The long-awaited amendment to the Act on Transformations of Commercial Companies and Cooperatives (hereinafter the “Transformations Act”) brings about significant changes to the legal regulation of transformations with effect from 19 July 2024. Although the amendment is primarily a reaction to an EU Directive[1], some of the changes brought by the amendment are the result of the Czech legislator’s or government’s initiative.
The changes relate in particular to:
i. cross-border transformations and certification of cross-border transformations,
ii. rules protecting the interests of third parties who may be adversely affected by cross-border transformations,
iii. the manner of publication of the terms of transformation, or
iv. the method of appointment of the expert and valuation of the assets.
The amendment also introduces a new form of transformation.
The aim of this article is to present some of the changes introduced by the amendment and to describe their practical implications.
Cross-border transformations
From a practical point of view, the extension of the scope of the Transformations Act is very welcome. By modifying the wording of Section 3(3)(d) of the Transformations Act, the scope of the Transformations Act is extended to cross-border relocation of the registered office from and to countries outside the EU and EEA. In practice, such transfers have so far been governed only by the Civil Code. This was an unsystematic procedure, whereby relocations within the EU or EEA had to comply with strict requirements, whereas relocations from or to third countries were spared these requirements.
The amendment further simplifies the processing of the cross-border transformation report. Under the current legislation, the cross-border transformation report must contain a section for shareholders or members and a section for employees. The possibility to draw up a separate report for shareholders or members and a separate report for employees is now introduced. In addition, the section for shareholders may be omitted where all the shareholders of the legal entity involved in the transformation have given their consent or where the company has a sole shareholder. The section for employees may be omitted if the Czech legal person or its subsidiary legal persons have no employees other than those who are also members of their statutory bodies. If the section for shareholders or members is waived and the section for employees is not required, the cross-border transformation report is not required.
The simplification also applies to the preparation of expert reports on cross-border mergers, cross-border divisions or cross-border relocations. The Transformations Act does not require the preparation of expert reports if all shareholders or members of the legal entities involved in the transformation agree, if the Czech legal entity involved in the transformation is a partnership or in the case of the cross-border division by separation.
The amended Section 211 of the Transformations Act contains a new regulation of simplified procedures in the case of certain forms of cross-border mergers, which is as follows:
- if one or more of the disappearing corporations merges with a successor corporation that owns all of the voting shares of the disappearing corporation; or
- if one or more of the merging joint stock companies or limited liability companies merges with the successor joint stock company or limited liability company and if all shares in all participating companies are owned directly or indirectly by a single person;
then it is not required to:
- include certain information in the terms of cross-border merger,
- prepare a report on cross-border merger by the disappearing participating corporation,
- prepare an expert report on the cross-border merger,
- approve the cross-border merger by the general meeting, shareholders or sole shareholder of the disappearing participating corporation.
Cross-border transformation certificate
The certificate of cross-border transformation shall be issued by a notary upon request in accordance with the procedure under Section 59x of the Transformations Act. This provision newly lists in paragraph 2 the documents based on which the notary examines the legality of the cross-border transformation. However, these are not all the documents required for the issuance of a cross-border transformation certificate, therefore this list is supplemented in Section 59x(3) of the Transformations Act by reference to Decree No. 416/2011 Coll. of the Ministry of Justice on the documents that a Czech person involved in a cross-border transformation is required to submit to the notary for the issuance of a cross-border transformation certificate.
If, after reviewing the documents pursuant to Section 59x(2) of the Transformations Act, the notary has a serious suspicion that the transformation has an abusive or fraudulent purpose, the notary is now able to apply to the public authority with jurisdiction in the area affected by the cross-border transformation for the necessary assistance pursuant to Section 59x(8) of the Transformations Act.
Section 59x(7) of the Transformations Act establishes the obligation of the notary to refuse to issue a certificate for a cross-border transformation if the person involved in the cross-border transformation does not submit the prescribed documents to the notary, i.e. pursuant to Section 59x(2) and (3) of the Transformations Act, or if the notary finds that the purpose of the cross-border transformation is abusive or fraudulent, aimed at avoiding or circumventing national or EU legislation, or at committing criminal activities.
The notary’s obligation to refuse to issue a certificate was weighed in the legislative process against the right to a fair trial under Article 36 of the Charter of Fundamental Rights and Freedoms. However, in this case, the notary cannot be regarded as an administrative authority or a court, and this procedure is therefore not covered by the Code of Civil Procedure or the Code of Administrative Procedure. Where the notary refuses to issue a certificate for a cross-border transformation, there is no right of appeal against that action and the refusal is merely noted in the file. However, a complaint may be lodged with the Chamber of Notaries against the refusal and any disputes arising from the relationship between the notary and the applicant for the cross-border transformation certificate are private law and will be settled in civil court proceedings.
Protection of creditors
The legal regulation concerning the protection of the rights of creditors of the parties involved in the transformation has also been amended. First of all, the time limit within which creditors may apply for the provision of sufficient security pursuant to Section 35 of the Transformations Act has been changed by reducing it from six months to three months. The right to sufficient security must therefore be lodged with the court within three months of the date of publication or disclosure of the terms of transformation pursuant to Section 33 or Section 33a of the Transformations Act, otherwise it will be extinguished.
The scope of claims that can be secured in this way has also changed. In addition to outstanding receivables, future or contingent receivables may now also be secured, provided that they are receivables arising from liabilities incurred before the publication or disclosure of the terms of transformation.
