Abstract
Although this paper focuses primarily on Czech company law, it begins with a description of the general legal development of Czech commercial (including company) law. The first part describes the social and historical background of the Czech law after the period of Communism (1948–1989), some defects ensuing from a paradigmatic understanding of law and problems with Czech case law. The paper tries to manifest that it is impossible to understand the Czech concept of (private) company law without a thorough knowledge of the legal thinking of current Czech judges and the relevant authorities. After this broad introduction, a selection of legal literature dealing with commercial and company law is provided.
The second part of the paper provides some general information on Czech company law, mainly its systematic incorporation into Czech private law and the structure of the Czech Commercial Code. The following sections describe each company type (partnership, limited partnership, limited liability company and joint-stock company) and co-operatives, including the European law connotation, supranational entities and their implementation in Czech law (Societas Europaea, European Interest Groupings and the European Co-operative Society). The anticipated future development of Czech private law (civil and commercial law) is sketched at the end of the paper, taking into account the drafts of the new Civil Code and Commercial Act and other new proposals related to private law.
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References
Cf., in particular, his book The Art of the Novel (London, Faber and Faber 1999) p. 123 et seq.
This was, in essence, a general act regulating the relations among socialist organisations.
‘If reason is to gain sharpness, we must train it by examining and seeking what others have already found, and methodically go through even the simplest human skills and through most of all those that show order, or require it.’
Especially after judgments in the cases of Überseering, Centros and Inspire Art.
The distinction between public and private law, however outdated it may be, is substantially relevant to the understanding of Czech commercial law. The public law understanding of private law concepts, as I describe it, is manifested, e. g., in the application of the principle of ‘what is not forbidden is permitted’, which is often maintained just formally, with open State interventionism (étatism) being expressly required instead, or in the interpretation of general legal principles (abusus iuris, neminem laedere, etc.).
This is the object of frequent (though inconsistent) criticism. Many lawyers continue to follow the argumentation of the Czech Supreme Court and fail to see the faults, or do not think they are faults.
In the Czech context, even the term ‘economic law’ has in itself a meaning that differs, for example, from the German Wirtschaftrecht, used, e. g., in M.A. Dauses, ed., Handbuch des EU-Wirtschaftsrechts, loose-leaf edn. (Munich, Beck). In its initial Czechoslovak meaning, the term economic law in essence follows Hedemann’s idea and creates a system of standards that — rather than regulating private relations — regulate the relations between State organisations (the so-called supplier-purchaser relations) built within the limits of planned economy and State dirigisme. In such relations, one can hardly speak of contractual freedom or the quality of will: the purpose was only to fulfil plans and meet the requirements of the State. In fact, the objective of Communism was, among other things, the extinction of law. Cf., Vyshinsky’s theses in Š. Luby, ‘Civil Law and the Theory of the so-called Economic Law’, in Collection of Studies in Civil Law (in Czech) (Prague, 1953) p. 305.
However, this effort is hindered by the existence of other business entities that either stand outside the regime of the Commercial Code — e. g., State enterprises — or are just based on the Commercial Code but otherwise have regulations of their own (banks, pension funds, insurance companies, commodity exchanges, investment companies and other such entities, which are all established as joint-stock companies).
See the draft of the Czechoslovak Commercial Act from 1937 and its exposé: Draft of Commercial Act (in Czech) (Prague, 1937) or Antonín Randa, Das österreichische Handelsrecht, 2nd edn. (Vienna, Manz 1911) p. 5 et seq.
For a detailed comparison, see the extensive study by Valentin Urfus, Domestication of the Law of Exchange in the Czech Lands and the Beginning of the Modern Commercial Law (in Czech) (Prague, 1959) or the overview by Karel Eliáš, A Course in Commercial Law: The Introductory and General Part (in Czech) (Prague, 1995) p. 9 et seq., including references. For a general view, cf. also V. Urfus, Historical Grounds for the Modern Private Law (in Czech) (Prague, 1994); for a regional view, see J. Šebánek, The History of Trade in Brno until 1740 (in Czech) or J. Janáček, The History of Trade in Pre-White Mountain Prague (in Czech) (Prague, 1955), etc. The latter title refers to the Battle of the White Mountain of 1620 in which the Czech kingdom lost its independence to Austria.
