Significant legal changes for businesses: amendment to the Business Corporations Act

14 September 2020

Jiří Šmatlák, Partner, Head of Legal |

On 1 January 2021, the most extensive amendment to the Business Corporations Act will take effect. In this article, we provide an overview of selected changes that this amendment will bring.

Distribution of profit and other own resources

The amendment sets clearer rules for the distribution of profits and other own resources (equity) of companies.

First, the conditions for the distribution of profit and for the distribution of other own resources are being unified. Currently, the system of distribution of other own resources is simpler than the system of distribution of profit. Therefore, the conditions for the distribution of other own resources, such as shareholders' contributions outside the registered share capital, are being tightened.

It will be possible to adopt a new decision on the distribution of profit based on the financial statements until the end of the accounting period following the accounting period for which the financial statements were prepared. Case law has already reached this conclusion in the past and the amendment now enshrines it as a general rule.

An advance on profit sharing may only be paid based on interim financial statements. If it later proves that the amount of profit to be distributed resulting from the regular or extraordinary financial statements does not reach at least the sum of the advances paid per share in profit, it will be necessary for the shareholder to repay this advance. The refund period is three months from the date on which the financial statements concerned were approved or should have been approved.

The amendment also prohibits companies from providing services free of charge to a shareholder or a person close to them, even with the consent of the general meeting. The purpose of this rule is to prevent circumvention of the rules for the distribution of profits and other own resources.

Action for replenishment of liabilities

The amendment replaces the regulation of the liability of members of elected bodies in the event of insolvency by an institute called an action to replenish liabilities. The purpose of this new regulation is clearly to strengthen the possibilities for protecting the creditors of a failing business.

On the proposal of the insolvency administrator, the insolvency court may decide that a member of the elected body is obliged to provide financial performance up to the amount of the difference between the total debts and the value of the business's assets.

The precondition for this responsibility is that

  • a member of an elected body has violated their duty (due managerial care),
  • thereby contributing to the insufficient amount of assets, and
  • the failure of the business corporation is resolved in the form of bankruptcy.

The current wording of the law allows the court to decide that the members of the statutory body of a company in bankruptcy are liable for the fulfilment of its obligations, if they did not do everything reasonably necessary to avert bankruptcy contrary to duty of due managerial care. However, it is an individual liability against individual creditors who have had to pursue this claim in court, and the courts have tended to dismiss these claims out of caution. As the new funds will be provided directly to assets, the principle of relative satisfaction of creditors will not be violated.

We believe that the legislator's introduction of an action to supplement liabilities clearly gives priority to the protection of creditors and we expect that the number of cases in which the members of the statutory body will be found liable for causing the company's bankruptcy will increase. It will be interesting to see how businesses adapt, and we think that the demand for liability insurance will grow.

Stocks and shares: new possibilities

The amendment establishes that a share in a limited liability company may be accompanied by the right to appoint a member of an elected body (for example, an executive or a member of the supervisory board). Likewise, joint-stock companies will be able to issue shares in which this right will be confirmed.

At the same time, it will be possible to create a share in a limited liability company with which voting rights will not be associated. Similarly, a joint-stock company will be able to issue shares without voting rights (also other than preferred shares).

At present, various types or classes of shares are relatively common in the founding documents. However, the law does not regulate how far one can go, especially with regard to unequal regulation of rights. The legislator is now giving clearer guidance, which we welcome. To achieve the above, the regulation in shareholder agreements is also used, which, however, is binding only on the contracting parties. For many companies, the amendment will present an opportunity to consider transferring the rules agreed in the shareholder agreement to the founding documents so that they are effective for everyone.

Joint attendance at the general meeting

The amendment explicitly allows for the joint participation of a shareholder and a designated third party (for example, a lawyer or another adviser) in the general meeting. The current decision-making practice of the Supreme Court concluded otherwise, and the amendment deviates from the court's conclusion.

The provision in question is dispositive and can be modified or completely excluded from the articles of association. Therefore, we recommend considering whether to exclude this rule.

Supervisory board: election and removal of members by employees

According to the current legislation, a third of the supervisory board in joint-stock companies with more than 500 employees is elected by the employees. The amendment maintains this rule and sets out more detailed conditions for their election and recall.

The amendment foresees the release of the electoral law, in which the process of electing members of the supervisory board by employees will be regulated in detail. The election rules will be prepared and approved by the board of directors upon consultation with the trade union, if one operates in the company.

According to the amendment, only employees of the company (not, for example, employees who have retired) have an active and passive right to vote on the supervisory board. According to the amendment, a proposal for the election or recall of a member of the supervisory board may also be submitted by a trade union, an employee council or at least 10% of employees in an employment relationship with the company.