Furthermore, it is made clear that the sufficient security is established directly by the court’s decision, thus eliminating the interpretation that the court’s decision merely sets the parameters of the specific security. In this case, the creditor needs to certify facts which indicate that the transformation will impair the recoverability of his claim.
Publication of the terms of transformation and notice of their deposit
The Directive itself, which is transposed by the amendment, does not require the publication of a notice of the deposit of the terms of transformation in the Collection of documents of the Commercial Register. For this reason, the publication of the notice in the Business Bulletin is now omitted because of its time and cost, since it is in itself without any obvious impact on creditors’ rights.
Therefore, according to the new regulation, the person involved in the transformation, who is registered in the Commercial Register, shall deposit the terms of transformation and a notice to creditors, employee representatives, employees, if applicable, and shareholders or members of their rights under the Transformations Act in the Collection of documents of the Commercial Register at least one month before the date on which the transformation is to be approved.
The person involved in the transformation shall also publish a notice of the rights under the Transformations Act on its website one month before the date on which the transformation is to be approved.
Depositing of the terms of transformation in the Collection of documents of the Commercial Register is not required if the person involved in the transformation publishes the terms of transformation on its website together with a notice of the rights under the Transformations Act, deposits the notice in the Collection of documents and ensures the registration of the details of the transformation in accordance with the Public Registers Act.
Exception for valuation of assets by an expert’s report
The amended provision of Section 13b of the Transformations Act allows to replace the expert valuation of the assets by the procedure regulated in Section 468 et seq. of the Business Corporations Act in cases where it provides for exceptions from the obligation to value the non-cash contribution with an expert’s report when increasing the share capital.
The exceptions can be divided into two groups. The first group includes valuations of investment securities and money market instruments under the Capital Market Undertakings Act. In this case, a weighted average of the prices at which the security or instrument was traded on one or more European regulated markets in the 6 months prior to the registration of the transformation in the Commercial Register may be used to determine the price.
The second group consists of valuations of other assets. Here, the fair value determined by a generally recognised independent expert using generally recognised valuation standards and principles no more than 6 months before the registration of the transformation in the Commercial Register may be used. If the company accounts for such assets at fair value, the value recognised in the financial statements for the previous financial year may be used. All exceptions may be used only if the statutory body of the company being transformed so decides.
As regards the definition of a recognised expert, the explanatory memorandum of the amendment refers to the commentary to the Business Companies Act. According to the commentary literature, another expert within the meaning of Section 469(1) of the Business Corporations Act is primarily a person possessing the knowledge and skills necessary to determine the value of the assets to be contributed to the company, which is generally recognised, i.e respected in the relevant professional circles, and who is independent of the company (on the concept of ‘independence’, see for example Supreme Court of the Czech Republic decision No. 29 Cdo 1314/2000). This would be, for example, a reputable real estate agency with experience in the type of property to be contributed to the company or a leading academic in the field of valuation of the property in question.[2]
Designation of an expert
The Transformation Act in Title V no longer speaks of the appointment, remuneration and removal of an expert, but of the designation of an expert. This change in content is due to the fact that the Business Companies Act no longer requires a court-appointed appraisal of the subject of a non-cash contribution by a court-appointed expert, and the requirement for the appointment of a court-appointed expert does not arise from the Directive. The requirement for the appointment of a court-appointed expert is therefore replaced in Section 28 of the Transformations Act by a requirement to designate an expert from a list of experts under another legal regulation. In our view, the fact that the expert is still selected from the list of experts ensures that, even after the amendment to the Transformations Act, the valuation will be carried out by a sufficiently qualified person who is independent.
The expert will be now selected by the person involved in the transformation, if there is more than one such person, then by all of them. Related issues, in particular the amount of the expert’s fee, are now also left to the agreement of the involved party and the expert.
Separation
Finally, the amendment introduces a new form of transformation – a division by separation. As a result of a separation, the company being separated does not cease to exist and the separated part of its assets is transferred in exchange for a share or shares to one or more new companies (separation with the creation of a new company or companies), to one or more existing companies (separation by merger) or a combination of both, i.e. the separated part of the assets is transferred to both existing and newly established companies.
The Directive introduces division by separation as a form of cross-border division but does not exclude the introduction of separation by merger in national law. Therefore, the new regulation in Section 243(1)(c) of the Transformations Act provides for separation by merger, division by separation and a combination thereof in order to provide Czech entities in domestic transformations with a wider range of transformation forms and to reduce the complexity of the administrative processes related to the transformation. For this reason, separation, in which shares in newly established or existing companies are transferred to the company being divided, are not applicable to cooperatives and the new separation regime therefore only applies to companies.
Conclusion
The amendment to the Transformations Act is quite extensive and affects virtually all parts of the Act. From our point of view, the amendment is welcome, especially because it eliminates some of the shortcomings of the existing legislation (especially as regards the appointment of an expert).
In the case of already started or soon to be started transformations, it is necessary to deal with the transitional provisions of the amendment or to adapt the transformation process to the current legislation.
If you have any questions regarding transformations or corporate law in general, please do not hesitate to contact us.
[1] Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions.
[2] ŠUK, Petr. § 469 [Other property]. In: ŠTENGLOVÁ, Ivana, HAVEL, Bohumil, CILEČEK, Filip, KUHN, Petr, ŠUK, Petr. 3rd edition. Prague: C. H. Beck, 2020, p. 985, marg. no. 2.
Mgr. Nikola Tomíčková, Junior Lawyer – tomickova@plegal.cz
Mgr. Martin Heinzel, Senior Attorney – heinzel@plegal.cz
JUDr. Tadeáš Petr, Partner – petr@plegal.cz
18. 7. 2024