References can be found, e. g., in Brikcí’s Municipal Rights of 1536.
For example, Municipal Rights of the Kingdom of Bohemia and Margraviate of Moravia (1610) by Pavel Kristián Koldín (approved by the Council and the King) or the Renewed Regional Law and Government of the Hereditary Kingdom of Bohemia (1627) which derived from Koldín’s work.
A. Randa, Commercial Law Professor at the Faculty of Law in Prague, was actively involved in political life. He was Goldschmidt’s pupil and co-determined the shape of commercial law in Austria-Hungary. Cf., his Das österreichische Handelsrecht (1911) or its Czech version, Austrian Private Commercial Law (1892–1894).
This took over, without any innovation, Grünhut’s German model, which in essence has remained in force until now.
However, this is just a theorem. In practice, of course, case law has always been dominant. Lower instance courts followed the decisions of higher courts, attorneys pointed them out in their submissions, etc. This remained so even in the socialist Czechoslovakia, as mentioned, in particular, in V. Knapp, Law Creation by Judges in Socialist Countries (in Czech) (Právník, 1969) p. 81 et seq., or ibid., Philosophical Problems of Socialist Law (in Czech) (Prague, Academia 1967) p. 61 et seq. Similar arguments were used by the Hungarian comparatist, Gy. Eörsi, Comparative Civil (Private) Law (Budapest, 1979) p. 552 et seq.
For a general survey, see K. Eliáš, et al., Commercial Code, Practical Annotated Issue with Selected Case Law since 1900, 3rd edn. (in Czech) (Prague, Linde 2004), with references not only to the cases decided by the Supreme Court but also those of the Constitutional Court and courts of general jurisdiction. Similarly, see also J. Karmán, K. Kizlink and J. Frohlich, Justicia — Systematic Collection of Decisions — Parts I and II — General Commercial Code (in Czech/Slovak) (Prague/Bratislava, 1935). Many private collections of decided cases as well as the official collection of the decisions of the Czech Constitutional Court and Supreme Court also appear on a periodical basis.
Beginning of the occupation of the country by Nazi forces.
See, e. g., the textbook of commercial law by Arnošt Malovský-Wenig, A Handbook of Commercial Law (in Czech) (Prague, 1947) or the textbook of criminal law by Vladimír Solnař, Criminal Law (in Czech) (Prague, 1947).
The concept of the contract was gradually abandoned and replaced by ‘service’ to reflect the suppression of private will and contractual autonomy. This was similar in other socialist countries.
Due to the colour of the jackets of the booklets in this series of commentaries (concerning not only the Commercial Code), readers generally refer to them as the ‘grey commentaries’.
The Civil Code addresses obligations in a similar way, so that certain contractual types are duplicated, the important point being whether or not the entrepreneur is involved in the contractual relation.
Initially, harmonisation was underrated but now it is overestimated both in legislation and, in particular, in professional literature.
The Supreme Court still understands commercial law as old-fashioned economic law (from the 1960s) and leading principle of interpretation see in legal formalism, non-validity of acting in any (formalistic) violation of law and in suppression of free will in favour of explicit wording of law. One of the judges of Czech Constitutional Court called it ‘boundless formalism’, and this ‘classification’ was used in plenty of the Constitutional Court’s cases.
Entities are based on a personal foundation — a community of persons. Foundations are different, based on a material foundation — specifically defined assets. There are also combined entities, based on both foundations, e. g., State-owned enterprises.
The division itself is not absolutely clear in theoretical terms; as a result, limited liability companies and limited partnerships are sometimes classified as mixed companies, showing traits of both personal and capital companies.
Conceptually, however, there is always the concept ‘enterprise’ alongside the entity as a subject of law. The enterprise is not a subject of law, but an object of law and obligation — an aggregate matter (universitas rerum) — i. e., an organised economic entity owned by the entrepreneur. From this point of view, there are very strict regulations as to the disposition of the enterprise or any part thereof (sale, lease, pledge).
Cf., in particular, A. Wenig, On the Legal Nature of Commercial Companies, Proceedings of Legal and State Sciences, XXIII (1923) p. 262 et seq., or E. Tilsch and E. Svoboda, Civil Law, General Part (Prague, 1925) p. 138 et seq.
