Overview of changes in the amendment to the Commercial Corporations Act II
In this issue of our summary of the legal changes brought by the amendment to the Business Corporations Act effective since 1 January 2021, we would like to present to you information regarding changes affecting limited liability companies and joint-stock companies.
Changes affecting limited liability companies
The first change applies to the process of establishing a limited liability company. If the sum of all monetary contributions does not exceed CZK 20,000, it is not necessary to open a bank account for the payment of the registered capital but the contributions can be paid in using other methods, including but not limited to cash paid to the fiduciary.
Most importantly, the rules regarding types of shares have been clarified. According to the amendment, it is possible:
- To issue shares associated with only one of the following rights: right to a share in profits, right to a share in the liquidation balance, or the right to vote at the general meeting. The other two rights can therefore be excluded. That means that a share may be issued associated only with the right to vote at the general meeting without the right to a share in profits or the liquidation balance, or a share associated with the right to a share in profits without the right to vote at the general meeting. However, other rights, such as the right to information or to participate in the general meeting (even if without the right to vote) cannot be excluded.
- To issue shares associated with the “appointment right”, i.e. the right to appoint and remove one or multiple executives. However, at least one half of executives must be elected by the general meeting.
The amendment allowed one person nominated by a shareholder to attend the general meeting with the shareholder – unless this is prohibited by the memorandum of association. That means a shareholder make bring along, for example, their consultant to the general meeting. Previously, the presence of such another person required consent of the general meeting. In addition, however, an obligation has been introduced to have the person to agree to confidentiality to at least the same extent as the shareholder.
Furthermore, the scope of grounds for suspension of the voting rights has been extended. The memorandum of association may define other material grounds, due to which the shareholder cannot exercise the voting right, beyond the law. All shareholders must agree with such a change to the memorandum of association.
In addition, it is not possible to vote on matters discussed at the general meeting later in writing in the event that a shareholder was absent. The shareholder may now later only express consent to the matter related a change to the shareholder’s rights or obligations within seven days of the general meeting.
The powers of the general meeting have been also modified including but not limited to an extension of the list of contracts approved by the general meeting. The right of the general meeting to define the principles and issue (general) instructions to be followed by the executives is expressly enshrined in law. However, such instructions must not interfere with business management.
The prohibition of competition has been relatively significantly changed as the amendment left out the previous ability of executives to waive the non-compete obligation and the express possibility of extending it to the shareholders. The prohibition of competition applicable to the executives has been declared non-mandatory which means that it can be extended or limited in the memorandum of association. However, if the prohibition of competition were to be extended to apply to shareholders, the shareholders in question would have to give their consent thereto.
In terms of transfers of shares, the memorandum of association may now define conditions under which the relevant body of the company must grant its consent or, on the contrary, when it must refuse to give its consent. Such consent must be requested by the shareholder. If the competent body does not decide on the request or its decision differs from the memorandum of association, the shareholder may leave the company.
A major change brought by the amendment is a change to the manner of pledging shares. It will now be possible to regulate the terms of pledging a share in the memorandum of association differently from the terms of share transfers. For example, it will be possible to completely exclude the possibility of pledging a share in a limited liability company or to allow unlimited transferability of a share without any further arrangements. The amendment also stipulates that other rights in rem to the share arise upon their entry in the Commercial Register (e.g. pre-emption right).
The regulations governing shareholder actions have been significantly clarified as, among other things, the regulations governing continuation of proceedings in the event that the shareholder, who brought the action, is no longer a shareholder, were supplemented. A shareholder action to exercise the shareholder’s right to demand on behalf of the company the removal of a shareholder from the company by the court may be filed not only due to non-compliance with the obligation to make a contribution but also due to any other violation of the shareholder’s obligations in a particularly gross manner. However, such a shareholder action requires consent of the general meeting.
It may be advisable in connection with limited liability companies to, in particular, examine the competences of the general meeting and their potential regulation with regard to the amendment in question. Similarly, the changes may also affect the manner of acting of the general meeting and voting by the shareholders.
Changes affecting joint-stock companies
The concept of shares was relatively extensively amended. The amendment unambiguously stipulates that at least one of the following rights must be inherent in a share: right to vote at the general meeting, right to a share in profits and/or the right to a share in the liquidation balance. The possibility to issue other than priority shares without voting rights and shares with an appointment right, i.e. the right to appointment and remove a member or multiple members of the governing body or the supervisory board, which eliminated any doubts regarding the option to issue such shares, and the terms of and procedure for their issuance were also specified.
