes changes to contracts of service. The amendment stipulates that a contract of service will not become effective until it is approved by the supreme body of the company. The contract of service will then come into effect on the start date of the office or the contract date, whichever is later, and the general meeting may decide differently. That means that the contract may also come into effect retroactively upon its approval.

In case of any discrepancies between the memorandum of association and the contract of service, the provisions of the memorandum of association will prevail unless the contract of service was approved by the majority required to make changes to the memorandum of association. This can be used to override the memorandum of association on a case-by-case basis without amending the memorandum of association for future cases.

In addition, no consent of the general meeting to wages and other benefits provided to an employee, who is also a member of an elected body, is required. Such consent will also not be required for close persons. This shall, however, not affect the rules governing conflict of interest.

De facto director

The amendment newly regulates the obligations of persons in the position of a member of an elected body (“de facto directors”). Persons, who actually contribute to the company’s business management regardless of their relationship to the business corporation, will be subject to provisions governing competition, the obligation to act with due diligence, and conflict of interest. That means that such persons bear similar liability for damage.
In case of a potential conflict of interest or intention to enter into a contract with the business corporation, the person in the position of a de facto director will notify the governing body or the supervisory body, and if no such bodies have been established, the supreme body.
De facto directors will include but not be limited to top managers and executives.

Removal

The ability to remove a member of the governing body has also undergone some changes. The removal may be proposed by anyone, including parties not involved in insolvency proceedings, who proves their legal interest in the removal. The court may issue a decision removing the person from the office for up to three years if the person in question has repeatedly or materially violated their obligations in the performance of duties of a member of the governing body.

The court’s decision terminates the person’s office in the governing bodies of all business corporations, of which the person in question is a member.

Obligations in case of bankruptcy of the business corporation

If a member of the governing body of a business corporation contributes to the business corporation’s bankruptcy by violating their obligations, the court may decide, if bankruptcy is declared, that the member must contribute to the insolvency estate in the amount of the difference between the total debt and the value of assets. In its decision, the court should take into consideration the degree to which the violation of the member’s obligations contributed to the insufficiency of the insolvency estate.

In addition, the court can, just like until now, impose the obligation to return the benefits obtained from the contract of service and any other benefits received from the business corporation over a period of up to two years before the initiation of the insolvency proceedings.

Proceedings regarding the imposition of the aforementioned obligations may be initiated only based on a petition filed by the administrator, and it qualifies as an incidental dispute.

The aforementioned consequences also apply to de facto directors.

In addition, liability for damage caused by failure to file for insolvency under the Insolvency Act as well as liability to creditors for the company's debt if damage caused to the company due to non-compliance with the obligation to act with due diligence is not paid remain.

Archiving general meeting minutes

The amendment clearly stipulates that minutes of meetings of a legal entity’s supreme body, i.e., minutes of general meetings for joint-stock companies and limited liability companies, including attachments (including but not limited to proposed resolutions, attendance sheets) should be archived throughout the existence of the legal entity. The same applies to decisions of the sole member (shareholder). If shareholders decide by a remote vote, documents concerning such decision-making (this includes other supporting materials for the decision) will be retained.

Such documents must be archived for 10 years after the dissolution of the company.

 

If you have any questions regarding the above, we are at your disposal.

Sincerely,

CCS Legal s.r.o., advokátní kancelář


Posted: 10. 1. 2021 Section: Legal Info