A silent partner participates in the other contractual party’s business through his equity contribution and is entitled to an appropriate share of profit (and also shares any loss). The silent partnership relation is not known to third parties, unless the parties to the contract decide otherwise.
Regulations in respect of the issues concerning the registered address are contained in the Civil Code, and the recognised registered address is that written in the Commercial Register (this relates to the appropriate court jurisdiction, etc.). However, the public may also refer to an actual address if it is clear that the company has its head office there, etc.
The State may, e. g., only take part in the business of a joint-stock company and may do so under specific conditions. However, this is complicated by the existence of the National Property Fund (NPF) as a special legal person created by the State for the purposes of privatising formerly State-owned property. The NPF is a partner or shareholder in a number of business companies. Its stake is considered as that of the State and its key purpose is to gradually transfer the interests in business companies to third parties.
However, the latest amendment to the Commercial Code unfortunately also extended this power to executors, thus levelling up the preliminary control. According to a special regulation, these persons — unlike notaries — are not required to comment on the content of the act they verify. It is highly probable that, as a result, the new wording of the Commercial Code does not fully comply with the First Directive.
However, to ensure prior supervision of the establishment and existence of business companies, a draft amendment is currently in the legislation process in which the review by the Registration Courts is to be removed and replaced by accelerated registration in which the presumption of entry in the case of court inactivity is applied (registration principle).
However, a draft amendment responding to changes in the First Directive is in the legislation process at present. The Commercial Register will thus be fully digitised.
In addition, no good commentaries on these issues are available, so that, in practice, lawyers consult with auditors and the resultant document is preliminarily discussed with a Registration Court judge. The process of entry in the Register in itself is not very difficult, but what is exacting is the handling of the vast number of mandatory enclosures.
A discussion is currently under way on the pages of the Czech professional press, focusing, among other themes, on the dispute which is now before the Constitutional Court: whether squeeze-out is a process and not unlawful dispossession. Cf., e. g., P. Zima, ‘Transfer of Equity in Our Country and in the World’ (in Czech), Právní Rozhledy, No. 12 (Prague, 2003) p. 600 et seq., or B. Havel, ‘Squeeze-out, Unconstitutional Changes in the Ownership Structure of the Joint-Stock Company?’ (in Czech), Právní Rozhledy, No. 21 (Prague, 2004) p. 773.
As to the development of the Czech concern law and its controversial points, cf., St. Černá, Concern Law in Germany, the European Union and the Czech Republic (in Czech) (Prague, 1999), or ibid., The de facto Concern, Control Contract and Profit Transfer Contract (in Czech) (Prague, 2002).
This trend occurred in spite of the frequent references in European literature to the thesis that — instead of the codified German concern law (the other country with a similar codification is Portugal) — it would be better to follow the judicial definition of concern, as is the case, e. g., in France — the so-called Rosenblum concept. Cf., the article written by the team referred to as Forum Europaeum Konzernrecht, ‘Konzernrecht für Europa’, 27 ZGR (1998) pp. 672–772.
This means a person having no legal connection with the controlled entity; alongside this, there are regulations concerning insider trading in the special legislation addressing business activities on the capital market.
As a consequence, certain controversial cases are solved, at the interpretation level, before the Securities Commission (capital market supervisor), the result often being in the domain of political economy rather than law.
Unfortunately, the issue has been considerably politicised and, officially, there are two conceptions of the new legislation. One of them, written by a judge, perpetuates the current approaches, which arose in the Czech territory in the 18th century, and treats the process as court proceedings with extensive involvement of the judge and administrator. The other, written by a team of lawyers and economists and based on a broad comparison with, and inclusion of, the requirements of the World Bank and UNCITRAL, addresses bankruptcy as an economic category where the decisive word in the key commercial decisions belongs to the creditors or their bodies and where the judge’s and administrator’s role is to monitor and guard the fairness of the process. This second text was also translated into English and was discussed with US and German experts (judges and administrators).
Abbreviated as ‘veř. obch. spol.’ or ‘v.o.s.’; if a partner’s name is included in the trade name, ‘a spol.’ (and co.) is added.
