Corporate Law in Czech Republic

These are the highlights if you want to know more about the essential Corporate Law in Czech Republic. This entry was drafted by BÁNYAIOVÁ VOŽEHOVÁ to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case ÁNYAIOVÁ VOŽEHOVÁ is an excellent option in Czech Republic.

As of 1 January 2014, the Czech Republic has enacted new legal regulation including the rules regarding the corporate law. The main regulation of the corporate law is contained in Act No. 90/2012 Coll., on Business Companies and Cooperatives (Act on Business Corporations), as amended, and in Act. No 89/2012 Coll., the Civil Code, as amended.

Types of Companies and Liability of Shareholders

Under Czech law, general partnership, limited partnership, limited liability company, joint-stock company, European Company and European Economic Interest Grouping are considered commercial companies or corporations. Besides these, the Czech law knows also cooperatives as additional legal form.

All companies and cooperatives are registered in the Commercial Register held by regional courts. Individual entrepreneurs may also be registered in the Commercial Register, otherwise if they hold a trade license, they are registered in the Trade Register.

JOINT-STOCK COMPANY (in Czech: akciová společnost): The joint-stock company is a separate legal entity the share capital of which is apportioned to certain number of shares. Shareholders are not liable for liabilities of the company (except for one extraordinary case). It is established by executing the Articles of Association before a Czech notary. The Articles of Association need to include the essentials set out in the applicable regulations. The joint stock company is established by registration into the Commercial Register, where the Articles of Association become part of the Collection of Deeds which is publicly accessible, mostly even online. The statutory minimum share capital is CZK 2,000,000, resp. EUR 80,000. At least 30% of the share capital must be paid in by the date of application for registration of the company in the Commercial Register. Joint-stock company is the corporate form adopted by larger companies with the major advantage that its shares can be transferred rather easily and, theoretically, be listed on a stock exchange, making it relatively easy to raise capital from the public.

LIMITED LIABILITY COMPANY (in Czech: společnost s ručením omezeným): The second form of corporations under Czech law is the limited liability company, which is the corporate entity most commonly used for enterprises in the Czech Republic. The minimum share capital of a limited liability company is lowered to CZK 1.00, i.e. less than EUR 1, as of 2014. The liability of shareholders for liabilities of the company is limited to the amount of the aggregate of their unpaid contributions according to the state of registration of contributions payment in the Commercial Register at the moment they have been invited by the creditor to pay it (except for one extraordinary case). It is easier to establish and administer than the joint-stock company.

Local and foreign corporations and partnerships as well as individuals may become shareholders of a limited liability company. It is established by executing a Memorandum of Association or a Foundation Deed (in case of one shareholder) before a Czech notary. Again, the Memorandum of Association needs to include the essentials set out in the applicable regulations. The limited liability company is established by registration into the Commercial Register, where the memorandum of association becomes part of the Collection of Deeds.

GENERAL PARTNERSHIP (in Czech: veřejná obchodní společnost): General partnership is a company of at least two persons who participate in its business and administration of its assets and are liable jointly and severally for its liabilities.

LIMITED PARTNERSHIP (in Czech: komanditní společnost): Limited partnership is a company in which at least one partner is fully liable for all debts and at least one partner whose liability is limited to the amount of its unpaid contribution.

COOPERATIVE (in Czech: družstvo): A cooperative is an association of unlimited number of persons established to provide mutual support for its members or third parties or for business purposes. The cooperative shall have at least three members. Cooperatives are not so often used for business purposes and if they are, it is in traditional sectors such as agriculture. Only the members of the cooperative can be elected to the functions of the members of the bodies of the cooperative.

A special type of cooperative is a housing cooperative established to provide for housing needs of its members and social cooperative established to carry out activities for public benefit, aimed at supporting social cohesion in order to ensure labor and social integration of disadvantaged groups into the society, preferably by meeting the needs and using the resources local to the registered office and sphere of activities of the social cooperative, particularly in the areas of job creation, social services and health care, education, housing and sustainable development.

BRANCHES: A foreign company not interested in doing business through a separate Czech legal entity may establish a branch. The branch has to be registered in the Commercial Register. Although contracts may be signed in its name, a branch is not a separate legal entity. For its registration, the court will request evidence of the existence of the foreign company.

Business may be also conducted through a silent partnership or a civil-law association which, however, are not considered separate legal entities.

The Czech legal system also knows other types of the legal entities, however these are not established for business purposes (e.g. Foundations, etc.).