The amendment also repealed the statutory differentiation between ordinary shares and shares with special rights. The designation of the share type must be regulated only if shares associated with various rights or obligations have been issued. The amendment left out the designation of ordinary shares. This is also reflected in the details specified on the shares.
In addition, the method of transferring unpaid or not issued shares has been changed and they will now be transferred under a written share transfer agreement.
If the company’s own shares are acquired, the prescribed details must be included in the annual report. Previously, they were included in the board’s report on the company’s business activities and its property standing. If the company does not publish an annual report, the details of the acquisition of its own shares will be provided in the annex to the financial statements.
Due to the extension of the possibilities of regulating rights associated with the share, including but not limited to the option to restrict them, the sphere of situations, when the company is obliged to perform a mandatory buyback of shares, has been extended to include situations involving a major change to the rights inherent in shares. The buyback right belongs to shareholders who did not agree with the change.
Regulations concerning the general meeting have undergone only partial changes. Participation of another person (in addition to the shareholder) at the general meeting is permitted under the same terms as in limited liability companies. The mandatory elements of invitations to general meetings have been clarified in relation to deciding on changes to the articles of incorporation. Some changes have been also made to the regulations on voting, including but not limited to voting depending on share types, where the amendment explicitly adds decisions to change types of shares to shares not associated with any voting rights to the group of decisions that require consent of all shareholders who own shares affected by the decision.
Similarly to limited liability companies, the powers of the general meeting have been amended. The general meeting will be able to directly elect the chairman of the board of directors or the management board. Furthermore, the ability to challenge decisions of a body other than the general meeting has been extended to include the ability to demand the declaration of invalidity of a decision to exclude a shareholder and the declaration of invalidity of a share or an interim certificate.
Similarly to executives of a limited liability company, the board of directors and the management board are required to follow the principles and (general) instructions approved by the general meeting if they are consistent with legislation and the articles of incorporation. However, the prohibition to instruct them as to business management remains. Reports on the company’s business activities and its property standing will be drawn up only by companies that do not publish annual reports. The report on business activities will be published in the collection of documents in the Commercial Register.
Similarly to limited liability companies, the prohibition of competition has been amended and is entirely non-mandatory for the board of directors as well as the management and the supervisory board. That means that the articles of incorporation may impose the obligation of non-competition according to the specific needs of the company and shareholders, and the non-competition obligation may be also left out entirely.
The amendment brought major changes to the regulations concerning electing members of the supervisory board by employees. The amendment specifies not only the group of persons having active and passive voting rights but also the organisation of the election, the procedure and conditions of the election and removal of the member of the supervisory board elected by employees, the options and procedures for electing via electors, and the ability to challenge the validity of the election or removal. It is expressly stated that only employees employed by the company may become members and their membership in the supervisory board ends with termination of their employment. An exception may be granted if the employment ends due to retirement. Participation of trade union officials at the supervisory board’s meetings, if such officials are not employed by the company, is still unambiguously prohibited.
Some of the most significant changes were made to the legislation concerning the monistic system. The supervisory board will continue to be the only body, which must be elected. The supervisory body combines the powers of the governing and the supervisory body without being differentiated into members with one or the other power. The previously existing other body (statutory director) has been abolished upon effect of the amendment, and the statutory directors were automatically deleted from the Commercial Register on 1 January 2021. The management board therefore serves as the governing body and the company may be represented by any member thereof unless otherwise agreed in the company’s articles of incorporation.
A legal entity may be a member or even the chairman of the management board. Previously, only a natural person was able to serve as the chairman of the management board. The management board may continue to only have one member.
The amendments concerning business corporations are usually associated with the need to modify deeds of foundation, including but limited to the definition of shares and shareholders’ rights if different types of ownership interests or, where relevant, shares have been issued, and, as appropriate, to modify the entry in the Commercial Register. Modifications must be made for joint-stock companies with a monistic structure due to the abolition of the statutory director. This is also associated with the requirement to make an entry in the Commercial Register; at least regarding the manner of representation of the joint-stock company.
We are available to you should you have any questions.