The general partnership is a frequently used company form, as it is the only form of entity, for example, that lawyers may establish to practice their legal profession. On the other hand, this form of entity is sometimes abused to avoid the legal regulations concerning employment and the social policy of the State (rather than directly practicing their trade as separate businesses, a number of persons associate and do their business activities through the established entity in which all partners are in fact employees).
It is obvious that this definition is wrong, as the partners do not carry out their business under a common trade name (firm), but it is the firm itself that does the business. This fault in the definition reflects the historical controversy between the subjective and non-subjective nature of general partnership.
Even this requirement is very non-standard. It was taken from Austrian legislation, where, however, such companies do not posses legal capacity.
Every entrepreneur entered in the Commercial Register may award powers of procuration. Like in the regions where German law prevails, procuration is considered as an unlimited business power of proxy, whose holder is authorised for all legal acts as may occur during the course of the company’s operation.
‘Publishing’ means printing in the Commercial Bulletin, which is currently maintained electronically. ‘Making public’ means printing in any daily newspaper. The Commercial Code strictly distinguishes between these two concepts.
The Act on Bankruptcy and Settlement (like its German or Austrian models) assumes that the debtor’s assets are generally identified at the beginning of the insolvency proceedings and that it is considered whether those assets are sufficient to finance the proceedings as such. If not, such a negative finding and the subsequent court decision have the same effect as the adjudication of bankruptcy.
Abbreviated as ‘kom. spol.’ or ‘k.s.’.
Unlike in the legislation in force in other countries (e. g., Switzerland), the provisions regarding general partnership and the specific provisions contained directly in the part of the Code concerning limited partners are not applied here: what is directly applied are the provisions about the limited liability company. This not only blurs the distinction between these companies but also causes numerous interpretational problems.
Abbreviated as ‘spol. s r.o.’ or ‘s.r.o.’.
And also the Reserve Fund.
According to case law, acting with due diligence is a mode of conduct as would be exercised by the person in the owner’s position to manage his own assets and matters.
In the one-partner company, the sole partner carries out the functions of the general meeting. Increased formal requirements are imposed on his conduct.
In spite of the theoretical discussions in professional periodicals over the last five years, the decision of the general meeting is not considered as a legal act and is treated as a different legal fact (owing to the absence of the will with which the Code associates certain legal consequences). As a result, the general meeting only makes decisions that are then carried out by the executive(s). This conception is wrong, but it prevails in Czech literature. One of the reasons being that the Supreme Court of the Czech Republic always decides to this effect.
This provision considerably increases the transaction costs of the transfers, as it may be unclear whether or not assets being transferred in 2005 were wrongly transferred, e. g., in 1995, which would make all subsequent transfers invalid. In spite of justified criticism, well supported by strong arguments, the Supreme Court continues asserting the invalidity of all transactions even in cases where the deviation from the Commercial Code was only formal (this is so because of the existence of Section 39 of the Civil Code of 1964, which was based on the principle of invalidity of transactions contradictory to law). In 2004, it was adjudicated that the transfer is also invalid if the concluded contract was contingent on a resolutive condition of approval by the general meeting. The Supreme Court of the Czech Republic neither responds to local criticism, nor does it reflect the actual meaning and wording of Art. 11 of the Second Directive, and it likewise ignores developments in the European Union. For example, the new provisions in Book V of the Italian Civil Code (in effect from 1 January 2004) always leave the transfers in effect, but infer the responsibility of the statutory body and the transferee (in solido).
Also abbreviated as ‘akc. spol.’ or ‘a.s.’.
No other entity may express its shares in the form of securities.
Share warrants corresponding to the amount so far repaid are issued instead of the still unpaid shares. If the registered capital is increased, scrips are issued before the entry of the new level of registered capital in the Commercial Register. These two types of documents temporarily substitute for shares.
The so-called separately transferable rights are an exception (right to profit sharing, preemptive right to subscribe to shares, pre-emptive right to subscribe to interchangeable and preferred bonds). These rights can be transferred separately through an assignment contract.
Unless they are issued in dematerialised (book-entry) form. In such a case, the owner is indicated in the records.
This issue has been frequently discussed of late, one of the reasons being that the ban on financial assistance also affects limited liability companies. Cf., e. g., B. Havel, ‘Financial Assistance — Recalling the Future of Czech Private Law’ (in Czech), Právní rozhledy, No. 12 (Prague, 2004) p. 464 et seq.
