Group corporations – new opportunities and obligations

Czech Republic: Company group law undergoes fundamental sea change as of 1 January 2014

The Czech lawmaker has for a long time been attempting to regulate relations within groups of companies (group corporations). Prior to the comprehensive overhaul of Czech private law at the beginning of this year, Czech group law was based on the German model (though with substantial simplifications), and differentiated between contractual groups and de facto groups. The new regime has abandoned this classification and operates with a wholly new concept instead.

Czech group law continues to acknowledge and respect the economic realities, in that it presupposes the existence of group corporations – groups of companies under central management. The “managing” entity (which roughly corresponds to the “controlling entity” in more common English legal parlance) is expressly entitled to give management instructions to the controlled entity. A new requirement is that all undertakings belonging to a group (i.e., both the controlling and the controlled entities) must publish the existence of the group on their respective websites. Failure to do so has a rather fundamental consequence in terms of compensation of financial harm caused to group members, as we shall see below.

 

The general rule is that anyone who exercises decisive influence over the conduct of a company, such that it incurs financial harm as a consequence of submitting to that influence, must compensate the company for that harm – with an exception that applies to group corporations: if the harm occurred in the interest of a group member and has been settled (or will be settled) on the level of the group, then the duty of compensation will not be triggered. For this exemption to apply, however, the existence of the group must have been made public on the websites of all its members, as explained above.

 

For the sake of completeness, we ought to mention that controlled undertakings are still obliged to compile a report on intra-group relations within three months from the balance date (i.e., from the end of the fiscal year), and to reveal in that report whether and how financial harm caused to them will be settled.

Source: Act. No. 90/2012 Coll., on Commercial Companies and Cooperatives (the New Corporate Code)

Contact:
JUDr. Lucie Josková, Ph.D., LL.M., Attorney-at-Law

 

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