In its decision no. 29 Cdo 3068/2013 dated 19 June 2014, the Supreme Court of the Czech Republic ("SCCR") once again ruled on the issue of the irreversibility of the legal effects of registration of transformation in the Czech Commercial Register.

This decision was published with the following legal summary:

"In case of registration of transformation of business corporations or cooperatives (Section 1(2) of the Act on Transformations) in the Czech Commercial Register, the principle of registration irreversibility applies without any exceptions. The fact whether the registration of the transformation in the Czech Commercial Register was made on the basis of a determined decision of the court maintaining the Czech Commercial Register or (even through a mistake of the court) on the basis of a decision that did not come into force yet is not significant for predicting the legal effects of the transformation in Sections 57 and 59(1) of the Act on Transformations.

[...]

Whatever possible defects there may be in the transformation process (including breach of law that could result into the annulment of the resolutions of the General Meeting approving the transformation), these will not be grounds for annulment of the registration or the resolutions of the General Meeting after the registration of the transformation in the Czech Commercial Register (Section 57(1) of the Act on Transformations); an exception would only be when, for example, the General Meeting did not take place at all and the minutes of its meeting have been forged."

Factual description

Factually, the decision provides that the surviving European Company (Societa Europaea) as a consequence of a merger acquired the equity of the dissolving joint-stock company ("Company") and a private limited liability company.

To the appeal of the Company, the Court of Appeal decided to annul the decision of the Court of First Instance approving the registration of the merger. The Court of Appeal came to its ruling based on the fact that the submission on registration of the merger had been applied for by an unauthorised representative on behalf of Company. The decision on granting such a mandate had been made by the chairman of the Board of Directors of the Company, who had been ordered by the preliminary measure to refrain from acting as a member of the Board of Directors, including from acting as a chairman of the Board of Directors. Moreover, the Company had been ordered by the preliminary measure to refrain from the implementation of the approved resolution of the General Meeting, including the approved merger project. During the course of the appeal, the Court of First Instance further decided on the annulment of the "legal force"of its decision approving the registration of the merger, and completely removed the registration of the merger from the Czech Commercial Register. Also, during the course of the appeal, the Company withdrew the submission on registration of the merger in the Czech Commercial Register on the grounds that it was filed by a person who was not entitled to do so.

The Court of Appeal based its argumentation on the fact that the irreversibility of registration of the merger in the Czech Commercial Register can occur only with the determined decision of the court maintaining the Czech Commercial Register. The appellants in contract argued that from 1 January 2012 no provision in the law legislation – as opposed to Section 131(3)(c) of Act no. 513/1991 Coll., Commercial Code, as effective on 31 December 2011 – excludes the possibility of annulling the final registration of a merger in the Czech Commercial Register. In addition, Section 57 of the Act on Transformations clearly shows that after the registration, it is not possible to cancel the registration, regardless of whether the relevant decision of the court maintaining the Czech Commercial Register became determined or notAccording to the appellants, the purpose of Section 57(1) of the Act on Transformations is – in accordance with Article 22(1) of Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies – specifically to protect the rights of third parties, and not to protect companies participating in the merger. The appellant further added that the course of procedure of the Court of First Instance, which ruled on the subsequent annulment of the "legal force" of its decision, does not change the fact the effects of the merger had been already established.

Legal assessment of the SCCR

Against this factual background, the SCCR clearly – and in accordance with the existing case law – concluded that the precondition for the establishment of the effects of the merger is its registration in the Czech Commercial Register, regardless of the extent of possible infringements. In other words, the registration of the merger in the Czech Commercial Register is absolutely irreversible from a legal point of view. The SCCR based its reasoning on the requirement of (i) the protection of third parties, and (ii) legal certainty and the practical impossibility of reversing companies’ affairs into the state in which they had been prior to the registration of the merger in the Czech Commercial Register.

The SCCR finally concluded that "...any defects in the merger process (including any breach of law that could lead to the annulment of the resolution of the General Meeting, approving the merger) will not establish grounds for the annulment of the resolutions of the General Meeting or registration of the merger in the Czech Commercial Register after it is completed.

Consequences of the decision of the SCCR

Although the decision of the SCCR may give the impression that it clearly leads to the end of the discussions regarding the (ir)reversibility of the legal effects of the registration of a merger in the Czech Commercial Register, it actually merely confirms the current line of interpretation.

Considering the initial argument is the principle of the protection of third parties and that the SCCR in its underlying decision expressly addressed (only) the defects of the resolution of the General Meeting by which the transformation itself had been approved, the possibility of „breaking” the effects and legal relationships established by the merger  remains fully preserved if and to the extent asserted defect relates to the facts occurring prior to the consummation the merger (see decision of the SCCR no. 29 Odo 1315/2006 dated 24 June 2008. In this decision, the SCCR permitted „breaking” the legal affairs established upon the division of a company by referring to defects in the preceding process of the transfer of assets to a sole shareholder (“squeeze-out”)).

However, in its decision analyzed herein, SCCR is apparently withdrawing from the requirement to ensure legal certainty and argument of factual impossibility to reverse the affairs of the companies into the state prior to the registration of merger in the Czech Commercial Register.

Conclusion

In the sense of the foregoing, one can assume that the approach of the SCCR regarding the issues of irreversibility of legal effects of the registration of a merger in the Czech Commercial Register remains unchanged. This stance will undoubtedly be applicable within the new Czech civil law rules introduced from 1 January 2014.