In this article, we would like to provide a basic summary of selected annual corporate duties that should be familiar to all managing directors (or other members of the executive management) of a company in the Czech Republic.
The existence of a business corporation is subject to a host of duties whose discharge is the responsibility of the corporation’s statutory (executive) body under the law – i.e., in the case of a limited liability company, its managing director(s), and in the case of a joint-stock company, the members of its board of directors (or administrative board).
These duties primarily comprise calling the annual general meeting, overseeing the production of a variety of mandatory records and their lodging with the collection of deeds at the register court and, last but not least, ensuring the on-going update of entries concerning the company in the commercial register and in the UBO register. Failure to enter the ultimate beneficial owner in the latter register or to lodge documents in the collection of deeds as prescribed may trigger non-negligible penalties. In addition, the members of the management of joint-stock companies should not forget about the duty to publish mandatory information on the company’s website as required by law.
On calling the general meeting
The statutory body must call the general meeting of the corporation by way of an invitation at least once annually. The Corporations Act stipulates specific rules which must be observed when calling the general meeting, including mandatory time periods and criteria for determining whether the general meeting has a quorum and may pass decisions.
The entire range of competencies of the general meeting follows, firstly, from the law and, secondly, from the memorandum of association (or founding charter) (in the case of limited liability companies) or the articles of association (in the case of joint-stock companies). In any case, the general meeting must convene at least once annually to discuss the financial statements and decide on how to dispose of the company’s profit or loss. In this respect, we note that while the general meeting is obliged to discuss the financial statements as presented by the statutory body, it is under no obligation to approve the statements on the first attempt if it has reservations. Rather, if the general meeting withholds its sign of approval, the general meeting must be called again after the shortcomings have been rectified. The proceedings of the general meeting must be recorded in minutes, and the attendance of shareholders present at the general meeting must be recorded in an attendance sheet.
If the general meeting decides to dispose of the company’s earnings by way of a payout of profit (dividends), one must keep in mind the management’s obligation to carry out the mandatory tests (balance sheet test, equity test, insolvency test) in connection with the appropriation of profit for payout and again prior to the actual distribution.
If the company has a single shareholder, then the general meeting does not convene. However, this does not mean that the sole shareholder is not obliged to take formal note of the financial statements. In such a case, a decision by the sole shareholder exercising the competencies of the general meeting must be drawn up, which only takes effect vis-a-vis the company upon delivery.
What documents must be produced, and which of them must be lodged in the collection of documents? What about archiving on the level of the company?
The set of mandatory documentation includes, in particular, the financial statements, proposals made by the management for the general meeting to discuss certain matters (including the proposal for the appropriation of profit) (and while the written form is not strictly mandatory for such proposals, it is strongly recommended!), minutes from meetings of the collective executive and supervisory bodies of the company, annual reports, reports on intra-group relations (which in our experience are not seldom neglected), and the management reports on a joint-stock company’s net assets, financial position, and result of operations.
A number of these must subsequently be submitted to the register court for filing in the collection of deeds: aside from the financial statements, the draft proposal for (and final resolution on) the distribution of profit or other equity items or the settlement of loss, the annual report, the report on intra-group relations, and the management report, Sec. 66 of the Act on Public Registers of Legal Entities and Trusts also requires the lodging of such other documents as e.g. decisions to appoint or remove members of the executive body, or the full re-stated wording of the memorandum of association (founding charter) / articles of association after each change to those documents.
If the Company is in default with its obligation to timely publish the mandatory documentation in the collection of deeds and fails to make remedies even upon being invited to do so within a set time period by the court, it may be fined up to CZK 100,000 – repeatedly in the case of repeat offenses. In the extreme case, the competent register court may even decide to wind up and liquidate the company (or, in specific cases, dissolve the company without liquidation).
In addition, failure to publish the complete financial statements is an offense under the Accounting Act which may be punished with a fine of up to 3% of the company’s asset value. For completeness’s sake, we note that the financial statements must be lodged in the collection of deeds within 30 days from their approval by the general meeting (and at the same time no later than within 12 months from the balancing date).
Lodging documents with the collection of deeds is an important obligation, but one should also be mindful of the obligation to archive all minutes of the proceedings of the general meeting (including all annexes) throughout the existence of the company and for ten years thereafter.
Keeping the public record up-to-date
Last but not least, the entries for the company in the commercial register and in the register of ultimate beneficial owners must be kept current. In the case of the latter, failure to enter (all of) the ultimate beneficial owner(s) carries a stiff penalty: aside from a fine of up to CZK 500,000, the UBO Act anticipates, among other things, a ban on the exercise of voting rights on the part of the unlisted UBO or a ban on the payout of profit shares to the unlisted UBO.