On 1 January 2014, new rules on private law (adopted as part of the entire private law re codification process) came into effect in the Czech Republic. Based on new principles, these rules, which are common in continental Europe – such as rigorous enforcement of the principle of autonomy of contractual will and freedom – are also reflected in the new corporate-law legislation, and namely in two basic legal regulations: the new Civil Code (Act No. 89/2012 Coll.) governing, inter alia, the general rules for all legal entities and their corporate bodies, and the Act on Business Corporations (Act No. 90/2012 Coll.), containing the rules that regulate in more detail the operation of business corporations and cooperatives, including their organisational structure.

Liberalisation of corporate law

To make Czech corporate law more attractive and competitive, the lawmakers have significantly liberalised the rules for the operation of business corporations. Therefore, even in this otherwise legally stringent area of law, the new legislation has brought a higher degree of contractual freedom of shareholders, while ensuring adequate protection of third parties and minority shareholders. All these changes are carried out against a background of structural changes introduced by the Civil Code (e.g., a greater tendency for legal regulations to have a non-mandatory character, a weakening of the absolute invalidity of agreements, and an emphasis on the classical Roman-law principle of vigilantibus iura skripta sunt (laws are written for the vigilant)).

Under the new legislation, shareholders are given a broad possibility to regulate the rules for convening a general meeting or for the corporate governance of a company as such (the admission of a monistic governance system for joint-stock companies). Certain problematic provisions have been deleted or replaced (e.g., draconian measures to protect against conflict of interest, which essentially needlessly complicated and increased the costs of implementing even quite standard operations within company groups, or provisions prohibiting the representation of members of collective statutory bodies, etc.). A higher emphasis is put on corporate governance, which is a standard practice in Europe.

Liability rules specified

In addition, the rules for liability of members of statutory and other corporate bodies have been specified in more details. Whilst the concept of powers and liabilities of such members remains unchanged, the rules for their applications are being specified in greater detail and, hence, it should prevent any unexpected excesses on one hand, and any paralysed conduct of business corporations on the other hand. Primarily, the rules of corporate governance are formulated as motivation rules with ex ante effect. Furthermore, “business judgment” rules known from other legislations (UK) are now reflected in Czech corporate law and supplement the general rules governing the Duty of Care (in Czech: “Pé?e ?ádného hospodá?e”).

For the most frequent type of business corporation – limited liability company – attention should be drawn to the following major news: a corporation may create a different types of ownership interests (in Czech: “podíly”) to which different rights and obligations can be attached. The ownership interests can be replaced by securities in a form of ordinary share certificates (in Czech: “kmenové listy”). The minimum capital contribution may amount only to CZK 1 (one) provided that at least CZK 1 (one) is attributable to each share.

The ban on “chaining” and the statutory limitation of a maximum number of shareholders were cancelled.
Generally, the regulation of a limited liability company was emancipated from the law of joint-stock companies, which it was frequently subject to under the former legislation.

Management of joint-stock companies

Regarding the new regulation of joint-stock companies, the following news could be pointed out: introducing the option for companies to choose between a dualistic and a monistic corporate governance system. In a monistic system, a corporation is governed by the statutory director and the board of directors; in certain cases, one individual may act as director and simultaneously as a sole member of the board of directors and thus be responsible for the corporate governance of the entire joint-stock company. In addition, a corporation is allowed to issue, irrespective of the corporation's financial results, practically any type of shares/stock (in Czech: “akcie”) (according to the rights attached to them) except for interest-bearing shares. The entire legal regulation of joint-stock companies has been liberalised, albeit to a lesser degree when compared with other areas of law, also based on European law.

It should be further noticed that, even though this change does not relate to the re-codification of private law, as from 1 January 2014 the Czech joint-stock companies cannot issue certificated bearer shares (which are anonymous shares). As a result, from 1 January 2014 all certificated bearer shares have been transformed in to registered shares by operation of law (except for immobilised or book-entry shares) and the corporations that issued these certified bearer shares in the past should exchange them by 30 June 2014. The shareholders who will fail to respond to company's invitation for exchange of their certified bearer shares will not be entitled to exercise any rights attached to such shares until the replacement of such shares.

Compliance call

Business corporations are obliged to revise their corporate documents and bring them in compliance with the new mandatory provisions of laws by 1 June 2014. This statutory requirement should secure that the internal life of corporations will adapt to the new legislation, and thus removing the conflict between the actual status and the situation described in the statutes, etc.

Finally, all the existing Czech companies have the option to fully adhere to the new regulation set forth by the Act on Business Corporations, which is more than advisable. To do so, there is a two-year period for the general meeting of shareholders to adopt the relevant decision.

Trust funds

Along with greater freedom for business entities, the new Civil Code also introduced other changes influencing the business sphere. In particular, foundations or endowment trusts now have the possibility to conduct business, provided they use any profit for the main non-business purpose. As a result, these entities become a potential competition to corporations; the Czech Republic is following the same legislative route as Germany, Austria or the Switzerland.

A completely new instrument is an endowment fund (or trust fund; in Czech: “sv??enský fond”). The Czech law, inspired by Quebec legislation, permits establishing a property entity with no legal personality or owner. A trust fund can be a public service entity (beneficial to the public) or private entity that is managed by an administrator in the interests of a beneficiary.

This is a model markedly inspired by the common law legal system; nevertheless, at the same time it attempts to respond to Czech law. A trust fund can be established during a person’s life or based on a last will and testament; any property allocated to a trust fund is not in the possession of a beneficiary or establishing authority (founder). The trust administrator exercises property rights attached to a trust fund on the account of the fund; even though the administrator is not the owner. The new legislation also sets the rules for supervision of the trust fund administration, and a trust fund may not be established for any purpose that would be detrimental to creditors.

The new trust funds regulation introduces a variety of legal schemes which can be applied not only for business purposes; for instance, an affiliated fund of a foundation (in Czech: “p?idružený fond nadace”) - a form of a private foundation known in Austria - is also introduced by the new Czech private law regulation.

Roman Pecenka  is a partner at PRK Partners, Czech Republic. Bohuslav Havel, PhD is author of the new Act on Business Corporations and co-author of the new Civil Code as well as being Of counsel at PRK Partners.