The new Czech Business Corporations Act (“BCA”), which will replace the current Commercial Code, becomes effective on 1 January 2014, but companies are well advised to start considering its implications now.
The BCA gives existing companies the choice of remaining governed by the current legislation (the Commercial Code) or to opt into the BCA. The switch to the BCA regime must be made by 1 January 2016.
Although the BCA introduces a new and untested legal regime, there are good arguments for existing companies to opt in.
Even if an existing company chooses to remain governed by the Commercial Code, provisions of its founding documents that do not conform to the mandatory provisions of the BCA will become void on 1 January 2014. Any such company is therefore obliged to modify its founding documents to bring them in line with the new law and file them with the Czech Commercial Register within six months of the BCA entering into effect. Unless a company formally opts for the BCA regime, it may find it harder to determine which provisions of its founding documents are valid and which rules it must follow.
What’s more, there is no indication in the BCA as to which of its provisions are mandatory. In many cases, it is unclear whether a particular provision of the BCA is compulsory, or whether companies will be able to regulate a specific issue differently. Misjudging whether a BCA provision is mandatory or not may expose a company to unpredictable legal consequences. The difficulty of determining the extent of these consequences is compounded by the fact that it may take years before a body of court decisions shed some clarity on the interpretation of the scope of key provisions.
Companies that choose to opt into the BCA can eliminate the aforementioned risk by adopting new founding documents. These documents can be structured so that they deviate from statutory provisions only to the extent explicitly permitted by the BCA.
Further, for companies that remain subject to the old regime of the Commercial Code, it is not yet clear whether certain limitations – such as restrictions on transactions between related parties (section 196a), the need to obtain the consent of the supervisory board to enter into a contract the size of which exceeds the statutory threshold (section 193 subsection 2), or the prohibition on dividend payments after the lapse of six months from the end of a financial year (established by the case law of the Supreme Court on the basis of section 178) – will remain applicable after the BCA comes into effect.
The decision to remain subject to the provisions of the Commercial Code may also affect the attractiveness of a company as a target, especially for a buyer already operating under the full BCA regime. Reasons for this include added legal work, increased complexity of the transaction, potential non-conformity of the target’s founding documents to the BCA and related legal risks, impossibility of opting into the BCA regime after the two-year transition period, and impossibility of unifying the legal regime of companies within a group after the target is acquired.
While the decision to be governed by the provisions of the BCA must be made based on an assessment of each company or group of companies’ particular situation, there are already many compelling reasons to consider opting into the new regime.