Definition of the line of business in the deed of incorporation
One of the mandatory elements of the company‘s deed of incorporation (memorandum or articles of association) is the definition of the company‘s line of business or activity. In addition, the company must obtain the appropriate trade or other authorisation for its business. As a rule, a significant part of a company‘s business activities belong to the so-called reporting free trade. Since the 2008 amendment of the Trade Licensing Act, the free trade is defined in the Act residually, i.e. by reference to other annexes to the Trade Licensing Act: „production of trade and services not listed in Annexes 1 to 3 of the Trade Licensing Act“. In practice, it has gradually become established that companies state this designation as their line of business in the deed of incorporation.
It came as a great surprise to the business community when after many years the Supreme Court, in a May decision, concluded that the above wording was no longer sufficient and caused the company‘s deed of incorporation to be considered vague. Companies that do not have a sufficiently precise definition of their line of business in their articles of association should add this information without undue delay. If they fail to do so, the Commercial Court will invite them to remedy the situation. Failure to comply with the court summons may result in a fine of up to CZK 100,000. However, the Commercial Court may also decide to dissolve the company and order its liquidation without further delay after the summons is ignored. This decision is then very difficult to reverse.
The point is not that the definition of the line of business or activity in the deed of incorporation must literally coincide with the fields of free trade, the list of which is contained in Annex 4 of the Trade Licensing Act. Nevertheless, the actual line of business should be sufficiently described. We recommend that the designation in the incorporation document should at least roughly correspond to the individual fields of activity, as this will subsequently make it much easier to register the correct trade.
I consider it appropriate for companies to check their deed of incorporation. If the document still contains an indeterminate definition of the line of business or activity, this should be rectified as soon as possible, otherwise the company will expose itself to the unnecessary risk of sanctions or even forced dissolution. A resolution of the general meeting or the sole shareholder is required to amend the deed of incorporation accordingly. The decision must be legally drawn up by a notary public.
If you are in doubt as to whether your company‘s deed of incorporation is sufficiently specific, please do not hesitate to contact us. We will be happy to help you.