Originally published January 21 2004

Pursuant to current legal regulations, a Czech joint stock company can issue shares as certificated or uncertificated shares. Certificated shares exist only in the book-entry form in the registry of the Securities Centre. Both types of shares may be made out as a registered or bearer share, although certificated bearer shares are expected to be abolished in the near future.

The owner of certificated or uncertificated registered shares can be identified quite easily. Certificated registered shares are transferable by endorsement and delivery and therefore their owner can be identified directly from the document representing the share. The owner of uncertificated registered and bearer shares can be identified from the registry of the centre. If a company issues certificated or uncertificated registered shares, it must also keep a list of the shareholders.

However, the owner of certificated bearer shares cannot be identified from the document representing the share itself or from any registry. The transferability of a bearer share is unrestricted and the rights attached to a certificated bearer share are exercised in principle by the person who submits the share. It is also possible for a share to be acquired in good faith from a person who had no right to transfer it. Because of the lack of any registry, it is currently almost impossible to identify the real owner of such shares. Similarly, it is also impossible to prove that a person who acquired such a share from a person who was not the rightful owner did not act in good faith. Thus, certificated bearer shares seriously infringe the security and transparency of the capital market, and their abolition is welcomed with a view to bringing greater transparency to M&A transactions.

The recodification of the Commercial Law aims to eliminate this problem. Once the amended law has been passed, it will be possible to issue bearer shares only as uncertificated shares. This means a partial dematerialization of the securities market. Total dematerialization (a system adopted by France and Finland, for example) means that no securities (apart from specified exemptions) are issued in certificated form. They are issued in book entry form in an uncertificated registry that is kept by the issuer or an authorized intermediary.

This change is another sign of the erosion of shareholder anonymity. Previous measures that have contributed to this trend include:

  • the introduction of the reporting duty of a person who exceeds a certain threshold of voting rights in a company with listed shares;

  • the obligatory recording in the Commercial Register of a person who is in possession of all the shares of a company; and

  • the right of a shareholder to request a copy of the list of holders of registered shares, as opposed to the previous limited right to request only that part of the list which was relevant to him or her.

The subject matter of the new Commercial Act has been approved by a governmental resolution and its precise wording is now being prepared. The bill is likely to be submitted to the government by the end of next year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.