On 19 February 2013, the Chamber of Deputies passed a bill concerning certain measures to increase the transparency of joint-stock companies and amending certain other acts (hereinafter referred to as the “Act”). The Act includes the requisite amendments of the Commercial Code, the Securities Act, and the Act on Engaging in Business on the Capital Market.

At the core of the Act are legislative measures aimed at doing away with shareholder anonymity and helping trace shareholders. The main objective of the mechanisms proposed is to ensure greater transparency in areas where private entities are applying for public funds and to restrict the room for corruption for which anonymous shares are ideal. Given the popularity of the Act in the media and the nearly one-hundred percent support both in the House and the Senate, it is more than likely that the Act will soon apply in its current form.

The Issue of Anonymous Shares in General

We discussed the general issue of anonymous shares in our previous article which you can find here.

Just to refresh your memory, these are shares that do not state the name of their owner, whose owner does not have to be registered in any publicly accessible registry, and whose transfer is possible by a mere hand-over. This guarantees practically absolute anonymousness to their holders. Another problem lies in the tax sphere, as the present situation practically does not compel former holders of anonymous shares to state the sale of such shares in their tax returns, which significantly facilitates tax evasion.

The New Regulation and Its Proclaimed Benefits

The Act gives all holders of anonymous shares the following options:

1. To transform their anonymous shares from deed form into book-entered form; or

2. To immobilise the shares by physically depositing them with a bank.

If the owner does not take advantage of either of the two options, his shares will be transformed into registered shares by law as at 1 January of next year.

For more about each of the options, read our January article here.

The greatest benefit of the new regulation is to be in the transparency in public tenders and in the drawing of money from public resources, as has been stated above, and in combating money laundering. Another benefit is the greater equality of entities in competition in this country and an overall increase in the transparency of the Czech business sphere, which could ultimately draw in new foreign investors. Also better perception of the Czech Republic abroad is expected, and positive responses by international organisations that fight corruption and money laundering. The explanatory memorandum of the Act also states that the regulation is expected to result in an increase in government budget income.

Problems in the New Regulation

The problematic parts of the Act include, above all, the issue of the governing law that will govern the legal position of the company concerned. The number of countries that permit anonymous shares is slowly decreasing, but it will not be a problem for a new entrepreneur to set up a company for example in the Cayman Islands, which still offer that option. All that is required for an existing company is the relocation of its registered seat. Furthermore, the issue of anonymous shares is not unified throughout the European Union, each Member State has its own regulation. Consequently, it suffices for a company to have its registered seat in Poland, where bearer shares are permitted and where a share can be transferred by virtue of a mere transfer agreement, without any further formal requirements, and the company will retain access to public tenders and protect the anonymousness of its shareholders.

The Act does not deal with the problems of so-called “mules”, when there is a relationship of obligation between the registered owner and a third person operating in the background that allows that person to exercise all rights related to the shares. Furthermore, that third person can act as a member of the management board of that joint-stock company and has factual control over the company.

And finally, the Act does not deal with the transparency issue thoroughly, as registered shares or immobilised anonymous shares can be held by a foreign company, which itself has issued anonymous shares and its true owner will thus remain anonymous.

For more information, please contact our partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.