The Government approved an amendment to the Act on Transformations of Companies and Cooperatives

Relatively much has been written in the professional press about the forthcoming amendment to Act No. 125/2008 Coll., on Transformations of Companies and Cooperatives. However, the current wording of the draft amendment has undergone a number of technical changes compared to the original text and, in particular, it has been supplemented by a regulation of a demerger of a joint stock company with shares traded on the European regulated market with the termination of the participation of minority shareholders, which resonates strongly in the media and the professional public. What are the main changes introduced by the amendment? Does it eliminate the shortcomings that make it difficult in current practice? Is there a chance that the amendment passes the entire legislative process in this form? Below, we bring you an overview of the main changes.

The amendment has been submitted by the Ministry of Justice and aims to transpose into Czech law the new Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border transfer of the registered office, mergers and demergers.

Current status

The legal entry into force of the amendment was planned for 1 January 2023, but due to delays in the legislative process, this deadline was not met, and therefore the transposition deadline of 31 January 2023 was not met, either.

On 17 May 2023, however, the amendment was approved by a government resolution and headed to the Chamber of Deputies, where it was proposed for first reading at the 70th session of the Chamber of Deputies, scheduled for 27 June to 14 July 2023.

The most significant change

Demerger of a joint stock company with shares traded on a European regulated market (listed companies)

One of the last, but (in terms of media attention) most significant changes introduced by the amendment is the possibility of executing a demerger through spin-off of a listed company with an unequal share exchange ratio and a demerger through spin-off with the termination of minority shareholders’ participation with the consent of 75% of the votes of the shareholders present at the general meeting, under the following conditions:

  • a joint stock company whose shares are admitted to trading on a European regulated market (also a listed company);
  • a listed company has a majority shareholder within the meaning of the Business Corporations Act;
  • the majority shareholder makes a reasoned request for this type of demerger;
  • the shareholders holding shares with a nominal or book value exceeding two-thirds of the share capital are present at the general meeting approving the demerger and at least 75% of the votes of the shareholders present at the general meeting are in favour of the demerger; and
  • the shares of the successor company are also admitted to trading on a European regulated market.

To protect the minority shareholder, the amendment provides that if the fair value of the minority shareholder’s shares in the listed company being demerged is higher than in the successor company, the minority shareholder is entitled to a cash settlement in the amount of the difference in the value of the shares. In addition, if the minority shareholder did not vote in favour of the demerger, the demerging company is obliged to purchase those shares of the successor company that would have been exchanged for shares of the demerging company and the minority shareholder is also entitled to a cash settlement, as the case may be.

The proposed amendment simplifies the conditions for making this type of demerger for this specific listed (joint stock) company, provided that the above criteria are met. For other joint stock companies, the general (stricter) regulation requiring the participation of all shareholders at the general meeting and the approval of at least 90% of the votes for this type of demerger still applies.

Technical changes

Slightly paradoxically, however, the following (less interesting from the media perspective) new transformation options and other “technical“ changes will probably be of much greater importance for the Czech business environment, as they offer an interesting evolution in the whole area of corporate transformations.

  • Demerger through separation

The amendment introduces a new form of demerger, where the demerging company is not dissolved and the separated part of its assets is transferred to the successor company in exchange for share(s) either (i) in the newly established successor company, in which the demerging company becomes its sole shareholder, or (ii) in an already existing successor company (demerger through separation with absorption), where the demerging company acquires a share and becomes another shareholder.

Thus, unlike a normal demerger, the demerging company directly becomes a shareholder of the successor company (and not its shareholders), allowing the demerging company to establish a new subsidiary (in the case of a separation with the establishment of a new company). A demerger through separation can also be carried out by a combination of these procedures. However, only a demerger through separation with the establishment of a new company will be allowed for a cross-border demerger.

  • Cross-border transfer of the registered office to or from third countries

The amendment explicitly provides for the possibility of cross-border transfer of the registered office to or from other than a Member State of the EU or EEC, i.e., to or from a third country. This means that it will now be possible to relocate the registered office of a company or cooperative from the Czech Republic to, for example, Switzerland, Norway, or the USA without any further doubts. This change responds to the fact that such conversion of the registered office has already been successfully completed several times in practice, according to the general regulation contained in the Civil Code.

  • Other technical changes

Now, the effective date may not precede the date of entry in the Commercial Register by more than 12 months. Under the current regulation, the effective date may not precede the date of filing the application for registration in the Commercial Register by more than 12 months. Therefore, the date on which the limit for determining the effective date is calculated changes (the period between the effective date and the registration of the transformation in the Commercial Register may be shortened).

The amendment expressly provides that the effective date of the merger or demerger cannot be set on a date prior to the date of incorporation of the participating company or cooperative, and thereby removing the doubts that have prevailed so far.

The amendment also explicitly allows for combined transformations in which a company or cooperative participates in several transformations with the same effective date.

The obligation for the participating company or cooperative to have a court-appointed expert for the valuation of the assets or for the review of the transformation will be abolished, but the expert will now be selected by the participating company or cooperative from the list of experts.

The publication and information obligation of the participating company or cooperative is amended by introducing a combination of publication of the transformation plan and a notice to creditors, employee representatives and, where applicable, employees and members regarding their rights (“Notice“) in the Commercial Register and on the website, with a choice of two alternatives.

The existing obligation to publish the notice of the deposit of the transformation plan in the Collection of Deeds and the notice in the Commercial Journal is thus abolished.

The deadline for creditors to exercise their right to sufficient security before the court is shortened to 3 months from the date of publication of the transformation plan and the scope of claims is also clarified to claims arising from liabilities incurred before the publication of the transformation plan (in relation to future or contingent claims).

Finally, with regard to the changes proposed for cross-border transformations, a simplified cross-border merger will now no longer require a cross-border transformation report and in the context of the issuance of a cross-border transformation certificate by a notary, the notary will now be obliged to examine the purpose of the cross-border transformation, whether it is abusive or fraudulent, aimed at avoiding or circumventing national or EU law or at committing criminal activities. If the notary finds this, they will be entitled to refuse to issue a cross-border transformation certificate.

Along with the amendment to the Act on Transformations, related changes will be made to the Act on Business Corporations and the Act on Public Registers of Legal and Natural Persons and on the Register of Trusts.

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