Czech Republic: The New Commercial Code

The following text contains chronological descriptions of the individual articles.

Revising the Commercial Code was particularly necessary in order to conform Czech commercial law to EU law and international standards. The new law has also stipulated several definitions of terms, which help eliminate interpretation problems. New provisions were introduced for the protection of creditors, minority shareholders and against misuse.

Company headquarters are considered to be located where company business is actually taking place. It is therefore no longer possible for a company to be registered by a Registration Court in another area.

According to this provision, natural persons with turnover of at least 40 mil. CZK must also be registered in the Commercial Register.

Business correspondence (incl. invoices) must include the following information:

• Firm name;
• Company headquarters;
• Identification number and Registration Court, Registration number (reference number).

Old business correspondence can be used until 30/06/2001.

Foreign natural persons with an EU residence no longer have to be registered in the Commercial Register if they want to conduct business in the Czech Republic.

Registering in the Commercial Register has a constitutive effect. Therefore vis-à-vis third parties, one can first invoke facts which are subject to registration when registration has occurred or initially 16 days after these facts were published (exception: the third-party already had knowledge of these facts).

Should for example, registration of a managing director be rejected, then his/her appointment is null and void from the beginning. However, innocent third parties are protected.

The Registration Court compiles documents. Two copies of the following documents should be submitted:

• Articles of Incorporation or company agreement including notarial certification;
• Appointment/dismissal of the managing director, general authorised signatory, advisory board members and branch manager;
• Annual report and audit report;
• Documents that furnish proof of change(s) to the company agreement and important contracts (e.g. resolution to change company form, contract to purchase or lease the business, controlling and profit transfer agreements, capital increase resolution, consolidation contract, relevant expert documents, documents for non-cash capital contributions and consolidation, a list of all actions prior to registering a company).

For branch offices of foreign companies: Annual reports and annual financial statements from the foreign company, company contract, company charter and all revisions, extract from the Commercial Register, documents on pledged assets in other countries.

All foreign language documents must be submitted as officially certified translations. An apostille must be affixed to all public foreign documents.

Missing supporting documents may be filed subsequently for a period of up to one year.

The following data must be registered in the Commercial Register:

• Registered trade name, legal form, identification number, company activity;
• New: members of corporate executive boards and general authorised signatories with identification details, date of appointment and dismissal. Should a legal person be the corporate executive board, the members of the corporate executive boards must be indicated.

The signatures of the corporate executive boards must also be submitted.

Neither a managing director nor an advisory board member of a company where bankruptcy proceedings have commenced can be appointed. It is important to consider here that this regulation is also effective if this person resigned as a member of the company’s executive board during a three-year period prior to the commencement of bankruptcy proceedings.

The articles of incorporation for a joint stock company and limited liability company must be recorded by a notary. A signature authentication is insufficient.

Two independent expert opinions must be obtained to establish the value of non-cash capital contributions with a contribution value of more than 10 mil. CZK. Only those non-cash capital contributions within the economic interest of the company can be claimed.

A non-cash capital contribution in the form of claims is not permitted. It is only possible for a joint stock company (Section 163/3) and a limited liability company (Section 108/2), with the stockholders‘ or partners‘ permission to have non-cash capital contribution with a prior set-off.

Rights and duties from such transactions prior to the company’s incorporation are no longer automatically transferred to the company, only with the company‘s consent within three months of registration (a list of these transactions must be submitted).

These contracts must be made exclusively in writing. The contract must be approved in the shareholders‘ meeting.

From a tax point of view, this can be particularly important because the tax deductibility on earnings will be endangered, if the contract does not entered into a legally effective basis.

The signature of the authorised agent must be included with the registered trade name. However, a violation of this rule does not result in the invalidity of legal transactions.

A controlling influence exists:

• for persons who have a decisive majority for de facto or legal reasons;
• for a capital interest of at least 40 %, if no other partner or stockholder has 40 % or more of the shares with voting rights. The presumption of influencing is however rebuttable;
• in the case of partners acting in consensus, who jointly have voting rights of at least 40 % (e.g. shares are held by other affiliated companies that each have less than 40 % of the voting shares).

A group of companies consists of the controlling company and controlled companies.

The authorised representative of the controlled company must prepare a report about the relations between the controlled company and the controlling company and all other companies controlled by the controlling company (e.g. an affiliated company) within three months after the tax year has ended. This report is part of the annual accounts and should be attested by an advisory committee from the company and in the case of the statutory audit requirement of the annual financial statements by an auditor. This rule protects the interests of minority shareholders.

The obligation to report is not applicable in the case of a control agreement and or an agreement to transfer profits or if one shareholder has all voting rights.

Leasing an entire company has been permitted for the first time. The regulations are similar to those for mergers.

