Assessing the first months under the sweeping new amendment to the Business Corporations Act
The extensive amendment to the Business Corporations Act, effective from 1 January 2021, has brought a number of changes with interesting practical implications. Here is a basic overview and our experience with it to date.
Entries of mandatory data in the Commercial Register
One of the novelties is the scope of data that companies are obliged to enter in the Commercial Register. We list the most common data below.
These include the mandatory registration of rights in rem attached to shares. In addition to pledge rights, it is now obligatory to record, for example, information on pre-emption rights or prohibition of alienation or encumbrance. These rights only come into existence (and therefore have the intended effects) upon entry in the Commercial Register.
A similar innovation concerns the registration of information on restrictions on the transferability of registered shares. The amendment links the effectiveness of the restriction on transferability to the entry in the Commercial Register; this applies even if the restriction on transferability is included in the company's articles of association at its incorporation. The previous regulation did not imply such a requirement and the restriction on transferability contained in the articles of association at the company's incorporation was effective without the need to enter this fact in the Commercial Register.
The amendment also brought changes to the registration of a legal entity as a member of a body of another corporation. The legal entity must authorise a natural person to represent it in this body and a new obligation to register this natural person in the Commercial Register has been introduced. This means Commercial Courts will not register a legal entity as a member of a body unless the authorised natural person is also registered. If the natural person is not registered within three months of being elected to the legal entity, the performance of the function ceases by law. This obligation also applies to legal entities who became members of bodies before the amendment came into force and who were obliged to register a natural person by 1 April 2021.
Unless otherwise specified in a particular case, the company is obliged to ensure that the newly entered facts are entered in the Commercial Register no later than 1 July 2021. While we do not expect that the Commercial Courts will strictly apply sanctions, we recommend that everyone bring the entries into compliance with the law.
The amendment also significantly revised the rules for the distribution of a company's profits. Consistent with an earlier Supreme Court decision, it is now clear that profits may be distributed based on ordinary or extraordinary financial statements up to the end of the fiscal year following that for which the underlying financial statements were prepared. This is proving to be practical and provides greater flexibility for company owners, even when the latest financial statements are already relatively out of date. The amendment thus gives more weight to the so-called bankruptcy test. Although the general meeting may have decided on the distribution of profits in accordance with the law, it is the responsibility of the statutory body to assess, with due care, whether the distribution of free cash flow will not jeopardise the company's solvency.
The maximum amount of distributable profits and other equity is now set generally for all companies. Generally, the amount distributable in the company may not exceed the so-called residual profit, i.e. the sum of the profit of the last financial year, the profit of previous years and any other funds, less allocations to the reserve fund and other statutory or voluntary earmarked funds. The possibility of paying out retained earnings from previous years is therefore also explicitly envisaged, a conclusion that has been reached in practice before.
Changes have also been made to the treatment of advances on profit shares. The law now provides that the advance is to be returned within three months of the preparation of the financial statements, unless the profit to be paid out based on the financial statements is at least the sum of the advances paid out and the general meeting has decided to pay it out. In such a case, only the advances paid shall be accounted for. It is the statutory body that decides on the pay-out (albeit usually at the instigation of the shareholders) and therefore, here too, the members of the statutory body must assess the advance with due diligence in terms of liquidity and solvency.
Transfer or discontinuance of the plant or part of the assets
Among other things, the amendment to the Business Corporations Act also clarified the conditions under which the assets of a limited liability company or a significant part thereof may be disposed of. This commonly applies to holding or project companies owning a single asset (e.g. shares or stock in another company, real estate, receivables or intellectual property rights). The practical impact is most often seen in financing and securing loans.
According to the amendment, the competence of the general meeting includes the approval not only of the transfer or pledge of enterprise, but also of such part of the assets that would entail a material change in the company's actual line of business or activity. In the case of project companies, such a material change will certainly always be the case when disposing of their only significant asset. In the case of operating companies, the individual assessment may be more complex.
What is certain, however, is that in practice banks and other creditors require such approval as a precautionary measure in principle whenever the creation of a lien on the debtor's or pledgee's property is approved. The consequence of the absence of approval by the general meeting is the relative ineffectiveness of the legal transaction and the possibility for the shareholders to contest the validity of the security. In addition, in the case of a public limited company, the approval of the general meeting must take the form of a notarial deed, which in our opinion represents an unnecessary expense, especially in the case of single-member companies.
Although the amendment to the Business Corporations Act did not lead to major innovations for most businesses, the change in the legislation has had quite significant practical effects – in our opinion, mostly positive ones. At the same time, we recommend all those who have not yet done so to check their founding legal documents and the status of their registration in the Commercial Register, as the 1 July 2021 deadline for compliance with the amendment is fast approaching.
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