This article is a continuation of a series of contributions from our law firm dealing with the first extensive amendment to Act No. 90/2012 Coll., On Business Companies and Cooperatives (the Business Corporations Act), as amended (hereinafter the “Business Corporations Act”), most of which shall take effect as of 1 January 2021.
The current legal regulation regarding increase of the registered capital in joint-stock companies could be described as sometimes unclear and unsystematic. Over the years, the practice has revealed a number of problems to which the Business Corporations Act amendment materially responds, clarifies and introduces provisions that correspond to the existing legislation on this matter in companies other than joint-stock companies. In the following paragraphs, we would like to introduce, in our view, the most important changes that the Business Corporations Act amendment brings in the area of registered capital increase for joint-stock companies, especially concerning two selected ways, namely (i) registered capital increase by subscription of new shares and (ii) registered capital increase by decision of the Board of Directors or Administrative Board.
Increase of registered capital by subscription of new shares
Similarly to the current legislation, increase in the registered capital by subscription of new shares will be permissible only if the shareholders have fully repaid the issue price of previously subscribed shares, unless the unpaid part of the issue price is negligible due to the amount of registered capital and the General Meeting approves the registered capital increase.
This limitation does not apply if, while increasing the registered capital, only non-monetary contributions are made in the sense of Section 474(2) of the Business Corporations Act. In this context, the Business Corporations Act amendment introduces the obligation of the Board of Directors of a joint-stock company with a dualistic system or the Administrative Board of a joint-stock company with a monistic system to prepare and submit a written report to the company’s General Meeting, whereas the report must contain, inter alia, reasons for the increase of the registered capital by non-monetary contributions.
This obligation can be encountered, for example, in the current legislation on increasing the registered capital by non-monetary contributions in a limited liability company (see Section 219(2) of the Business Corporations Act). At the same time, it is a matter of reintroducing the described obligation, that was imposed on the Board of Directors of the joint-stock company by Act No. 513/1991 Coll., the Commercial Code (hereinafter the “Commercial Code”) and which was not inadvertently taken over by the Business Corporations Act.
The legislator attaches great importance to this change in the explanatory memorandum, stating that it is a simple and straightforward way to provide shareholders with essential information before holding General Meeting and deciding to increase share capital, such as why it is desirable to increase registered capital by non-monetary contributions, what are the contributions and what is their price. According to the explanatory memorandum, the main reason for reintroducing the above-mentioned obligation is the fact that this decision of the General Meeting excludes the right of pre-emptive subscription by eligible shareholders when increasing the registered capital by subscription of new shares.
The amendment to the Business Corporations Act will also bring fundamental changes in the area of legal regulation of the above-mentioned pre-emptive right of shareholders to subscribe for new shares, namely the following:
- Each shareholder has a pre-emptive right to subscribe for a part of the company’s new shares subscribed to increase the registered capital, newly in the ratio of the nominal value of its shares to the registered capital, if their issue price is to be repaid in cash.
- A joint-stock company that has issued several types of shares and increases the registered capital by subscribing shares of only one type will be entitled to determine in the articles of association or by the decision of the General Meeting to increase the registered capital that, in the first round, only those shareholders who own shares of this type have the pre-emptive right to subscribe the shares in accordance with Section 484(1) of the Business Corporations Act, whereas the pre-emptive right can be exercised within the ratio of the nominal value of the shareholder’s shares to the part of the share capital represented by the sum of the nominal values of shares of this type. Only in the second round will it be possible to exercise the pre-emptive right to unsubscribed shares by shareholders holding another type of shares in the ratio of the nominal value of shares to the part of the share capital that is not represented by shares of that type of shares. This change also follows the legislation at the level of the European Union, specifically Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 on certain aspects of company law.
- The decision to increase the registered capital (i.e. also to give priority to only shareholders of a certain type in the first round of subscription) will now require the consent of a two-thirds majority of present shareholders and two thirds of votes of present shareholders of each class of shares whose rights will be affected. Therefore, shareholders who do not have the pre-emptive right in the first round will also have to take part in the voting.
- If a shareholder wishes to waive his pre-emptive right, he must do so before deciding on the registered capital increase, in writing with an officially verified signature or his own statement at the General Meeting where the registered capital increase is decided upon. On the basis of the Business Corporations Act amendment, the hitherto controversial issue will certainly be cleared so that the waiver of the pre-emptive right has effects vis-à-vis any other acquirer of the shareholder’s shares in both cases referred to above.
Increase of the registered capital by a decision of the Board of Directors or the Administrative Board
The current legislation precludes the Board of Directors or the Administrative Board from deciding on an increase from non-distribution of profit in the event of an increase in registered capital from its own resources. This rule has been taken over entirely from the Commercial Code and its purpose is to maintain decisions on the use of profit in the exclusive competence of the General Meeting. However, with regard to the fact that the competence of the General Meeting also includes decisions on the distribution of other own resources, the legal regulation in this respect seemed considerably illogical, and therefore the restriction in question was abolished by the Business Corporations Act amendment. It will now be left to the Articles of Association and the mandate of the General Meeting of a company to determine the conditions under which the Board of Directors or the Administrative Board may decide to increase the registered capital also from non-distributed profits.
Conclusion
The Business Corporations Act amendment brings with it a number of very beneficial changes to the current legal regulation of registered capital increase of joint-stock companies, the aim of which is to eliminate inaccuracies, establish clearer and more concise rules for individual ways of registered capital increase, thereby unifying the legislation on registered capital increase with other than joint-stock companies and removes undesirable incompatibilities with the European law.
If you have any questions regarding the topic of this article or corporate law in general, we are at your disposal – do not hesitate to contact us.
Mgr. Martin Heinzel – attorney
Mgr. Tereza Dvořáková – junior lawyer
30. 11. 2020