The New Czech Private Law

By Hana Klossova. 21st March 2014

The new private law rules (adopted along with all private laws regarding the process of codification) were enacted in the Czech Republic on January 1, 2014. According to these newly established principles, the rules set forth here, including rigorous enforcement of principle autonomy of freedom and contractual will, are to be reflected in this newly devised corporate-law legislation.

This sort of regulation is common throughout continental Europe. Specifically, this refers to the two basic legal regulations: the new Civil Code (Act No. 89/2012 Coll). governs, inter alia, the overall rules for corporate structures and legal components, as well as the Act on Business Corps.(Act. # 90/2012 Coll.) governing, inter alia, the rules that govern all corporate entities and legal bodies, the Act on Business Corporations, which contains detailed rules that regulate the operation of cooperatives and business corporations. It also deals with its organizational structure.

In order for Czech corporate law to favor its corporations in the marketplace, these legislators have made the rules for running a business quite a bit more liberal. So even though the law is otherwise more legally strict, the new law offers shareholders more contractual freedom and at the same time ensures enough third party and minority shareholder protection. The entire body of these changes is carried out with reference to a background of structural changes that were introduced by the Civil Code. One example is a greater tendency for legal regulations to be non-mandatory. This quality weakens the absolute invalidity of agreements. Furthermore it emphasizes the classical Roman-law principle which states that laws are written for the vigilant (Vigilantibus iura scripta sunt).

Thanks to this new legislation, shareholders will have a broad possibility of regulating the rules for calling a general meeting and for corporate governance of a company. This may also be stated as the incurrence of a monistic governance system for joint-stock companies. There are specific problematic provisions that have been replaced or deleted. For example, some draconian measures aimed at protection against conflict of interest have been deleted because they are needlessly complicated. Furthermore, this provision increased the costs of implementing very simple and common operations within company groups. Other deleted or replace provisions include the prohibition of the representation of members of collective statutory bodies, and so forth. It puts more emphasis on corporate governance, a common European standard.

Specification of Liability Rules

Also, the liability rules for those who are members of statutory or other corporate entities have been detailed in the specifications. While the concept of liabilities and powers of members such as these remains unchanged, rules for their applications have become more specific and detailed. For this reason, unexpected excesses should be prevented on one hand, while paralyzed conduct of business corporations will be prevented on the other hand. It is truly key that corporate governing rules be formulated with an ex ante effect as motivation rules. In addition, corporate law in Czech reflects “business judgment” rules gleans from other legislations like the UK which add to the overall rules that govern Duty of Care.

For the limited liability company, which is the most common of corporations, the following news needs to be taken into account: these companies are entitled to develop various kinds of ownership interests and attach various rights and obligations to them. Securities can replace the interests of ownership by issuing nondescript share certificates. Providing that a minimum of CZK 1 (one) is attributed to each share, the minimum capital contribution can be only CZK 1 (one).

There was cancellation of the ban on “chaining,” as well as putting a limit on the maximum amount of shareholders allowed.

In general, a limited liability company is now no longer legally tied to the regulation of joint-stock companies as it often was previously.

Explanation of the management of joint-stock companies: In regards to the new regulation of joint-stock companies, here is some pertinent news. The introduction of the option for companies to be able to choose between a monistic and dualistic corporate governance system is of note. A monistic system lets a corporation be governed by its statutory director along with a board, and in some instances one person can be both the director and the single member of the board and so take responsibility for the whole joint-stock company. Also, the corporation can issue just about any kind of stock/share as per the rights attached therein with the exception of interest-bearing shares regardless of the corporation’s financial outcomes. The liberalization of all companies legal regulations, though it’s less when one compares this to other branches of the law, is also formulated upon European law.

Furthermore, although this change is not connected with the re-codification of private law, beginning 1 January 2014 the Czech joint-stock companies will not be able to issue certificated bearer shares (AKA: anonymous shares). That means from January 1, 2014 and into the foreseeable future, every certified bearer share is converted to registered shares by the law (with the exception of book entry or immobilized shares), and they need to be changed over by their corporations as of June 30, 2014 at the latest. Those shareholders who don’t answer the invitation of the company to the certified bearer shares exchange won’t have any rights that go with these shares until they are replaced.

Calling for compliances: By January 1, 2014 business corporations need to be revising their corporate docs so they are in compliance with the new mandatory parts of the laws. This is a statutory requirement, and it should ensure that a corporation’s internal life is adaptable to the new legislation. This will have the effect of removing the conflict between the situation described within the statutes and the actual status. This also applies to other similar situations.

Lastly, every Czech business that exists now can decide to completely follow the Act On Business Corporation’s new rules, which is the best course to follow. If one does this, there needs to be a period of two years for shareholders to have a general meeting and approve this particular decision.

Trust Funds

In addition to making business entities to be freer, this newly crafted Civil Code introduces additional changes that will influence the business world. This is particularly true now that endowment trusts and foundations can possibly do business transactions assuming the profits go to the primary non-business purpose. Therefore, as the Czech Republic is adopting the same laws found in Switzerland, Germany and Austria, these bodies become possibly competitive toward corporations.

A trust fund or an endowment is a really new tool to utilize. Quebec laws inspired the Czech legislation which allows one to establish a property entity without a legal owner or personality. A trust fund can benefit the public realm or a private entity and it is administrated by a third party in a beneficiary’s best interests.

This model derives its inspiration from common law, but it still tries to respect Czech law. An individual can set up a trust fund in their lifetime or as part of a will; whatever property that’s in it isn’t held by a beneficiary or founder (who is the establishing person). The property rights that accompany a trust fund are administered by a trust fund administer on the fund’s behalf even though the admin doesn’t own this. In addition, these new laws set rules for supervising how the trust fund will be administered and say that it can’t be set up for any purpose adversely affecting creditors.

In this new trust fund legislation, various legal scenarios are introduced and can be applied to many different circumstances; for example, a foundation in Austria, that is an affiliated one, is addressed by the regulations in this new Czech law.