An amendment to the Business Corporations Act will enter into force on January 1st 2021, bringing several significant changes.
However, the amendment does not bring important changes only into the future, but may also affect existing business corporations, which are obliged to adapt to the amendment. In some cases, there are even very short deadlines (three months from the effect of the amendment).
A description of the selected changes and their impacts can be found in the following article.
- Introduction
On January 1st 2021, the amendment to Act No. 90/2012 Coll. on Commercial Companies and Cooperatives (hereinafter referred to as “Business Corporations Act”), which will bring several significant changes to corporate law, comes into effect.
However, the amendment does not bring important changes only into the future, but may also affect existing business corporations.
According to the transitional provisions of the amendment, the provisions of the memorandum of association of business corporations which are not compliant with the amendment, cease to be binding with the effect of the amendment. Corporations are then obliged to harmonize their memorandums of association with the amendment within the first year since the amendment is in force, i.e. by 31st of December 2021.
Business corporations are obliged to register new facts or new documents that are not registered in the Commercial Register under the current regulation within 6 months since the amendment is in force, i.e. by 30th of June 2021.
For the registration of the representative of a legal entity which is a member of a statutory body, there is even a deadline of only three months, i.e. by 31st of March 2021 (for more details, see below).
All existing corporations should therefore review their memorandums of association and, if necessary, harmonize them with the amendment.
We would like to present a very brief summary of selected points of the amendment. Please note that the description of the changes introduced by the amendment below is exemplary.
- Profit distribution (Section 34 and 40 of the Business Corporations Act)
The profit is paid on the basis of financial statements approved by the supreme body. However, the current version of the Business Corporations Act does not explicitly specify a maximum period that may elapse between the preparation or approval of the financial statements.
The amendment eliminates this shortcoming, which has so far been bridged by case law, and explicitly stipulates that, on the basis of approved financial statements, profit and other own resources may be distributed only until the end of the accounting period following the accounting period for which the financial statements were prepared.
The amendment further extends the so-called balance test in the distribution of profits, which previously explicitly applied only to a joint-stock company and a limited liability company, to cooperatives as well. At the same time, it introduces the obligation to perform a balance test in the distribution of other own resources, which previously applied exclusively to a joint-stock company, to limited liability company and cooperatives as well.
The balance test is based on the fact that a capital company (a joint-stock company and a limited liability company) and a cooperative may not distribute profit or other own resources if the own resources resulting from the financial statements or own resources after distribution of profit fall below the registered capital increased by funds that cannot be distributed according to law or the memorandum of association agreement at the end of the last accounting period. A decision of the highest body adopted in violation of this balance test has no legal effect and is treated as if it had not been adopted at all.
When distributing the profit after the amendment takes effect, it is therefore necessary to pay attention to these new rules.
- Legal entity as a member of a statutory body (Section 46 of the Business Corporations Act)
Under the current regulation, a legal entity which is a member of the body of another legal entity empowers a natural person as a representative in the body. However, if any particular representative is not explicitly empowered to represent the legal entity as a member of the body, the legal entity shall be represented by its statutory body. This may then lead to further chaining if another legal entity is a member of such a statutory body.
The amendment fundamentally changes this procedure and determines that a legal entity that is a member of an elected body must, without undue delay after election, choose a single natural person as a representative.
Without the election and registration of a representative, a legal entity cannot be registered as a member of the body in the Commercial Register.
If such representative is not chosen within three months of the election of the legal entity as a member of the body, the legal entity’s membership in this body expires by law.
Not choosing a single natural person as its representative therefore brings serious consequences for the legal entity.
All legal entities that have other legal entities as members of their bodies should therefore immediately choose and register its representatives in the Commercial Register. The law establishes a deadline until 31st of March 2021. If a representative is not registered within this period, the membership of the legal entity in the body expires.
- Executive service agreement (Section 59 of the Business Corporations Act)
Important changes are also connected to the non-approval of the Executive service agreement by the company’s supreme body.
Under current legislation, Executive service agreement that has not been approved by the corporation’s supreme body is relatively invalid. This means that the contract is valid and will remain in force unless one of the parties (i.e. the company or a member of the body) invokes the invalidity.
Thus, according to the current regulation, the contract which is not approved by the supreme body could be possibly valid throughout the entire period of performance of the function.
However, the amendment fundamentally changes this approach when it establishes that a contract cannot take effect without approval. Thus, an unapproved contract would be treated as if it had not been concluded until it was approved.
- Change in the monistic system of legal entities (Section 456 and following of the Business Corporations Act)
The regulation of the monistic system of joint-stock companies is also undergoing a fundamental change.
The current regulation of the monistic system was not purely monistic, because it also allowed a duality of bodies – the administrative board and the statutory manager elected by the board.
The amendment introduces a purely monistic system, completely abolishing the function of the statutory manager. The amendment even removes the current regulation of the chairman of the administrative board. After the amendment takes effect, the administrative board as a whole will thus be the only statutory body of a joint-stock company with a monistic system.
- Conclusion
The amendment to the Business Corporations Act brings a number of significant changes which affect existing corporations. Business corporations are (in case of a conflict with the amendment) obliged to harmonize their memorandums of association and also register new facts and new documents in the Commercial Register.
However, the amendment also affects other areas, such as the validity and effectiveness of executive service agreements not approved by the supreme body, or the procedure of payment of profit and other own resources.
To assess the compliance of the existing memorandum of association with the changes introduced by the amendment to the Business Corporations Act, we recommend seeking professional legal assistance. We will be happy to help you with all the necessary tasks.