What changes should companies expect and when they will come into effect

An amendment to Act No. 90/2012 Sb., on Companies and Cooperatives (the Companies Act), as amended (the “Companies Act”), will introduce a number of major and minor changes in the life of business companies. The amendment is already set to come into effect on 1 January 2021, except for changes to the Registers Act, which will apply to companies from 1 July 2021.

Our Guide to the Corporate World explains what changes businesses should expect and how to prepare for them correctly.

The amendment gives companies an opportunity to amend their memoranda and articles of association to comply with the new regulations within one year of the effective date. Nevertheless, some changes will apply to companies immediately upon the amendment taking effect.

Besides some ambiguities and inaccuracies contained in the currently applicable law, the amendment introduces some new concepts of corporate law, while changing and amending others (already firmly fixed in practice today).

The first part of our Guide introduces you to the changes that affect corporate life and that our clients should prepare for (in advance). Other parts of our Guide will expand on individual changes in detail.

Distribution of profit and other equity funds

As for the distribution of profit and other equity funds, the legislature has granted the requirements stemming from legal practice and reflected some conclusions from judicial decisions. As a result, the amendment permits the distribution of profit and other equity funds throughout the entire accounting period. However, at the same time, the rules governing the limits on the distribution of profit and equity funds payments have been unified and tightened.

One-tier joint-stock companies

The most visible changes include those affecting joint-stock companies with a one-tier corporate governance structure. Under the new rules, the management board will be the only mandatorily established body and will combine the powers of the governing director and the management board. As a result, we recommend every one-tier structure company pay careful attention to the amendment to the Companies Act.

Rights of shareholders in limited liability companies and joint-stock companies

The amendment enacts some special types of shares and interests (carrying no voting rights or carrying a right to delegate a member to the company’s elected body). Shareholders will also be allowed to attend general meetings jointly with their (one) adviser.  

Changes in the concept of a business

Today, the transfer of a business (enterprise), or such a part thereof, that would constitute a change in the current structure of the business or the company’s scope of business or activities requires the consent of the general meeting. Although a concept has recently prevailed in the practice of the courts that such a part of a company’s business must be deemed to mean a branch, the amendment has diverted from these conclusions and expressly requires consent be granted to the transfer of a material part of a company’s assets and liabilities (irrespective of whether or not it is formally a branch).

Restrictions on the transferability of shares and interests

The amendment permits creating a pre-emptive right, a buyback right and other similar rights with effects in rights in rem (i.e. should be of a similar nature to easements in the case of immovable assets).

Status of members of elected bodies and other persons in a similar position

The changes also affect the rules governing the execution of service agreements and resignations. The amendment has expanded the liability for a breach of the duty of due care and diligence to apply to persons acting as members of an elected body, although in fact not being such (‘shadow directors’). Material changes have been made to the rules governing the exclusion from office of members of an executive body by the court. 

An interesting novelty is the opportunity granted to the general meeting to adopt principles and instructions for members of the company’s executive body (except for interventions in business management).

Legal entity as a member of the executive body

Even today, legal entities may become members of a company’s executive body. In this respect, the amendment imposes an obligation on legal entities that are members of a company’s elected body to appoint a specific individual as their representative to perform the office; otherwise, the legal entity cannot be entered in the Commercial Register as a member of the elected body, or alternatively, the office of the member will cease to exist if the representative fails to be appointed within 3 months of the appointment or expiry of the office of the previous representative. In respect of current entities, the representative must be appointed and entered in the Commercial Register by 1 April 2021.

Do not forget to follow our Guide to the Corporate World after the Amendment to be informed in detail about the individual changes and new concepts outlined above. Our next part will focus in detail on the distribution of profit and other equity funds.

Individual parts of our Guide will also be available on our website HERE.