Czech Republic: Regulation of Corporate Groups in the New Civil Law

Effective 1 January 2014, the re-codification of the Czech civil law introduced a new system of regulation of corporate groups (koncerny) deviating from the current conceptual sources in German legal regulation.

Corporate groups will now have more flexibility in the management of business affairs, permitting full utilisation of synergic effects existing within such groups. On the other hand, a number of new duties will be imposed on the members of corporate groups and, unlike under the previous legal regime effective until 31 December 2013, it may be expected that the members of statutory bodies of controlling persons will generally exercise more vigilance and business awareness when making business decisions concerning a corporate group.

Corporate group building blocks

Under the new Czech civil law, a corporate group represents a complex form of management of business groups where one or more persons (controlled persons) are under the influence of another person or persons (controlling persons) regarding operations of the controlled person aiming to (for the purpose of the long-term asserting of the corporate group’s interests within a uniform policy of the corporate group) co-ordinate and manage conceptually at least one significant element or activity within the business operations of the corporate group.

Now, a corporate group will be established even if only some elements within business operations of the entire corporate group are subject to uniform policy and direction (eg, financial operations, production, human resources, etc.).

De facto corporate group and controlling agreements

The new legal regulation works exclusively with the concept of a de facto corporate group (faktický koncern). The existence of the corporate group is then solely based on factual satisfaction of the above outlined corporate group’s building blocks.

The new concept also translates into removal of controlling agreements and profit transfer agreements from the new legal regulation, and automatic termination of such agreements entered into until 31 December 2013 by operation of law, all with effects as at the last day of the accounting period immediately following 30 June 2014.

Affiliation with corporate group

Along with the de facto existence of a corporate group, the publication of the existence and affiliation with the corporate group on the websites of all corporate group members is an essential condition for reliance on statutory rules on compensation of damage within the corporate group. Without satisfaction of the outlined corporate group’s building blocks, the publication of the existence and affiliation with the corporate group alone will not result in establishment of the corporate group.

Despite the wording of the law, the controlled person need not own the internet domain where the website containing information on the corporate group’s existence is located. A reference to its own website should comprise also the website that the controlled person is using based on a valid legal title.

From the territorial perspective, the requirement to publish the existence of the corporate group on a website should not apply to controlled persons governed by a foreign corporate status (eg, a German corporation).

Instructions concerning business decisions

A possibility of the controlling person to give instructions to the controlled person concerning business decisions is a basic consequence of the existence of the corporate group. But such instructions must be in the interest of the controlling person or another person that forms a corporate group with the controlling person.

Such possibility is a specific exception from a general prohibition to instruct the statutory body of a business corporation on matters concerning business decisions.

Compensation of damages within the corporate group

A basic consequence of the corporate group’s existence, and declaration on affiliation with the corporate group, is the possibility of the controlling person to discharge a duty to compensate for damages suffered by a controlled person under the influence of the controlling person. To use such a possibility, the controlling person must prove that the damage (i) was established in the interest of the controlling person or another person forming a corporate group with the corporate group and (ii) was or will be compensated within the corporate group.

Damages will be deemed compensated if they are settled within the corporate group in an adequate manner or through other demonstrable benefits resulting from membership in the corporate group, all within a reasonable time. Benefits would typically comprise lower costs of external financing, easier access to customers, etc.

A limitation to a damages compensation mechanism would be an instance of insolvency of the controlled person that resulted from the controlling person’s steps.

Minority shareholders sell-out right

To reinforce the position of minority shareholders, a new regulation introduces a right of minority shareholders to request that the controlling person buy their shares for an adequate price, if the controlling person exercises its influence over the controlled person in a manner resulting in material aggravation of the position of the minority shareholders of the controlled person or in other material aggravation of their interests – and for these reasons it is not fair to demand that the minority shareholders remain in the controlled person.

The new Business Corporations Act introduces a new concept of regulation of corporate groups, offering a higher level of flexibility and permitting full use of synergic effects existing within corporate groups by allowing the controlling person to compensate for the damages caused to the controlled person upon employment of the influence of the controlling person.

author: Vladimír Čížek