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With Love from the Heart of Europe: New Rules for Czech Joint-Stock Companies

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Abstract

In 2012, the Czech Parliament approved two key Acts essential to the re-enactment of Czech private law: Act No. 89/2012 Coll., the Civil Code, and Act No. 90/2012 Coll., the Business Corporations Act. Both Acts took effect on 1 January 2014 and introduced a number of fundamental changes to Czech law. This article outlines the most significant changes applicable to joint-stock companies and analyses the basic innovations which the new legislation has brought to investors utilising the legal form of a joint-stock company in the Czech Republic.

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Notes

  1. Act No. 89/2012 Coll., the Civil Code (‘Civil Code’). The number ‘89’ symbolically (and intentionally) refers to 1989, when communism fell following the so-called Velvet Revolution.

  2. Act No. 90/2012 Coll., on Business Corporations and Cooperatives (‘Corporations Act’).

  3. Act No. 513/1991 Coll., Commercial Code, as amended (‘Commercial Code’).

  4. On the one-share-one-vote principle within the EU, see particularly Ferrarini (2006), at p. 147 et seq. (tackling the question whether ‘one-share-one-vote’ should become a European law rule), who follows up on previous literature on the one-share-one-vote principle [see particularly Grossman and Hart (1988) or Harris and Raviv (1988)].

  5. A list of the European regulated markets can be found at http://mifiddatabase.esma.europa.eu.

  6. Particularly Act No. 256/2004 Coll., on Capital Markets, as amended (hereinafter the ‘Capital Markets Act’).

  7. Section 117a et seq. of the Capital Markets Act.

  8. Section 120 et seq. of the Capital Markets Act.

  9. Section 124 et seq. of the Capital Markets Act.

  10. See Kraakman et al. (2009), at p. 78.

  11. Section 51(1) of the Corporations Act (‘a person shall be deemed to act with due care and the necessary knowledge where, in business-related decisions, he or she could in good faith and reasonably assume to be acting on an informed basis and in justifiable interest of the business corporation’).

  12. The core of the Czech joint-stock company’s board members’ duty of loyalty is set out in Section 159(2) of the Civil Code, which provides that ‘a person who accepts the office of a member of an elected body [of a legal person] undertakes to discharge the office with the necessary loyalty as well as with the necessary knowledge and care’.

  13. See, e.g., Czech Supreme Court Resolution of 24 February 2009, No. 29 Cdo 3864/2008.

  14. For instance, in the largest Czech energy company ČEZ, a.s., whose shares are traded on both the Czech and Warsaw stock exchange and in which the Czech state owns the controlling stake.

  15. Section 59(3) of the Corporations Act. The previous legislation was based on the principle that if the company had not agreed on a remuneration for the director’s/body member’s service, the director (body member) had the right to remuneration which was ‘adequate and reasonable’ (Section 66(2) of the Commercial Code).

  16. Section 61(1) of the Corporations Act.

  17. The rationale for this ban is, according to the legislator, to ensure that state employees are unbiased and impartial. See the explanatory report for Act No. 231/1992 Coll. (which added the ban to the then-applicable Labour Code), which provides the following explanation: ‘These provisions are designed to impose other duties on state-administration personnel … by the operation of law. These duties are based primarily on the impartiality principle, which is one of the fundamental principles of a democratic government. This principle goes hand in hand with the duty to maintain unbiased and objective decision-making and the statutory rules on certain restrictions of the state personnel’s non-work related activities and the receipt of employment-related benefits. These restrictions are aimed at preventing state employees from attempting corruption and misusing their position. To avoid doubt regarding impartiality and misuse of one’s position, certain restrictions are to be introduced in respect of serving as a business entity’s executive or on supervisory bodies and in respect of doing their own business. These personnel are banned from serving as a business entity’s executive or on supervisory bodies unless their employer has posted them, in which case they will do so without having the right to receive any remuneration from the business entity.’

