Content of the Memorandum of Association after Re-Codification

The re-codification has imposed a duty on business corporations to adapt their memorandum of association to the new legal regulation, a requirement many still have not complied with – even if the sanction for such non-compliance might be the court’s decision on dissolution of the company via liquidation.

The re-codification has introduced considerable changes regarding limited liability companies in order to make them more attractive for foreign investors. Companies may make use of some of the advantages implemented by the new legal regulation only if the respective regulation is expressly reflected in the memorandum of association. Therefore, shareholders of a Czech limited liability company should pay attention to the contents of its memorandum of association.

Minimum content of the memorandum of association required by law

Pursuant to the new legal regulation, the memorandum of association must contain the following information:

1. seat of the company (the indication of the municipality is sufficient; the exact address need not be stipulated in the memorandum of association);
2. business name of the company;
3. scope of business;
4. specification of the shareholders;
5. determination of the types of shareholding interests and rights and obligations relating to such interests (under the former legal regulation, only one type of shareholding interest in a limited liability company with the same rights and obligations was permissible);
6. amount of the contributions of the shareholders relating to their shareholding interest;
7. amount of the registered capital; and
8. number of the executive directors and a stipulation of how they represent the company.

If the memorandum of association does not contain information pursuant to points (ii), (iii), (vi) and (vii) above, the business corporation may be deemed invalid, and the court may dissolve the company via liquidation.

Pursuant to the Czech Business Corporations Act, the following additional information must be contained in the memorandum of association adopted when establishing the company:

1. contribution obligation of the establishers, including the term of its fulfilment;
2. the name of the executive director(s) appointed by the establishers;
3. determination of the contribution administrator; and
4. determination of the non-monetary contribution, its evaluation and the determination of the expert who will evaluate the non-monetary contribution.

Recommended content of the memorandum of association

It is recommended that the memorandum of association contain, besides the minimum content required by law, further information in accordance with the preferences of the shareholders.

The memorandum of association may set forth that the shareholding interest will be certified by a share (kmenový list), which was not permissible under former legal regulation. The memorandum of association may stipulate that a shareholder may be a holder of more shareholding interests, and that they may be of different types.

The memorandum of association may also extend the statutory competences of the general meeting by, for example, entrusting to the general meeting the decision-making on dissolving the company via liquidation and amendments of the memorandum of association (otherwise, the conclusion of an agreement on such amendment by all shareholders is required), or entitlement to grant instructions to the executive directors of the company.

Furthermore, the possibility of payment of the shares in profit by non-monetary means may be excluded in the memorandum of association; otherwise, the general meeting may distribute the profit via non-monetary means. If persons other than the shareholders are entitled to a share of profits (eg, the executive directors of the company), the memorandum of association must expressly stipulate so.

The memorandum of association may further provide that the executive directors of the company form a collective statutory body, which is a new institute not present in the former legal regulation.

The new legal regulation no longer requires that a limited liability company create a reserve fund. Therefore, the provisions dealing with the reserve fund may be left out of the memorandum of association, and the monetary means of the dissolved reserve fund may, from the bookkeeping point of view, be transferred to the account “undistributed profit from previous years”.

Under the Czech Business Corporations Act, a business corporation, including a limited liability company, may opt-in to the Czech Business Corporations Act (and the new Czech Civil Code) as a whole until 1 January 2016. We recommend our clients pursue such opt-in; otherwise, some of the provisions of the abrogated Czech Commercial Code relating to the rights and obligations of the shareholders remain applicable. Since there is legal uncertainty among the experts which of the provisions of the abrogated Czech Commercial Code have survived, it is preferable that Czech companies install the regime of the new legal regulation as a whole and thereby exclude the application of the abrogated legal provisions.

The regulation of the limited liability company has been amended in the course of the re-codification. To make use of the advantages introduced by the new legal regulation, their reflection in the memorandum of association is necessary. Note also that the memorandum of association should have been adapted to the new legal regulation by 30 June 2014. Many Czech corporations have not done so.

author: Otakar Fiala