Of interest.

Amendment to the transformations act

In line with the Government’s Legislative Work Plan for this year, the Ministry of Justice has submitted a draft amendment No. 1423/22 (the “Draft Amendment“) to amend Act No. 125/2008 Coll.,
on Transformations of Business Companies and Cooperatives, as amended
(the “Transformations Act“). The proposal is intended to simplify the process of national and cross-border transformations in general, but it also introduces major innovations, for example a new form of division by way of separation (in Czech: “vyčlenění”).

In particular, the Draft Amendment aims to implement Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 (the “Directive“) amending Directive (EU) 2017/1132, concerning cross-border transformations. The deadline for the implementation of the Directive into Czech law will expire as soon as on 31 January 2023.

Current status of the Draft Amendment

The Draft Amendment has already been subject to the governmental review procedure on 19 September 2022. After the comments from the relevant sources are processed the Draft Amendment will be submitted to the Legislative Council of the Government, which will provide its opinion typically within 60 days from the date on which it receives the material. Subsequently, the material will be approved by the Government (which is not bound by the opinion). If the Draft Amendment is approved, the material will be submitted to the Chamber of Deputies, thus starting the standard legislative process.

Because of the above, it can be assumed that the Draft Amendment may still be subject to amendments in its details. However, we assume that the main features of the Draft Amendment will remain unchanged. It is already clear, however, that the Draft Amendment will not be adopted in time prescribed by the Directive.

Harmonisation of cross-border transformations

In line with the Directive, the Draft Amendment aims to set a comparable standard for the legal treatment of cross-border transformations in each of the EU countries. So far only one form of transformation has been harmonised at the European level, namely cross-border mergers. Therefore, the legislation on other forms of cross-border mergers has been rather exceptional in the individual Member States. In particular,
the Directive is expected to facilitate the cross-border mobility of business corporations, thereby promoting business on the internal market of the European Union.

The Czech Transformations Act has long been an exception to the above rule – unlike most European jurisdictions, ours has regulated not only cross-border mergers but also cross-border divisions, cross-border transfers of the registered office and cross-border transfers of assets. This was done out of the Czech legislator’s initiative. The relatively comprehensive current Czech legislation on cross-border transformations can be therefore described as quite exceptional.

The Draft Amendment harmonises the Czech rules on cross-border transformations with the new European regulation. In addition to the novelties brought by the Directive the Draft Amendment also introduces a partial update of the already effective national legislation.

The purpose of the harmonisation is to remedy the absence and unify the European legal framework for cross-border transformations and to eliminate practical problems in their implementation, as it is essential for the implementation of a cross-border transformation that the laws of both/all Member States involved in the transformation allow such an operation.

The following are examples of what we consider to be significant changes that will be implemented in the Czech legal system if the proposed amendment is adopted, being directly derived from the text of the Directive:

(A)       A new form of division by way of separation

The Draft Amendment envisages (in the proposed wording of Section 243(1) (c) of the Transformations Act) the introduction of a new form of division by separation (in Czech: “vyčlenění”), as a result of which the company being divided will not cease to exist and the separated part of its assets will be transferred:

  • to one or more newly created companies;
  • to one or more existing companies; or
  • a combination of the above.

The fundamental difference between the division by split-off (in Czech: “odštěpení) and the division by separation is the fact that due to the division by separation the company being divided becomes the sole shareholder of a newly created successor company (separation with the creation of a new company) or acquires a share in an existing successor company (separation by merger). Thus, in contrast to a division by split-off, the share in the successor company is acquired by the divided company itself and not by its shareholders.

(B)       Certificate of cross-border transformation

Under the current provisions of Section 59x of the Transformations Act, the compliance with the statutory requirements by a Czech entity involved in a cross-border transformation is certified by a notary, who issues a cross-border transformation certificate (as a public deed). The documents to be submitted to the notary for this purpose are to be newly specified directly in the Transformations Act and not in the implementing legislation (decree).

Currently, the notary may refuse to issue a certificate for a cross-border transformation only if the Czech entity involved in the cross-border transformation does not submit the required documents. However, according to the Draft Amendment, the notary will also be able to refuse to issue the certificate if, after reviewing the documents in question, he finds that the purpose of the cross-border transformation is fraudulent, aimed at avoiding or circumventing national or EU legislation or at committing criminal activities. In case of any doubts, the notary will be able to contact the public authorities and request the necessary assistance to review the state of affairs and assess the legality of the cross-border transformation.

(C)       Change in the protection of creditors

The Draft Amendment also brings a change in the scope of protection of creditors of the parties involved in the transformation against the deterioration of the recoverability of their claims due to the transformation. First, the time within which such creditors may request the provision of additional security and the very definition of the claims in respect of which security may be sought by creditors of the parties to the transformation are changed.

