The New Czech Civil Code (Act No. 89/2012, Coll., the Civil Code) will become effective as of 1 January 2014 and will practically rebuild the entire area of civil law in the Czech Republic. Along with the related Act on Commercial Corporations (Act No. 90/2012, Coll. Act on Commercial Corporations), the Civil Code will also trigger the legal availability of new types of legal entities – or rather, modified versions of existing corporation types under Czech law, which were introduced this August by the Act on Investment Companies and Investment Funds (Act No. 240/2013, Coll.)
These modified corporation types were structured specifically to suit and attract new investors, to revitalise the Czech capital markets’ investment environment – which, it must be said, historically has not been particularly forthcoming – and to meet current European standards.
First among these modified corporation types is a limited partnership issuing investment certificates ("CZ SICAR"). This is the functional equivalent of a limited partnership under UK law or SICAR under Luxembourg law, both of which are investment vehicles widely used in Western Europe and are among the most successful and common forms of specialised venture capital and private equity funds.
CZ SICAR is structured around the unlimited liability of the shareholder acting as the manager of the vehicle, whereas the liability of the investors/shareholders will always be limited to their individual contributions. The partnership rights of the investor shareholders will be vested into the investment certificates, which will be freely transferable (with the limitation on trading on regulated markets, such as MTF under MiFID).
The good news is that compared to the general Czech corporate regulations, the new rules applicable to the CZ SICAR are in fact quite liberal, leaving plenty of room for tailoring the statutes and the internal functioning of the CZ SICAR to fit the needs of the investors.
Second is the joint stock company with variable capital ("CZ SICAV") – a Czech counterpart to OEICs in the UK and SICAVs in Luxembourg (and in continental Europe in general). CZ SICAV is a purely open-ended investment vehicle, whereby new shares may be issued anytime an investment is made.
CZ SICAV will issue two types of shares, where:
- the founders’ shares would bear traditional managerial rights, such as the right to attend and vote on the general meeting of the CZ SICAV;
- the investment shares would bear the redemption rights with their holders having little to no influence on the management of the vehicle.
The redemption itself can be triggered by the investor, according to the CZ SICAV statutes – which, like those of the CZ SICAR, are regulated quite liberally. The CZ SICAV will redeem the investors’ shares for the redemption amount of the shares’ actual value, as of the redemption request. The actual calculation of the value and the technicalities of the redemption will be set out in the statutes.
Another novelty is the possibility of CZ SICAV to establish sub-funds, which would constitute – to a certain degree –separate sets of assets of the CZ SICAV, being accounted separately and having their own investment strategies.
This presents an opportunity for investors to manage their own strategies, simply by switching between different sub-funds at very limited costs and administrative burdens (unlike when exiting the fund as such). It also presents a risk mitigation instrument, for the claims against a sub-fund may only be satisfied from its own assets; this shields the assets of other sub-funds.
Generally, the efforts of the legislators are commendable and much welcome. However, given that the regulation in the capital markets and of the entire civil law are completely new and untested, they carry quite a significant amount of legal uncertainty.
Also, as tax implications are a major reason behind the usage of the SICAV and SICAR vehicles in Europe - particularly in Luxembourg - without the corresponding tax regulation and the introduction of similar tax benefits, just how attractive the new Czech vehicles will prove to be to foreign and domestic investors (in comparison to the well-established and functioning mechanisms in other jurisdictions) remains questionable.