Share Capital

As mentioned above, the statutory minimum share capital is EUR 0.04 (CZK 1) for the limited liability company and EUR 80,000 for the joint-stock company. It has to be subscribed in full. Contributions can be made in cash or in kind. The share capital of a limited liability company is divided into ownership interests which are not issued in the form of certificates. Each shareholder holds an ownership interest corresponding to the amount of the original contribution, if not agreed otherwise. The Memorandum of Association may allow for different types of ownership interests to be formed. Each type shall be comprised of ownership interest associated with the same rights and duties. If provided by the Memorandum of Association, the shareholders can own more than one ownership interest in the company.

An ownership interests in a limited liability company may be transferred by assignment or inheritance. The contractual transfer can be made conditional upon the consent of the General Meeting of the company.

If provided by the Memorandum of Association, the ownership interests of the company may be represented by a common certificate. A common certificate can only be issued for the ownership interests that are not subject to any restrictions or conditions regarding its transferability. The common certificate is a security which can be transferred to other person in the same way as in case of joint-stock company shares, however it may not be subject to public offering or admitted for trading on a European regulated market or other public market and it cannot be issued as a book-entry security.

The share capital of a joint-stock company is divided into shares issued in the form of certificates. They may be issued as registered shares which contains the name of its owner and also the name of the owner is registered in the company’s share register and may be issues either as certificates or as book-entry shares. Bearer shares can be only issued as book-entry securities. It means that there is not possibility to issue “anonymous” shares. Additionally, shares can be issued as ordinary shares or preferred shares. Bearer shares enjoy free transferability. The corporation is not allowed to restrict in any way their transfer, whereas a transfer of registered shares might subject to conditions (such as a consent of the General Meeting of the company or another corporate body) stipulated by the Articles of Association.

In relation to the new Act No. 134/2016 Coll., on Public Procurement, effective as of 1 October 2016, the joint-stock companies shall book-entry their shares in case they wish to participate in public tenders. In case the shares of the company are not book-entry securities, the contracting authority can exclude such company from the tender

Corporate Governance

Shareholders decisions are made through shareholder resolutions passed in General Meetings in case of joint-stock companies and limited liability companies and partners meetings in case of partnerships.

JOINT STOCK COMPANY: The formal bodies of a joint-stock company are the General Meeting, the Board of Directors and the Supervisory Board. An individual cannot simultaneously be a member of both the Board of Directors and the Supervisory Board. The General Meeting is the supreme body of a joint-stock company. It must be held at least annually no later than 6 months from the end of the company’s financial year. In case of a sole-shareholder, it fully acts in the capacity of the General Meeting and can decide on all matters that belong to the competences of the General Meeting according to legal regulation or Articles of Association of the company (e.g. approval of the Financial Statements, recall and election of the members of the bodies of the company, changing the Articles of Association, dissolution of the company, etc.).

Generally, the General Meeting constitutes a quorum if the present shareholders hold shares with the nominal value that exceeds 30 % of the registered capital of the company unless provided otherwise in the Articles of Association. A simple majority of votes is sufficient for most decisions, e.g. when electing and reappointing members of the Board of Directors and the Supervisory Board, as well as approving Financial Statements and profit allocations, unless mandatory law or the Articles of Association require a greater majority as may be the case for amendments to the Articles of Association or increases or decreases in capital, or change of the corporate form.

The statutory body of a joint-stock company is the Board of Directors. Members of the Board of Directors are elected by the General Meeting, unless the company’s Articles of Association entrust this power to the Supervisory Board. The Board of Directors oversees the day-to-day operations of the company and it is responsible for maintaining proper accounting and reporting procedures. The members of the Board of Directors act and sign on behalf of the company in the manner stated in the Articles of Association. The Board of Directors is a collective body and its members have to decide on any matter by their majority, unless any specific area is delegated to the powers of any of the members of the Board of Directors. However, it is necessary to differentiate between deciding on the matters of the company and acting on behalf of the company.

A joint-stock company must have a Supervisory Board elected by the General Meeting. The Supervisory Board monitores the activities of the Board of Directors and the performance of the company, as well as reviews the Financial Statements and the proposed allocation of profits or compensation for losses. In case the company has more than 500 employees, the number of members of the Supervisory Board shall be divisible by three and at least one third of the members of the Supervisory Board shall be elected by the employees of the company.

The system of Board of Directors and Supervisory Board is designated as the dualistic system and it was the only possible system until the end of 2013. As of 1 January 2014, the Act on Business Corporation introduced also the monistic structure with the Managing Director as the statutory body and the Management Board as the supervisory body which, however, determines the basic goals of business management. It is also possible to concentrate the powers of the two bodies into one person. The dualistic system of organization of the company still prevails.

