A 2014 REVOLUTION IN CIVIL LAW: PART 3 WHAT WILL CHANGE FOR JOINT-STOCK COMPANIES?

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1 NEWS ALERT 10/2013. Do you know what changes will come into effect with the Act on Business Corporations ( ABC ) and the New Civil Code ( NCC ) from 1 January 2014? Our August News Alert presented major changes for limited liability companies ( LLC s ). This News Alert deals with the most important information you should know about changes for joint-stock companies ( JSC s ) effective from next year. 1. BE CAREFUL ABOUT CERTIFIED BEARER SHARES! 1.1 As we informed you in our News Alert of May 2013, certified bearer shares that are not immobilised (in the sense described in our May News Alert) will legally cease to exist from 1 January 2014, and will change, by law, into certified registered shares. Hence shareholders will be obliged to tell the issuing company their data to be entered into the list of shareholders and to submit their existing shares for replacement by no later than 30 June If they fail to do so and the company decides to distribute its profit, they will not be entitled to the dividend. In addition, shareholders must not exercise the rights attaching to their shares during the delay. 2. OTHER IMPORTANT INNOVATIONS AND CHANGES CONCERNING JSC S (ALSO APPLICABLE TO LLC S) 2.1 No later than 30 June 2014, each joint-stock company is obliged to adapt its articles of association to the new legislation and to deliver them to the court Commercial Register; provisions that contravene mandatory provisions of the ABC will be invalid as of 1 January A member of the board of directors will now be allowed to act for a company together with an authorised signatory (known as the mixed proxy) it seems that this way of acting for a company, which has been inadmissible so far but has been completely common in German-speaking countries, should be accepted from 1 January 2014 by the courts maintaining the Commercial Register. 2.3 Agreements to perform the position of office holder that have been entered into prior to 1 January 2014 will have to be adapted to the detailed requirements of

2 the ABC as concerns the specification of remuneration for the performance of the function by no later than 30 June 2014, otherwise the office shall be deemed to be performed for free under such agreements. 2.4 Creation of statutory provisions (reserves) will no longer be mandatory thus the funds included in them may, in particular, be paid out to shareholders, or transferred to the account of retained earnings of previous years etc. 2.5 New business rules, based on Business Judgement Rule, will apply to the statutory body: if the acting person proves that he or she decided in good faith and acted on an informed basis and in the defendable interest of a company, the person shall not be held liable for damage caused to the company. 2.6 A new creditor protection rule will be based on what is known as the insolvency test, which prohibits a company from paying out profit, funds from its other equity or making advance payments if the company were to find itself bankrupt as a result; the method will also be based on the rules of conflict of interest and on wrongful trading rules. 2.7 Wrongful trading if the statutory body breaches prudent management principles by failing to take steps necessary to avert bankruptcy, a court may, on a proposal from a receiver or a creditor, decide that the statutory body shall be liable for meeting the company s obligations. 3. SHARES AND THEIR TYPES 3.1 The ABC will make it possible for articles of association to include unit shares, which do not specify a nominal value and thus their contribution to the share capital is proportionate to the total number of shares issued. This may be practical, as it will eliminate the need to replace shares during share capital changes or, for example, in the event of the adoption of the Euro. 3.2 Articles of association may now provide that certain rights (but not obligations) can be associated with shares, notably with regard to the weight of votes, different profit sharing or sharing of proceeds of liquidation. 4. SHARE CAPITAL, PROFIT SHARING 4.1 Unlike LLC s, the minimum share capital of JSC s remains unchanged at the existing level of CZK 2 million. Now, however, share capital may also be expressed in Euros, in an amount of at least 80,000, but only if the bookkeeping of the company is also in Euros. 2/5

3 4.2 Articles of association may now stipulate that shares qualify for a fixed share of profit. In that event, the general meeting s decision to distribute profit is not required and such profit sharing is payable within three months from the approval of the company s financial statements. 4.3 The ABC will now allow making advance payments for profit sharing as well as allow the articles of association to stipulate that persons other than shareholders may share profit. This is important because, if the company wishes to pay royalties to members of its bodies, the articles of association will need to allow this explicitly. 5. GENERAL MEETING 5.1 Articles of association will now need to explicitly authorise the general meeting to change the company s articles of association, to provide the board of directors with policies and guidelines outside the business management, or to appoint and dismiss a liquidator. Otherwise, all shareholders would have to agree with such steps. 5.2 A shareholder will now be allowed to challenge the validity of a general meeting resolution only if the shareholder raised a protest against the resolution at the general meeting and specified his or her objections to it. Although this will improve the predictability as to which general meeting resolutions will be challenged, shareholders are expected to raise preventive protests; in addition, this will not help the company avoid legal action by the shareholders who did not take part in a general meeting. 6. OTHER COMPANY BODIES 6.1 It will now be possible for the board of directors and the supervisory board to be composed of only one member, even if there are several shareholders in the company. 6.2 The supervisory board will no longer be required to include employee representatives, and thus the general meeting will be allowed to elect all supervisory board members. 6.3 It will now be possible to set the term of office of any duration for members of the board of directors as well as the supervisory board. Hence it will likely also be possible to agree on the performance of an office holder for an indefinite period of time. 3/5

4 6.4 Even a legal entity, which will be represented by its representative, may now be a member of a business corporation body. 7. COMPANY STRUCTURE 7.1 The ABC makes it possible to define whether the company s internal organisation will be dualistic (board of directors plus supervisory board) or monistic, as known from Anglo-American companies. In the event of any doubts, it will be assumed that the existing system, i.e. dualistic, has been chosen. 7.2 The monistic system, which establishes the management board and the statutory director, will be allowed in addition to the dualistic one. The management board acts as the company s supervisory body and the statutory director as the company s statutory body. The position of the latter may be combined with the position of the management board chair. 8. NEW TERMINOLOGY (JUST AS WITH LLC S) It is also necessary to become familiar with new terminology, in particular: 8.1 Business corporation the ABC puts in place the overarching term business corporation, which covers business companies (notably general partnerships, limited partnerships, limited liability companies and joint-stock companies) as well as cooperatives. 8.2 (Business) plant the term business plant supersedes and updates the existing term enterprise. 8.3 Branch supersedes today s term division of an enterprise and refers to such a portion of a plant that has economic and functional independence. A branch registered in the Commercial Register is called subsidiary branch. We hope you have found our brief overview useful. Its purpose is only to point out the basic information and changes that the Act on Business Corporations involves from 1 January If you have any questions, please feel free to contact us at the address below. 4/5

5 bpv BRAUN PARTNERS Palác Myslbek Ovocný trh 8 CZ Prague 1 Our publications are prepared for general guidance on matters of interest only, and do not constitute professional advice. They do not and cannot take into account any specific circumstances, financial situation or needs of any reader; our readers should not act upon Tel.: (+420) Fax: (+420) the information contained in this publication without obtaining independent professional advice first. No representation or warranty (express or implied) is given info@bpv-bp.com as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, bpv Braun Partners s.r.o., its members, employees, cooperating attorneys and tax advisers do not accept or assume any liability, responsibility or duty of care for any consequences of the reader, or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 5/5