A major amendment to the Czech Corporations Act is imminent

A simpler way to pay up the deposit in low-capital LLCs; the entry of concrete individuals representing legal entities on the boards of companies into the Commercial Register; or the dissolution of inactive companies: these are a few of the concepts introduced by the amendment to the Corporations Act in the Czech Republic.

Around the beginning of 2020, the major amendment to the Corporations Act is nearing the finishing line on the long road from bill to law. The ministry of justice, as the department proposing the bill, had gathered comments and ideas both from professional circles and from the public and found that the current Corporations Act contains a number of insufficient or impractical solutions. Consequently, the ministry put together a comprehensive amendment of major scope. Within the confines of one article, we cannot hope to familiarize you with all the changes contained in this amendment bill. What follows is a brief introduction to several key points. In a future issue of our journal, we will devote a separate article to the changes concerning the members of corporate bodies specifically – of which there are quite a few.

Several changes seek to reduce the regulatory burden on corporations. For instance, it should in the future be possible to transfer shares in general partnerships without having to formally amend the memorandum of partnership. The establishment of what is known as low-capital companies with limited liability is also being sped up and simplified: under current law, shareholders must pay their cash contribution into a special bank account, but under the amendment bill, contributions to the registered capital of up to CZK 20,000 may be paid in cash directly to the trustee administering shareholders’ contributions.

This means shareholders are no longer required to open a special bank account just for this single purpose. Going forward, it will also be possible to strike certain content from the memorandum of association without the involvement of a notary public – today, such cases always require notarial certification. Specifically, this concerns certain data which is being entered at the moment of incorporation (such as the identity of the first members of the statutory body).

Substantial changes await the corporate governance of joint-stock companies that are organized under a one-tier system. Currently, one-tier joint-stock companies need to have, aside from the general meeting and the board of directors, a CEO. The amendment now does away with the latter. In practice, the current rules had caused uncertainty as to whether certain general provisions on joint-stock companies applied to the board of directors or to the CEO. In addition, the amended Corporations Act will provide that the board of directors must always have at least three members. The changes anticipated by the amendment bill brings the provisions on one-tier joint-stock companies into line with what is common practice abroad.

Current law makes it possible for legal entities to hold positions on the executive and supervisory boards of another legal entity. This has drawn criticism among practitioners of the law because it allows for daisy-chaining and ultimately makes it very difficult to identify the specific individual who actually exercises the powers and responsibilities associated with the given position as a corporate officer. The amendment will put an end to this: according to the draft bill, legal entities who assume a post in bodies of another legal entity must authorize a concrete natural person to act in this role, and must do so promptly upon being appointed or else they will not be entered in the Commercial Register as a member of the respective corporate body.

Finally, we should mention a fundamental change which the justice ministry hopes will resolve the issue of inactive corporations. According to some estimates, up to one fifth of the companies entered in the Commercial Register actually engage in no activity whatsoever, which is obviously an undesirable state of affairs. According to the draft bill, such inactive entities could in the future be dissolved without any prior liquidation process. Inactive companies, according to the amendment, are companies which for two consecutive financial years failed to lodge their financial statements in the Commercial Register, if it proved impossible to serve them official notice wherein they are being summoned to fulfill this obligation and supplement the missing financial statements.

Amendment to the Corporations Act and its explanatory memorandum, Parliamentary press document No. 207



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