The shareholders of the assignor and assignee firms must give their permission (3/4 majority of the votes present). The resolution must be recorded by a notary.

An expert must review the draft contract and assess the fairness of the purchase price or rent as long as the assignment is not made to a sole shareholder in the case of a joint stock company or a shareholder requests the expert opinion in the case of a limited liability company.

The draft contract and the expert opinion must be submitted at least one month before shareholders take a vote as well be submitted with the compiled documents at the Commercial Register.

The provisions for mergers have been completely revamped. Only legal subjects with headquarters in the Czech Republic may merge with one another. It is also new that now companies with different legal forms are permitted to merge with one another (however, only companies limited by shares and partnerships mutually, e.g. limited liability company with joint stock company or limited partnership with general partnership, but not general partnership with limited liability company).

A prerequisite is that the participating companies prepare a merger report, which will also be audited. A merger agreement between two companies can only be entered into subsequent to this. Should a merger of a company limited by shares occur due to new establishments, both participating companies are required to have the assets appraised. The assets of the merged company must be confirmed by an expert.

Splitting has also been newly included in the law. Splitting with incorporation / absorption (absorption into 2 two existing companies) and splitting by establishing a new company (two new companies are created) are possible. All assets and liabilities are assumed by the acquiring company(ies). The acquiring company assumes the liability for all obligations of the acquired company up to amount of assigned net assets.

Changing legal form does not mean that a company ceases to exist nor does it signify the existence of a new company. It only results in changing the legal form of a company. Historic balance sheet values will therefore continue. An „interim audit" is necessary for the day the legal form is changed (however, this has not yet been regulated by accounting law).

The general partnership is also faced with an agreement in restraint of trade (Section 84), which purports that a partner is not permitted to be in a top management position at another company with a similar corporate goal, unless there is a clause permitting this in the partnership contract.

Limited partnerships no longer require the permission of all partners for revision of the partnership contract if this is regulated mutatis mutandis in the partnership contract (Section 97/4). The limited partner’s minimum contribution is CZK 5,000 (Section 97a).

In Section 97a) the topic is first broached that the limited partnership raises nominal capital. This would have an expansive effect with respect to the limited partnership’s audit requirement. Section 20/2 of the Accounting Act actually states that all companies that raise nominal capital according to the law have an audit requirement as soon as revenues or equity capital exceed specific value limits. Thus an interpretation of the statute says that a limited partnership now faces a statutory audit requirement, if the other conditions stated in the Accounting Code are met (excess of certain turnover or equity limits).

According to Section 105/2 a one-man company can not be the exclusive partner of another company. It is not clear if this regulation is also applicable to foreign holding companies or affiliated companies (probably unlikely). In addition, a natural person is only permitted to be the sole shareholder at a maximum of three companies. These new regulations must be complied with by 31/12/2001. Otherwise, the companies can be judicially liquidated.

The minimum share capital amount was increased to CZK 200 thousand (not valid for existing companies as long as no capital increase is planned). In this context, it is important to note that all partners are jointly and severally liable for non-payment of contributions (Section 106/2).

The assignment of a partnership interest is possible only if designated in the partnership agreement (exception: one-man company). Approval at a shareholders’ meeting is not necessary unless stipulated in the partnership agreement.

Based on the new law, the partnership interest is inheritable, unless expressly stated to the contrary in the partnership agreement. However, should this be the case, the heir has a compensatory claim. In order to avoid a severe financial burden to the party paying the settlement, it is recommendable that this party chronologically grades the payments. Furthermore, the new law permits the pledging of a partnership interest (Section117a) if the assignment of a partnership interest is permitted by the partnership agreement. The pledging of such an interest must be entered into Commercial Register.

Section 128/1 provides that the meeting of the partners must be duly convened within a period of six months after the date of the annual accounts. However, there were no sanctions stipulated for violation of this time limit.

The partnership agreement may provide for a partner contribution requirement not only to cover losses but also to strengthen equity capital Section 121/1). The contribution requirement can also be determined by the partners.

According to Section 122/2 a partner can also exercise his controlling rights through an auditor or a tax adviser.

It is important to note the regulation that all contracts between the company and the sole partner who acts in the interest of the company require an authentication by a notary and signatures must be certified. This prevents contracts from being backdated.

The new law expands the competences of the partners’ meeting. For example, contracts with corporate agents and between business enterprises require approval.

In view of the quorum at the shareholders’ meeting, the following is valid:

• The partnership agreement can stipulate that more than half of all votes are necessary for a quorum;
• As in the past, a two-third’s majority of all votes is necessary for an amendment to the articles of incorporation and modifications to the partnership agreements, capital increases and reductions. Should the modification to the partnership agreement affect all partners or individual partners, the approval of all partners or the affected partners is required (Section 141/4). It is simply unclear which modifications affect all partners;
• Resolutions authorising transformation and agreements between business enterprises (including silent partnership) require a three-fourth’s majority of all votes.

