In the following article, the second one from the series in which our law firm focuses in more detail on the changes brought by the first extensive amendment to the Act No. 90/2012 Coll., on Commercial Companies and Cooperatives (Business Corporations Act), as amended (hereinafter referred to as the “BCA”), the majority of which will come into effect on 1 January 2021, we would like to bring you closer to another of the fundamental changes that the amendment will bring, namely changes in the concept of monistic system of internal structure in joint-stock company. This should, in contrast to the current legislation which faces numerous interpretative issues, reflect the form of monistic system of corporate governance known from the legal systems of other European countries.
According to the existing legislation when choosing the monistic structure of the internal organisation of joint-stock company pursuant to Section 396 (2) of the BCA, two bodies are obligatory, namely administrative board and statutory manager, which in fact does not differ much from the dualist system.
The key change introduced by the amendment to the BCA will be dissolution of the statutory director and the only statutory body of the joint-stock company with a monistic system of internal structure, as per the above-mentioned provision, will be the administrative board.
While the powers of the general meeting remain unaffected by the above-described amendment to the BCA, the position and powers of the statutory director will be transferred to the administrative board, which will become statutory body of the joint-stock company with management and control powers.
Management of the company’s business and competences
The amendment will also replace the current problematic provision of § 456 BCA which in practice brings unclear interpretative uncertainty regarding the position and competence of joint-stock company bodies with the monistic structure of internal organisation as it is not possible to clearly determine which statutory provisions within the dualistic system should be also applied within the monistic system and on what bodies. Instead, certain provision of the BCA will stipulate that the statutory body of the company is the administrative board which is responsible for the business management and supervision of the company’s activities.
The powers of the administrative board, which will be to determine the basic focus of business management and the basic focus of supervision of the company’s activities, cannot be delegated to persons other than members of the administrative board and this competence cannot be even divided among the members of the administrative board according to certain fields according to the Civil Code. The administrative board also ensures proper accounting, submits to the general meeting for approval the ordinary, extraordinary, consolidated or interim financial statements and, in accordance with the articles of association, a proposal for distribution of profit or other own resources. This and at the same time several other provisions of the BCA will explicitly determine the competences of the administrative board, which should in practice significantly contribute to strengthening legal certainty.
By changing the provisions of § 456 BCA, which currently provides in the second paragraph that: „Wherever the supervisory board is referred to in this Act, it shall mean the administrative board or the chairman of the administrative board and/or another body with a similar supervision authority, depending on the circumstances“, amongst other things, the questionable and frequently discussed question whether the provisions of § 448 et seq. BCA on the election of members of the supervisory board by the employees will also be applied to the administrative board of the joint-stock company with a monistic system of internal structure, since after the entry into force of the amendment to the BCA, there will be no room for these considerations in our opinion given that the provisions on codetermination do not apply to the joint-stock companies with a monistic system of internal structure.
The obligation of employee participation arises for joint-stock companies with dualistic arrangement directly from the law, i.e. from the provisions of § 448 and § 448a of the amendment to the BCA. However, the obligation of employee participation for the monistic system is not explicitly laid down in the amendment to the BCA for the administrative board. In this case, we believe that it is now practically certain that the rules on employee participation will not apply to the administrative board in a monistic system even with regard to its position as the company’s statutory body.
Function and staffing
The amendment to the BCA also abolishes the function of chairman of the administrative board, because according to the legislator the existing legislation, namely the provisions of Sections 461 and 462 of the BCA, creates a false impression that the chairman is another obligatory body, which is undesirable and distorting the concept of the monistic system of the joint-stock company.
The proposed amendment regarding the staffing of the administrative board has not been adopted, therefore it remains valid that the administrative board has three members unless otherwise stated in the articles of association. Newly, however, the term of office of the members of the administrative board will be modified and will be determined similarly to members of the board of directors in joint-stock company with the dualistic system of internal organisation, that is, if the articles of association or the agreement on the performance of office do not include the term of office, it will be three years.