LIMITED LIABILITY COMPANY: The General Meeting is also the supreme statutory body of a limited liability company and possesses rights similar to those of the General Meeting of a joint-stock company. The General Meeting must be held at least annually no later than 6 months from the end of the company’s financial year. Again, in cases of a sole-shareholder, it fully acts in the capacity of the General Meeting. The General Meeting constitutes a quorum if the shareholders holding at least one half of the votes in the company are present at the General Meeting of the company, unless the Memorandum of Association of the company stipulates otherwise. One vote pertains to each CZK 1 (approx. EUR 0.04) of the contribution to the registered capital of the company and the majority of votes of the present shareholders is required for the adoption of the decisions, unless the Memorandum of Association set otherwise. For some types of decisions, a higher number of votes is required (e.g. change of the Memorandum of Association).

The General Meeting elects one or more Executive Directors. No Board of Directors is required. The Executive Director is the statutory body of the limited liability company and oversees the day-to-day operations of the company, it is responsible for maintaining proper accounting and reporting procedures and acts on behalf of the company by the manner stated in the Memorandum of Association. The Executive Directors are individual bodies and for the decision on the matters of the company, the consent of the majority of the Executive Directors is required unless the Memorandum of Association stipulates otherwise. The Memorandum of Association may also set that the Executive Directors form a collective body and in such case, the same rules for the decision making as in case of the joint stock company apply. A Supervisory Board may be established for a limited liability company, but it is not mandatory. An individual cannot simultaneously be the Executive Director and a member of the Supervisory Board. Also, any other person authorized to act on behalf of the company and registered in the Commercial Register cannot be a member of the Supervisory Board of the limited liability company.

RELATIONSHIP BETWEEN COMPANY AND MEMBER OF A CORPORATE BODY. The relationships between the members of the bodies of the company and the company (their rights and obligations) are usually regulated by the agreement on performance of function. The agreement on performance of function has to be concluded in writing and the agreement and its changes have to be approved by the General Meeting of the company. The agreement on performance of function has to contain all remunerations (monetary and also non-monetary) that will be provided by the company to such member. In case the agreement on performance of function does not contain any remuneration, it shall be presumed that the performance of function is free of charge. Any other remuneration in favour of the person who is a member of a body of a business corporation other than those, to which the person is entitled to under legal regulations, the agreement on performance of function approved by the General Meeting or an internal document approved by the General Meeting, can only be granted with the consent of the General Meeting and subject to the opinion of the Supervisory Body, if established.

Commercial Register

Under the Czech law, third parties rely on the information provided by the Commercial Register for any given company, in particular in determining which person can act on behalf of the company to bind the company. Furthermore, any change affecting the information registered in the Commercial Register shall be notified to the Court without any undue delay so that the Court can register such change in the Commercial Register.

Besides the obligation to register all changes in the Commercial Register, the companies shall file some of their corporate documents to be publicly available in the Collection of Deeds of the Commercial Register, e.g. whole wording of the Articles of Association/Memorandum of Association/Foundation Deed and its changes, decision on recall and election of the members of the corporate bodies, Annual Financial Statements, decision of the General Meeting on the economic result of the company, Report on Relationships, etc.

Register of Ultimate Beneficial Owners

As of 1 January 2018, new Register of Ultimate Beneficial Owners (“UBO Register”) was established in the Czech Republic. All legal entities registered in the Commercial Register shall register their ultimate beneficial owners (¨UBO”) to the UBO Register till 1 January 2019 and legal entities registered in other Public Registers till 1 January 2021.

The UBO means a natural person who is in fact or legally able to exercise, directly or indirectly, a decisive influence in a legal entity, trust fund or other legal arrangement without legal personality. The indicators of the position of UBO in business corporation are that such person:

• has more than 25% of the voting rights of that business corporation or has a share in the registered capital of more than 25%
• alone or together with persons acting in concert, controls the person referred to in previous point above, or
• should be the beneficiary of at least 25% of the profits of this business corporation.

The identity of UBO and his/her position of UBO shall be proved during the registration of UBO to UBO Register.

The UBO Register is not publicly available, however the Ministry of Justice could enable the access to the information in UBO Register to the persons listed in Act 304/2013 Coll., on public registers of legal and natural persons and register of trust funds (e.g. Court, Police, Financial Authority, Czech National Bank, etc.).