Czech Republic enacts significant changes to corporate law

Czech Republic

On 1 January 2021, the Czech Republic's first major amendment to the Act on Business Corporations (Amendment) will come into force, bringing significant changes to both the constitution and operation of companies. The Amendment will simplify certain processes, remove unnecessary regulation, and introduce new corporate structures to streamline company operations.

The Amendment will impact directors’ liability and rules on conflict of interest, remuneration payments to company body members, profit distributions and advances and other financial resources, circular (i.e. per-rollam) voting, disposal of enterprises, pledges and the liquidation of shell companies.

The main provisions of the Amendment to the Czech Republic's Act on Business Corporations, which comes into force on 1 January 2021, include the following:

Agreement on the performance of office

The rules relating to remuneration for performance of office by a member of a corporate body and detailed in performance agreements concluded between a company and such member will change significantly.

Performance agreements will need to be approved by a general meeting (GM) following the conclusion of the agreements without undue delay. Once approved at the GM, the performance agreement will become effective from either the signing date of the agreement or its effective date (as applicable), rather than the date of the GM’s approval.

Currently, a performance agreement that has not been approved by the GM is deemed to be invalid, although such invalidity must be actively invoked. Under the new law, a performance agreement that has not been approved by the GM will not come into effect and a free-of-charge performance of office will be presumed. In this event, however, ad hoc payments can be made to the corporate body member if approved by the GM.

This principle is subject to certain exceptions which the Amendment modifies and extends. If the GM does not validate or approve the performance agreement (or the respective provision on remuneration) for reasons not attributable to the corporate body member (including vis maior), the company will be obliged to pay the corporate body member the usual remuneration for the performance of his/her office.

One-tier structure of joint stock companies

Currently, operating a company with a 'monistic structure' comprised of two bodies – a statutory director and an administrative committee with no clear distinction between their powers – can in practice result in various undesirable effects. To rectify this, from 1 January 2021, companies with a monistic structure will only have one corporate body: an administrative committee which will have both executive and supervisory powers. At the same time, the position of the statutory director will cease to exist by law.

The administrative committee must have a minimum of three members unless otherwise stated in the company’s articles of association.

Companies with a one-tier structure are required to update their articles of association by 1 January 2022 and submit the updated articles to the Collection of Deeds.

These changes have no impact on the well-established dualistic structure, i.e. joint stock companies with a board of directors as the executive body and a supervisory board.

Legal entity as an appointed director

The current law which allows a legal entity to be a member of the statutory body of another legal entity is quite broad. This can cause practical difficulties, such as making it difficult to track a person who is entitled to act for a legal entity where such legal entity has a chain of other legal entities in its elected bodies. However, once the Amendment comes into effect, any legal entity appointed as a director of another legal entity will be obliged to explicitly authorise a single individual (i.e. a person) to represent the director-legal entity.

Companies are required to register individuals entitled to act on behalf of such a legal entity in the Czech commercial register by 1 April 2021. Otherwise, the position of the director-legal entity will expire by operation of law.

For more information on the Amendment to the Act on Business Corporations and its impact on Czech companies, contact your regular CMS advisor or local CMS experts.