The Czech Supreme Court in its judgment file no. 27 Cdo 2645/2018 dated May 29, 2019 commented on the matter of transfer of a part of the business enterprise and the necessity of approval of the General Meeting pursuant to the Section 190 par. 2 letter i) of Czech Act No. 90/2012 Coll., on Commercial Companies and Cooperatives (Business Corporations Act), as amended (hereinafter referred to as the “Business Corporations Act”).
It is another breakthrough decision within which the Czech Supreme Court defines what is meant by the term “part of a business enterprise” used in the Section 190 par. 2 letter i) of the Business Corporations Act, which in practice, in so-called asset dealings[1], causes frequent uncertainties in particular in connection with the need to approve its transfer or pledge by the General Meeting of the company as stated in the aforementioned provision.
In connection with the transfer or pledge of a part of the business enterprise subject to the approval of the General Meeting, it is important to state that this applies only if the part of business enterprise the transfer or pledge of which would entail a substantial change in the existing structure of the business enterprise or a substantial change in the subject of business or business activity of the company.
The Supreme Court stated that the part of the business enterprise shall be a separate organizational unit (branch) of the business enterprise (and not any materially significant component of the business enterprise). In case of a transfer, only the transfer of such an organizational unit is subject to the approval of the General Meeting, provided that such transfer would entail a substantial change in the business enterprise’s existing structure or of the subject of the business or business activity of the company, whereas both assumptions must be met simultaneously. In this context, the Czech Supreme Court specifies that, for example, if one of several branches of a company operating in the same subject of business and has approximately the same turnover is transferred, the material condition will not be met in such a case and the General Meeting’s approval will not be necessary.
In its decision, the Czech Supreme Court also addressed the issue of avoiding the obligation to consent to a transfer by dividing the transfer of a substantial part of the business enterprise into several contracts. However, if such a transfer effectively constitutes the characteristics of a transfer of an organizational unit (substantial part of the business enterprise), it is also subject to the approval of the General Meeting, i.e. subject to the consent are therefore also transactions which in aggregate (in fact) to transferred of a separate organizational if the condition of significance of such a branch is met.
In this respect, the obligation to submit a transfer of business enterprise for approval to the General Meeting cannot be relieved. Otherwise, the parties to the transaction are exposing themselves to the risk of further negative consequences related to the denial of the true nature of the transfer (e.g. transfer of employer’s activity etc.).
Regarding the approval itself, it can be either unconditional or fixed to certain conditions under which the contract can be concluded. Such a transfer or pledge can then be executed by the statutory body of the seller only in the form in which it has been approved. In the event of the conclusion of a contract in violation of the stipulated terms and conditions under which the General Meeting has given its consent to the transfer or suspension, approval for such transfer shall not apply and the contract is relatively void pursuant to the Section 48 of the Business Corporations Act.
However, the above described does not exclude that the approval of the General Meeting may be granted additionally, i.e. later after the conclusion of the contract on the transfer or pledge of the business enterprise or its part. Such a (unapproved) contract is relatively void until the approval of the General Meeting is granted. If the approval of the General Meeting is subsequently granted, the reason for the relative invalidity is waived and the contract is validly concluded.
The decision of the Czech Supreme Court brought further clarification in the area of transfer and pledge of part of the business enterprise and how the term “part of the business enterprise” and the whole provision of the section 190 par. 2 letter i) of the Business Corporations Act shall be interpreted. It will always be necessary to properly assess and analyse the nature of the transferred assets for each individual transaction – meaning assets, in order to determine whether it is possible to carry out a transfer by form of separate transfer (purchase, cession or other) contracts or whether the transferred of the assets must be viewed as a transfer of a business enterprise. In the case of a transfer of the business enterprise, it will also be necessary to assess the nature of such business enterprise, resp. part of the business enterprise of the seller, to determine the need to approve the transfer by the General Meeting of the seller.
Should you have any questions regarding the transfer or pledge of the business enterprise in the light of the above-mentioned case law and current legislation, we are at your disposal. Please, do not hesitate to contact us.
Mgr. Bc. Štěpánka Vajdová, junior lawyer – vajdova@plegal.cz
Mgr. Jakub Málek, partner – malek@plegal.cz
25. 06. 2019
[1] Purchase of assets of the target company directly from this company, not acquisition of the whole company (so-called share deal).