We hereby bring you another article within our series, in which we gradually focus on the changes brought by the extensive amendment to the Act No. 90/2012 Coll., on Commercial Companies and Cooperatives, as amended (hereinafter the “Business Corporations Act”) , which takes effect on 1 January 2021.
The aim of this article is to present several selected innovations in the field of elected bodies of business corporations – specifically changes in the functioning of legal entities as members of elected bodies of business corporations and the newly established institute of so-called “posting right” within capital companies.
Legal entities in the role of members of elected bodies
According to the current general legislation contained in the provision of Section154 of the Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter the “Civil Code”), it is allowed that the function in control or statutory bodies of legal entities are performed by another legal entity. It may subsequently authorize another natural person to represent it within the exercise of its function or, failing that, the legal entity shall be represented by a member of its own statutory body. This concept is maintained for business corporations according to the current regulation contained in the Business Corporations Act.
However, this current regulation has been repeatedly a target for criticism. In that regard, it was particularly criticized for allowing the organizational structures of commercial corporations to become non-transparent. According to its critics, this regulation also does not sufficiently ensure that within a particular business corporation, the natural person who acts on its behalf, in fact manages it, and who can possibly be held liable for errors that occur can be unambiguously traceable. At the same time, it was also pointed out that the discussed regulation does not ultimately prevent the purposeful chaining of legal entities, typically as a statutory body of a business corporation, in order to make it practically impossible to identify a specific natural person, which represent the legal entity in a specific body.
In order to find a way to solve the described pitfalls, the current amendment to the Business Corporations Act decided to create a new special regulation, exclusively for capital companies, respectively for cooperatives (the specifics of partnerships will be mentioned below).
Therefore, Section 46 of the Business Corporations Act newly introduces, for cases where a member of an elected body of a capital company (or cooperative) is a legal entity, the obligation of such a legal entity to authorize without undue delay a single natural person who will represent it within the elected body. At the same time, this natural person must meet the same legal preconditions for the performance of the function as are imposed on the member of the elected body itself.
However, the amendment also brings some other mechanisms which aim to ensure that for each legal entity, as a member of an elected body of a capital company (or cooperative), a specific natural person will always be traceable.
A fundamental innovation in this regard is the obligation to register a legal entity, as a member of an elected body, in the Commercial Register together with its representative. In addition, if a legal entity does not appoint a representative within three months of the creation of its function, and if the representative is not registered in the Commercial Register within the same period, its function will automatically terminate by law.
It is appropriate to specify that, according to the transitional provisions of the amendment to the Business Corporations Act, the three-month period begins to run for the first time from the effective date of the Act, i.e. from 1 January 2021. In the event that a representative of a legal entity as a member of an elected body of a capital company or cooperative is not registered in the Commercial Register by 1 April 2021, or more representatives are registered by that date, the function of the legal entity in the elected body expires.
Finally, it should be mentioned that the above-mentioned new regulation only affects the elected bodies of capital companies and cooperatives. Its application to the highest bodies, i.e. the general meeting in case of a capital company, or members’ meeting within a cooperative, is excluded by the nature of the matter.
This new regulation can neither be applied to the statutory bodies of partnerships (i.e. unlimited partnerships and limited partnerships). In their case, membership in a statutory body (unless the articles of association provide otherwise) is linked to their participation in the corporation, i.e. to their share.
Posting right in a limited liability company
Another fundamental change that the mentioned amendment to the Business Corporations Act brings to the area of bodies of business corporations – here limited liability companies – is a new provision of Section 194a.
This provision allows the company to issue a special type of share, which is associated with the so-called posting right. The said posting right then consists in the possibility of appointing one or more company executives, or the possibility of dismissing such an appointed executive. A similar authorization can then be stipulated in relation to the appointment and dismissal of members of a supervisory board. However, it is always necessary to stipulate these rights in the articles of association and the consent of all shareholders is required for such a change. By its nature, it is a decision which interferes with the rights and obligations of all shareholders within the meaning of Section 171 (2) of the Business Corporations Act.
Due to the fact that this new right of the shareholder actually results in the delegation of part of the competences of the general meeting to the shareholder, the amendment also introduces specific limitations of the said right of the shareholder.
First of all, the number of executives appointed in the said way may not exceed the number of executives appointed by the general meeting. The aim is primarily to maintain the influence of other shareholders, respectively of the general meeting as the highest body on personal structure of the executives.
It is also worth mentioning that dismissal of such appointed executives by the general meeting is allowed only if the posting right expires or due to a serious reason resulting from the performance of the function of the appointed executive (especially if this person seriously or repeatedly violated his/her duties). Within the exercise of a posting right a written decision with an officially verified signature will be required for the appointment and dismissal of an executive; such an appointment and dismissal will become effective in relation to the company upon the delivery of the respective decision.
In connection with the above, an innovation is also the possibility of temporary co-optation of executives if that they form a collective body of the company. If a shareholder endowed with a posting right does not appoint an executive within one month from the date on which he could exercise this right, the other executives (whose number must not drop below half) may appoint a substitutive executive until a new executive is duly appointed by the shareholder.
Posting right in the joint-stock company
Similarly to what was mentioned above for issuing a share with a posting right in a limited liability company, the articles of association of a joint-stock company may explicitly stipulate the possibility of issuing shares with the right to appoint and dismiss one or more members of the board of directors (Section 438a), the supervisory board (Section 448b) or the administrative board (Section 458).
With regard to the nature and functioning of the posting right the same in principle therefore applies to the joint-stock company to what has been described above in relation to a limited liability company. Similarly, in case of a joint-stock company, there is a restriction according to which the number of members of the body appointed by the shareholder may not exceed the number of members of such a body appointed by the general meeting. Again, the purpose is to maintain the influence of other shareholders, respectively the general meeting as the highest body of the company. The same regulation shall then apply to the possibility of dismissing a member of the body by the general meeting or the possibility of co-opting individual members of the body.
However, some partial differences resulting from the differences between the two capital companies can be mentioned.
In the case of a joint-stock company, the consent of ¾ majority of all shareholders of each type of shares is required for the adoption of a decision amending the articles of association which provides for the possibility of issuing shares with a posting right. The posting right itself within a joint-stock company is then linked to the possession of a share, not to a certain amount of the share on voting rights.
At the same time, the articles of association of a joint-stock company may, among other things, stipulate that members of the board of directors shall be appointed and dismissed by the supervisory board, not the general meeting. In such a case, however, the rights that would otherwise belong to the general meeting in relation to the posting right now belong to the supervisory board.This rule typically applies to a situation where the posting right to appoint and dismiss a member or more members of the board of directors expires, or if there are serious reasons for his/their dismissal. In this case, the competent body to dismiss such a member of the board of directors shall be the supervisory board.
It can be briefly summarized that with the entry into force of the mentioned amendment to the Business Corporation Act, there will be partial, but still significant, changes in the area of functioning of elected bodies of capital companies in particular. Capital companies must therefore pay due attention to these changes and take appropriate measures if necessary. This applies in particular to the above-described obligation to register a specific natural person in a timely manner as a representative of a legal entity in the capacity of a member of the company’s body, respectively the cooperative’s body, to the Commercial Register.
As for the introduction of the institute of so-called posting right, we shall await with excitement, what practical consequences this innovation may bring. However, it is likely that it can bring new dynamism to the functioning of many capital companies.
In conclusion, we would like to remind that the above-mentioned amendment to the Business Corporation Act enters into force on 1 January 2021. We will keep you informed about further changes and innovations brought by this amendment.
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.
JUDr. Miloš Kulda, Ph.D., attorney – email@example.com
02. 11. 2020