In addition to the absolutely fundamental changes described above, the amendment to the BCA will also bring other adjustments that will reflect the changed concept of the monistic system of the joint-stock company. In this context, it may be point out, for example, changes to the rules governing the election of the members of the administrative board by the general meeting or changes to the procedure when adding members to the administrative board in the event that the function of one of them ceases to exist.
Newly, members of the administrative board are expressly elected and recalled by the general meeting, unless the articles of association stipulate that the right to appoint one or more members of the administrative board and to remove such member is attached to a share. The provisions governing the appointment and recall of a member of the administrative board appointed by the shareholder will then apply to such case.
In addition, a newly stipulated provision states that the articles of association may provide for the administrative board whose number of members has not fallen below half to appoint alternate members for the next general meeting. The term of office of the alternate member of the administrative board shall not be included in the term of office of the member of the administrative board, unless the articles of association provide otherwise. As mentioned above, a legal person may also be a member of the administrative board (including its legal successor).
Another change consists of introducing a ban on competition by members of the administrative board and a change in the method of its voting according to the provisions applicable to the board of directors of joint-stock company with dualistic system. In addition, the provisions on the conflict of interests of a member of the supervisory body shall apply to a member of the administrative board. In addition to these changes, the amendment obviously also derogates from provisions which are no longer compatible with the new concept of the monistic system.
Any changes to the concept of the monistic system of the internal structure of the joint-stock company described in this article shall apply from the effective date of the amendment, i.e. from 1 January 2021.
Based on the transitional provisions of the amendment, the provisions of the articles of association of the joint-stock companies which contradict the compulsory provisions of the amended version of the BCA, become obsolete on the effective date of the amendment and all of the joint-stock companies concerned are obliged to adapt their articles of association to the amended wording of the BCA and to submit the articles of association into the collection of deeds of the Commercial Register, no later than 1 year from the effective date of the amendment, i.e. by 1 January 2022.
As regards the newly-imposed ban on competition of the members of the administrative board, under the transitional provisions of the amendment to the BCA, members of the administrative board who are authorized to exercise the office and to whom the ban of competition applies, may continue with the office.
The transitional provisions of the amendment to the BCA also stipulate that any joint-stock company established before the effective date of the amendment shall bring its articles of association in line with the amended wording of Section 457 (1) of the BCA, at the latest on the day of the election of new members of the administrative board or the first change of the number of members of the administrative board in the articles of association. However, we consider this transitional provision to be completely devoid of purpose, since the current and amended wording of Section 457 (1) of the BCA are identical.
Recommendations for changes
Given the above-mentioned transitional provisions of the amendment to the BCA, any joint-stock companies with the monistic internal structure are advised to amend their articles of association without undue delay after the entry into force of the BCA so that their full wording corresponds to the amended concept of the monistic system of internal structure of joint-stock company, in particular to the extent stipulated by the mandatory provisions of the amended version of the BCA.
It is already advisable for the affected companies to gradually become familiar with the amended version of the BCA and thus prepare for the necessary changes to be made in this context or start planning in advance to see how these changes will be implemented as soon as the BCA amendment becomes effective.
In conclusion, the amendment to the BCA will bring fundamental changes to the concept of the monistic system of internal organization in joint-stock company, which will consist of only one obligatory body, thus fulfilling its conceptual designation and no longer being just a analogue of dualistic system. Following the example of European arrangements of the monistic structure of joint-stock company, all management and control powers will be entrusted to a single body, i.e. the administrative board.
In the overall context, this is a highly desirable change that will remove many uncertainties associated with the current legislation, particularly as regards the position and competences of the bodies within the framework of the monistic system of joint-stock company and will give businesses a choice between two completely different internal arrangements of joint-stock company and in practice will enhance their legal certainty in the operation of each system.
Mgr. Bc. Štěpánka Vajdová, junior lawyer – firstname.lastname@example.org
Mgr. Tereza Dvořáková, junior lawyer – email@example.com
Mgr. Jakub Málek, partner – firstname.lastname@example.org
22. 03. 2020