  18. In a departure from the previous legislation, two foundation documents (the foundation deed and the statutes) are no longer required to incorporate a joint-stock company. Statutes are now the only deed of foundation for joint-stock companies. Nevertheless, the Corporations Act provides for two phases of a joint-stock company’s life, to which even the mandatory requirements of the statutes are subject. A number of content-related requirements for the statutes are executed and cease to exist as soon as the company is incorporated and the contribution(s) to the registered capital paid. The Corporations Act responds by setting forth that certain requirements (related to incorporation of the company, subscribing and paying for shares – these requirements are listed in Section 250(3) of the Corporations Act) may be removed from the statutes once the company is incorporated and the contributions paid (such as the information on the appointment of contribution administrators, determination of the price for contributions in kind upon establishment, determination of the amount of registered capital which must be paid at the moment of establishment – see Section 250(4) of the Corporations Act). This allows a Czech joint-stock company to eventually simplify its basic statutory document.

  19. Section 34 et seq. of the Capital Markets Act.

  20. Section 474 et seq. of the Corporations Act.

  21. A limited liability company’s registered capital can now amount to one Czech crown (the minimum member’s contribution is CZK 1 – approx. EUR 0.04 – and one-member limited liability companies may be incorporated).

  22. The registered capital represents the aggregate of contributions, whether in cash or in kind. If a contribution in kind is invested in the company, the price is determined by an expert’s report. The Corporations Act no longer requires (as of 1 January 2014) that the expert be appointed by the court. It is up to the founder to choose the expert. When a company already exists, the expert is appointed by the board of directors (if the registered capital is increased by contributions in kind). However, the expert must be on the list of experts administered by the regional court.

  23. Under the balance-sheet test set forth in Section 350(1) of the Corporations Act, a corporation ‘may not distribute profit or other own resources among its shareholders if, as at the last date of the accounting period just ended, its equity as shown in its regular or extraordinary financial statements or its equity after such profit distribution will fall below the amount of the registered capital increased with the funds which cannot be distributed among the shareholders pursuant to the Corporations Act or the statutes’.

  24. Section 403(2) of the Corporations Act.

  25. Hence, contrary to the view of Gerner-Beuerle and Schuster (2014), at p. 302, there is a change to Czech directors’ fiduciary duties surrounding insolvency.

  26. Czech regulation of wrongful trading has been, to a great extent, inspired by the English rules on wrongful trading (see Section 214 of the Insolvency Act 1986). On the English rules of wrongful trading, see, e.g., Dbe (2010), at p. 9.

  27. On the choice between a one-tier and two-tier system among EU Member States, see, e.g., Werlauff (2009), at p. 258 et seq., or Hopt and Leyens (2004), at p. 135.

  28. Article 39 of the SE Regulation sets forth that the number of members of the management body or the rules for determining it shall be laid down in the SE’s statutes.

  29. Eidenmüller and Lasák (2012), at pp. 247–248.

  30. This did not apply to one-shareholder companies, where even under the previous Commercial Code the joint-stock company could opt for a one-member board of directors.

  31. See Njoya (2011), at p. 270 et seq. (which suggests that the possibility of evading or at least diluting co-determination has been widely seen as the main attraction or danger of the SE, depending on the view taken of the role played by co-determination).

  32. For instance, as of 3 October 2011, 937 SEs were incorporated. The clear market leader for SE incorporations was the Czech Republic: 529 SEs, i.e., approximately 56% of all existing SEs, were established in the Czech Republic, followed by 180 in Germany (the data were taken from research by the European Trade Union Institute, available at http://ecdb.worker-participation.eu/show_overview.php?letter=A&orderField=se_name&status_id=3&title=Established%20SEs). In a report for the European Commission, Ernst & Young also conducted an empirical investigation into the operation and impact of the Statute for a European Company (SE). Specifically with respect to the Czech Republic, the report identified corporate governance reasons as the main driver for SE formations: board size can be reduced to a minimum of one member on the management board and one member on the supervisory board, and a one-tier structure can be chosen – both options were not available to Czech public corporations (Ernst & Young 2009). For a more data-based study of the relative success of SE incorporation in the Czech Republic, see Eidenmüller and Lasák (2012), at p. 237 et seq. For a comparable study of SE incorporations in Germany, see Eidenmüller et al. (2009).