According to the current provision of Section 36(c) of the Transformations Act, creditors whose claims arise after the registration of the transformation in the Commercial Register do not benefit from any protection. However, according to the legislator, this rule does not sufficiently protect creditors with claims based on long-term contractual relationships, such as leases, etc. Therefore it is proposed
to extend the scope of the protected claims also to future or contingent claims, provided that such claims are arising from obligations existing before the publication or disclosure of the transformation project. As regards the time limit for filing a motion for the provision of sufficient security, it must be filed within 3 months from the date of publication of the transformation project, after which the right expires. Sufficient security will be granted directly by a court decision.

(D)       Transformation project and the Commercial Bulletin

The provisions of Section 33 and Section 33a of the Transformations Act, which regulate in detail the information to be provided to parties that may be affected by the transformation, are also to be substantially amended. Until now it has been mandatory (as required by the Directive before its amendment) to publish a notice of the deposit of the transformation project in the commercial register and a notice to creditors of their rights in the manner provided for in the Transformations Act (i.e. by publication in the Commercial Bulletin), the current Directive regulates this obligation differently – it no longer requires the publication of the notice of the deposit of the transformation project in the Commercial Bulletin for a fee and thus allows Member States to abolish this obligation.

It should now be sufficient if the draft terms of transformation, together with the notice to creditors, employees, and shareholders, are filed with the competent registry court at least one month before
the date on which the transformation is to be approved.

In addition to the above-mentioned changes, the legislator proposes to implement in the Draft Amendment certain other partial changes beyond the requirements of the Directive, reflecting the needs of practice in connection with business corporation transformations. A selection of the proposed changes is provided below:

(E)       The appointment of an expert by the court not to be required

The legislator proposes, in the interest of consistency of the legal system and reduction of administrative burden (including reduction of the burden on the courts), to abandon the requirement for appointment of an expert by the court in relation to transformations and to replace it with the requirement to select an expert from a list of experts pursuant to relevant legal regulation. The expert should thus henceforth be selected directly by the party involved in the transformation.

(F)       Per rollam decision on transformation

It is proposed to amend the provisions of Section 19(1) of the Transformations Act, which in its current form implies that the decision on approval of the transformation can be adopted outside of the general meeting only in a limited liability company. For the avoidance of doubt, it is proposed to amend this provision to a more general wording so that it is made clear that the possibility to decide on the approval of the transformation outside of the general meeting applies to joint-stock companies as well.

(G)       Determination of the decisive date and concurrence of transformations with the same decisive date

According to the Draft Amendment, the earliest possibility for setting the decisive date will be based on the date of registration of the transformation in the Commercial Register, not on the date on which the application for registration of the transformation in the Commercial Register is filed. Along with this, it is proposed to implement the rule that the decisive date of the merger or division cannot be a day preceding the date of formation of a company or cooperative involved. According to the explanatory report, the above amendment is proposed because the parties involved in the transformation must fulfil various obligations as of the decisive date, which is not possible if they do not exist at that time.

Furthermore, it is proposed to add a new paragraph to Section 10 of the Transformations Act, according to which it is now made clear that a company or cooperative may participate in several transformations having the same decisive date. The accounting legislation is intended to determine which companies
and cooperatives will draw up the final accounts and opening balance sheet in such cases as well as the rules for the preparation thereof.

(H)       Relocation of the registered office to/from the EU or the EEC

Another proposed change is the modification of the provisions of Section 3(3)(d) of the Transformations Act, where under its current wording, cross-border relocation of the registered office is only allowed to
or from EU or EEC Member States. However, the Draft Amendment now introduces the possibility of relocation of the registered office to or from other countries to increase the flexibility of the business environment and expand the possibilities of business mobility.

Related procedural changes

Although the Draft Amendment adopts mostly the uniform European legal framework for cross-border transformations contained in the Directive, it also contains some additional innovations and changes related to the above, such as modifying the legal framework for national transformations so that they form a logical whole with the deviations for cross-border transformations.

As a result of the incorporation of the new EU rules, it will also be necessary to make certain partial amendments to Act No 304/2013 Coll., on Public Registers of Legal and Natural Persons,
and in connection with this, also to modify selected functions of the information system of public registers. According to the explanatory report to the Draft Amendment,
the new data to be entered when registering cross-border transformations (modification of forms) will be modified and information will be exchanged with other national registers via the BRIS system.

Conclusion

The professional community expects that the implementation of the Directive and thus the creation of
a legal framework for cross-border transformations will facilitate the European mobility of business corporations and thus promote business in the internal market of the European Union. It can also be assumed that costs and the administrative burden on the companies involved will be reduced. We consider the added value of the proposal to be the fact that the legislator has taken
the opportunity to introduce, in addition to the implementation of the Directive, several other related changes in the area of transformations responding to the needs of legal practice.

Should you have any questions on the topic of cross-border and/or national transformations, we are at your disposal.

 

Mgr. Tomáš Maux, Junior Lawyer – maux@plegal.cz

JUDr. Tadeáš Petr, Partner – petr@plegal.cz

 

www.peytonlegal.cz

 

12 December 2022

 

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