Described, e. g., in Pošvář’s book, The Joint-stock Company (in Czech) (Prague, 1933).
Class actions are not available under the Czech law.
Cf., e. g., Commission Recommendation on Strengthening the Role of Non-Executive or Supervisory Directors and on Fostering an Appropriate Regime for the Remuneration of Directors, issued in 2004.
Special securities addressed in the Act on Bonds. These securities are issued before the capital is to be increased. The rights they bear are either exercised through exchange for shares (interchangeable bonds) or through priority subscription to new shares (priority bonds).
For details, see the relevant parts written by PetrČech in J. Dědič, et al., The Commercial Code. Commentary (in Czech) Vol. III (Prague, 2003) p. 1833 et seq. It must be said that, although this commentary is generally not of a high quality, the parts concerning takeovers are so well-prepared that they can be considered as the best post-1989 commentary-type treatise in the area of commercial law.
However, Czech law does not recognise a limited liability co-operative, as is the case, for example, in Austria or as was the case historically (regulations in force from 1873 until 1954).
This applies, in particular, to the formulation of the monistic system of management of European companies. The draft Commercial Act derives from the Swiss and Italian conception, whereas the European Company Act follows the rigid French pattern. These two regimes are so widely different that the difference causes difficulties (e. g., the extent of executive powers of the administration board, etc.).
Cf., Council Regulation (EC) No. 2157/2001 on the Statute for a European Company, including the accompanying Directive 2001/86/EC.
Cf., Council Regulation (EC) No. 2173/85 on the Establishment of the European Economic Interest Grouping.
Cf., Council Regulation (EC) No. 1435/2003 on the Organisational Form of the European Co-operative Society, including accompanying Regulation (EC) No. 2003/72/EC.
The Civil Code will not contain provisions on business companies, but will contain provisions concerning the entrepreneur. Hence, a partial commercialisation is involved. The Commercial Act will not only define anew (in a traditional way) basic concepts (trade name, procuration, enterprise) but will also contain entirely new provisions concerning takeover bids, relocation or the definition of the public joint-stock company. The Commercial Act will also entirely change the conception of concern law, in which it will rely on the above-mentioned Rosenblum concept. Both these basic pieces of private law will be thoroughly interlinked: private law will no longer be duplicated and will become a standard system similar to those of other EU Member States.
The draft in Czech is available at: http:///www.juristic.cz. For its development and the underlying ideas, see, in particular, K. Eliáš and M. Zuklínová, Principles and Underlying Assumptions of the New Private Law Code (in Czech) (Prague, 2001), K. Havel and K. Eliáš, ‘Report on the State of Work on the New Commercial Act’ (in Czech), Právní rozhledy, No. 5 (Prague, 2002), B. Havel, ‘The New Commercial Act and Doctrine’ (in Czech), Právní rozhledy, No. 5 (Prague, 2003), or ibid., ‘Focusing on the Joint-Stock Company’ (in Czech), Právní rozhledy, No. 10 (Prague, 2003), I. Pelikánová, ‘Some Notes on the Draft First Provisions of the New Commercial Code’ (in Czech), Právní rozhledy, No. 2 (Prague, 2003), or ibid., ‘Codification of Private Law in the Czech Way’, etc. The drafts have been, and still are, discussed not only in academic circles but also at seminars in law firms, etc.
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The purpose of this paper is not to provide a scientific study of the details of Czech commercial law — this is in fact impossible after the many years of development in this branch of law. My purpose and effort is only to outline the social and normative framework in which the Czech business community and, in particular, Czech companies exist and function, and to refer to the key relevant sources. It remains a fact that the Czech law’s normativity involves numerous problems and that since 1991 many papers have been written and plenty of books and articles have been published, trying to address those problems. However, a list of all of them would take up half the space of this paper and would still remain far from complete. I believe there is no space and no reason to include such a list here.
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Havel, B. An Outline of Czech Company Law. Eur Bus Org Law Rev 6, 581–623 (2005). https://doi.org/10.1017/S1566752905005811
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DOI: https://doi.org/10.1017/S1566752905005811