  33. See Section 463(3) of the Corporations Act.

  34. Almost like in historical Babylon, the Corporations Act is also confusing in terms of the body holding the power to elect and recall the statutory director in a joint-stock company with a one-tier board system, as under one provision this power lies with the general meeting (Section 421(2) letter e) of the Corporations Act) while under another it lies with the administrative board (Section 463(1) of the Corporations Act). Only recently has the Czech Supreme Court held that unless a company’s statutes provide otherwise, it is the general meeting which is authorised to elect and remove the statutory director. See the Supreme Court’s opinion of 13 January 2016, No. Cpjn 204/205.

  35. The statute-required employee involvement was the reason why businesses often chose to operate as limited liability rather than joint-stock companies. There were even cases of companies changing their legal form to avoid employee involvement in the supervisory board.

  36. Cf. Supreme Court’s opinion of 13 January 2016, No. Cpjn 204/205.

  37. This is without prejudice to the possibility that the statutes anticipate a nomination process among employees and to the board of directors’ obligation to propose to the general meeting the employee nominees to be elected as the company’s supervisory board members. See, e.g., Section 10 of the statutes of Česká spořitelna, a.s., one of the largest Czech banks and member of the ERSTE Group (available at http://www.csas.cz/static_internet/cs/Obecne_informace/FSCS/CS/Prilohy/stanovy_cs.pdf).

  38. The Czech Republic was traditionally listed among countries with mandatory employee co-determination, but this is no longer the case (van het Kaar (2009), at p. 58, Stroinski and Stanuch (2009), at p. 85, or Njoya (2011), at p. 294).

  39. Legislative Proposal No. 592, Chamber of Deputies of the Parliament of the Czech Republic (2015).

  40. Although no par value shares do not have any par value, this does not mean that they cannot be issued with a share premium. The share premium in such a case is the difference between the share’s issue price and the share’s book value (i.e., the ratio between the registered capital and the number of no par value shares).

  41. Shares to which the same (special) rights are attached constitute one class of shares.

  42. I.e., the right to a dividend, the right to a share in the company’s other resources, or the right to the company’s liquidation balance.

  43. Typically voting rights.

  44. This argument is largely based on the wording of Section 256(1) of the Corporations Act, which defines a ‘share’ in a joint-stock company as a security to which the right of the shareholder to participate as a member in the profit is attached. According to this interpretation, a share to which no right to profit is attached is no share at all and, therefore, issuing such shares is impermissible under the Corporations Act.

  45. Section 350(1) of the Corporations Act.

  46. Section 350(2) of the Corporations Act.

  47. Section 40(1) of the Corporations Act.

  48. Similarly, in August 2015, the Italian government allowed corporations incorporated under Italian law to issue multiple voting shares (in detail, see, e.g., Ventoruzzo (2015), at p. 1 et seq).

  49. In contrast to the converging trend towards ‘Anglo-American’ standards within the EU, including the one-share-one-vote principle. See Ferrarini (2006), at p. 171.

  50. See, e.g., Gilson (2014), at p. 101. However, the larger the difference between the owner’s proportion of voting rights and his share of the equity, the stronger the controller’s incentive to extract private benefits of control. See, e.g., Classens et al. (2000) or Gilson (2014), at p. 102.

  51. See DEL. CODE ANN. tit. 8, § 214.

  52. See Wenjia (2015), at p. 86 et seq.

  53. For criticism of the provisions on cumulative voting in the Corporations Act, see e.g. Lasák et al. (2014), at p. 1610 et seq.

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Authors and Affiliations

  1. Department of Private Law and Civil Procedure Law, Palacký University in Olomouc, Olomouc, Czech Republic

    Jan Lasák (JUDr, LL.M. (Columbia), Lecturer, Attorney-at-law at the law firm)

  2. Kocián Šolc Balaštík, advokátní kancelář, s.r.o., Prague, Czech Republic

    Jan Lasák (JUDr, LL.M. (Columbia), Lecturer, Attorney-at-law at the law firm)

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Lasák, J. With Love from the Heart of Europe: New Rules for Czech Joint-Stock Companies. Eur Bus Org Law Rev 18, 85–100 (2017). https://doi.org/10.1007/s40804-016-0059-6

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