New rules on limited liability companies
The new Civil Code and the Companies Act will bring changes affecting the operation of limited liability companies. How to best adapt to these changes? Early in 2012, new key regulations came into force: the Companies Act and the new Civil Code. Unless there is any change, these regulations will take effect from 1 January 2014. Since the new Civil Code contains general provisions governing legal entities, companies will be required to comply with both of these acts upon incorporation, operation and dissolution. The legal rules governing limited liabilities that are contained in the Companies Act are to simplify the existing regulations. The main objective is to promote greater understanding among the general public and to increase the attractiveness of Czech legal entities for foreign investors. The changes will apply mainly to the creation and required amount of registered capital, the rules governing general meetings, service agreements for members of executive and other corporate bodies, and the relationships between companies and members of their bodies. The most significant change relating to limited liability companies is the decrease in the minimum registered capital. The new statutory level will be CZK 1. In respect of shareholdings, the Companies Act will introduce the possibility of holding several shareholdings. In addition, a shareholding in a company may take the form of a security (equity certificate). However, the security may not be book-entered or tradable on regulated markets. For in-kind contributions, no expert appointment by the court will be required. The company will be allowed to select the expert from a list of authorised experts. This will also lead to cost savings. Another change relates to the administrator of contributions. So far, only one of the founders or the bank may be the administrator. Under the new legislation, a third person may also become an administrator. The amendments also apply to non-competition covenants. The new rules will allow an executive director to be appointed as executive director of several companies with a similar scope of business by the shareholders, releasing the executive director from the non-competition covenants. The general meeting will still be the supreme corporate body of a company. Under the new rules, the general meeting may give instructions to the executive director regarding business management, but only provided that such instruction is requested by the executive director. In practice, there may be situations where the executive director is faced with some difficult decisions and will want to know the opinion of the shareholders. The new Civil Code will regulate in detail the concept of due and professional care. Members of a company’s elected bodies are required to act with loyalty, with essential knowledge and thoroughness, and with due managerial care. Whether or not a member of the executive body is able to fulfil this obligation should be carefully considered. A more significant change will affect the company’s conduct towards third parties. In cases where the company has more executive directors acting jointly on the company’s behalf under the memorandum of association, only one executive director may be authorised for a specific task. The Companies Act expressly stipulates that arrangements contained in the memorandum of association in contravention of the provisions where no deviations are allowed will be abrogated on 1 January 2014. Afterwards, companies will have half a year to amend their memorandum of association so that it complies with the new regulations. If they fail to do so, the companies face the risk of dissolution by the court of last resort. However, the Companies Act also permits companies to stipulate in their memorandum of association within two years of the Companies Act’s effective date that they will continue to be governed by the Companies Act only. This fact must be entered in the Commercial Register. Therefore, we strongly recommend that the companies be prepared for these changes so that they could avoid any difficulties that may arise in this respect.