A partner cannot exercise his voting right if he has defaulted on his contribution (Section 127/5d) or if contracts are entered into with this partner beyond normal business operations (exception: agreements between business enterprises) and when the partner has been terminated as a corporate executive because of a failure to comply with his duty. This regulation is not valid for one-man companies.

Certain specific details must be considered with respect to the convening of the shareholders’ meeting and the recording of the minutes at this meeting (see Section 129). For example, the date and the program must be communicated to the partners at least 15 days before the meeting is to take place. Should there be a modification in the partnership agreement, all modification points must be mentioned in the invitation. Should the partner be represented, the authorisation to represent must expressly include the waiver of formal and time limit requirements if the meeting was convened informally. The managing director can obviously not represent the partner. The managing director must prepare a record of the minutes. Modifications in the company agreement of a company limited by shares require that the record of the minutes be recorded by a notary (Section141/III).

In addition, innovations were made with respect to partnership lawsuits, modifications in capital and liquidation, which will not however be detailed here.

The joint stock company’s nominal capital now amounts to a minimum of 2 mil. CZK. A joint stock company traded at the stock exchange has a minimum nominal capital amount of 20 mil. CZK (Section 162). The articles of incorporation must be recorded by a notary. Contributions in cash must be deposited in a bank account with a restriction on transferability (Section 163a/4).

The law now clearly states that advance payments on profit interests are not allowed (Section 178/1).

Shareholder rights have also been revised (e.g. the right to information, counterproposals). Protection for minority shareholders has improved; stock ownership level of only 3 % now (nominal capital of more than 100 mil. CZK) or 5 % (nominal capital of less than 100 mil. CZK). Minority shareholders can now make a judicial request that an expert witness review the controlling report.

Specific registration requirements must be observed when purchasing or transferring listed shares (gen. 5 %of the voting shares and multiples thereof). This obligation to register exists vis-à-vis the joint stock company, the Securities Exchange Commission and the Securities Center (Section 183 d)). Non-compliance with the registration requirements has a negative effect on the ability to use voting rights. Should the purchase of shares result in control of the company (Section 66 a)), there is a duty to make a tender offer to minority shareholders. Specific regulations must be adhered to in view of price-fixing (see Section 183 h)).

Please refer to the provisions in Sections 184 ff for specifics on the general shareholers‘ meeting.

The management board of a joint stock company is composed of at least three board members (Section 194/3). This however, is not the case for the one-man joint stock company, which is only capable of naming one board member. The management board in this case is not bound by instructions, also not by the instructions of the general shareholders‘ meeting. This however, increases the management board’s liability because he cannot be bound by instructions! In the case of liability, it should also be noted that all board members are jointly and severally liable and bear the burden of proof. Section 196 establishes that a board member cannot have an outside business with the same company purpose. He is also not permitted to enter into business dealings with the joint stock company.

The advisory board should also have a minimum of three members. Should the company have 50 or more employees, at least one-third of the advisory board must be composed of employees (Section 200/1). The advisory board must consent to any contract with a contract value of at least one-third of the company’s nominal capital (Section 193/2). In the case of listed companies, shareholders must also give their consent at a meeting of the general shareholders.

Entering an earnings and control agreement is legally regulated (Sections 190 a) and b)). This agreement is made between a controlling company and a controlled company. The controlling company assumes the liability for the controlled company’s obligations. This contractual agreement must be reviewed by two experts appointed by the commercial court.

According to the new regulation, in the case of a company acquisition, the purchaser does not purchase the individual assets but ownership or title to the entire company. An agreement in restraint of trade can be negotiated for a two-year maximum with the seller (Section 488a)).

Agency agreement law was also significantly revised. Of particular emphasis is the right to compensation upon contract termination. A right always exists henceforth, as long as there was no breach of contract by the agent, the agent did not assign the contract to a third party or the agent did not terminate the contract without good cause. Compensation damages amount to an entire year in commissions (based on an average of the last five years). Agreements to the contrary within the employment contract are ineffective. An agreement in restraint of trade can be negotiated for a two-year maximum (limited to a specific area or persons).

An adjustment of the Accounting Law was planned. However, only minor amendments were made. The amendment in the fiscal year can be underlined here. Starting in 2001, the tax year is no longer linked to the calendar year.

The draft bill also provided for an amendment in the statutory audit requirement. This would have included all commercial companies in addition to joint stock companies when specific size features are exceeded, whereby these size features were planned to be increased compared to current law.