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Joint stock companies and limited liability companies are the most frequent forms used by foreign companies wishing to do business in the Czech Republic.

JOINT STOCK COMPANY

A joint stock company is a company whose registered capital is divided into a certain number of shares of certain nominal value. The company is liable for the violation of its commitments with all its assets. The shareholder is not answerable for the liabilities of the company. The company’s trade name must contain the words "akciová spoleãnost" (joint stock company) or the abbreviation "akc. spol.", or the abbreviation "a.s."

LIMITED LIABILITY COMPANY

Limited liability companies are among the basic types of investment companies. Their registered capital is constituted by the investments of the partners. The maximum allowed number of partners is 50, irrespective of whether they are natural or juristic persons. The company answers with all its assets for the non-fulfilment of its liabilities, whereas its individual partners are only liable to the amount of their registered and still unpaid investment. The company’s trade name is determined by the general meeting at its first session. The name of the company must comprise the words "společnost s ručením omezeným" (Limited Liability Company), or at least one of the admissible abbreviations, "spol. s r.o." or "s.r.o.".

Similarities
In both cases the company may be established by one person only. In the case of a joint stock company, however, its founder must be a juristic (not a natural) person. Furthermore, a limited liability company having only one partner may not be the only founder or the only partner in another limited liability company. A natural person is only allowed to be the sole shareholder in not more than three other limited liability companies. In general, to be entered in the Business Register1), any company, whatever its form, must have a trade licence2)3), Nevertheless, a company may be entered in the Business Register even without having a trade licence if it is a company with a specific object of business which, according to the Trades Licensing Act, is not a trade. Both forms of company must maintain a reserve fund (which is actually a bookkeeping item) to cover potential losses.

Differences
A joint stock company issues shares, in contrast to a limited liability company, whose capital portions do not have the form of shares. The shares of joint stock companies may be listed on the Prague Stock Exchange according to rules laid down by the Securities Act and other legislation. This legislation defines the rules for share transfers. Business shares in a limited liability company may be transferred under the terms of the Commercial Code and the company’s Memorandum of Association. A joint stock company must have both a board of directors and a supervisory board. The company’s employees elect one-third of the supervisory board members, provided there are more than fifty fulltime employees at the time of the election; the supervisory board may be delegated certain approval rights, but as a rule that body only supervises the operations of the company. The members of the board of directors and the supervisory board are usually elected by the general meeting consisting of shareholders. As a rule, the decision-making power of a limited liability company is delegated to one or more "executives" appointed by the general meeting, i.e. the body representing the partners; a limited liability company has no board of directors, but it may establish a supervisory board.

BRANCH OFFICES

Branch offices of foreign companies are not considered Czech juristic persons. They act as representatives of foreign companies and assume their responsibilities. The requirements for a branch office to be established in the Czech Republic are similar to those applying to limited liability companies. In their case, emphasis is placed on the role of the founder, in whose name the company acts. The branch office is entitled to start business in the Czech Republic on the day of its registration. The head of the branch office, whose name is entered in the Business Register, is entitled to carry out all acts concerning the branch office as a representative of its founder.

COOPERATIVES

A cooperative is an association of an undefined number of persons established for the purpose of doing business or for ensuring the economic, social, and other needs of its members. The name of a business firm must bear the word "Cooperative". A cooperative differs from a trading company in that the generation of profit is not its only or main purpose. Its specific and obviously most frequent form is the housing cooperative. Unless at least two juristic persons are its members, the cooperative must have at least five members. The cooperative is a juristic person and as such is liable with all its assets for the nonobservance of its obligations. Its members are not liable for the cooperative’s obligations unless otherwise provided for by its statutes. A cooperative’s registered capital is formed by the sum of its members’ investments which the members committed themselves to pay. The amount of the cooperative’s registered capital, which is entered in the Business Register (registered capital) is fixed by the statutes, but it may not be less than CZK 50 000. Before applying for registration, whereby the cooperative is established, at least half of the registered capital must be paid up. The statutory body of the cooperative is its board, and its supreme body the cooperative’s membership meeting, which elects and recalls members of the board, decides on the distribution and use of profit or loss, fusion, transformation, division or the winding up of the cooperative, etc. Unless the extent of the competition ban is regulated by the statutes, members of the cooperative’s board, its control commission, chief executives and its director may not be businessmen or members of statutory and supervisory bodies of juristic persons with a similar object of business In 2006, the Czech Republic passed a law on European cooperative companies, which makes it possible for people and companies from the EU to establish European cooperative companies (SCE) in the CR. The required minimum registered capital of the company is EUR 30 000, which is made up of its members’ investments, and its assets must have an identifiable economic value. The basic document of a SCE is its statutes, which must comply with regulations applying to the establishment of cooperatives in the member state, where the cooperative company is based. The statutes must be in writing and must be signed by the founding members. The regulations determine the minimum essentials the statutes must contain. In its other provisions, the regulations stipulate the procedure of moving the registered offices of the SCE, different possibilities of establishing an SCE, the structure of its bodies, decision-making processes, the rights and duties of the members, the rules of handling the profits, cancellation of the SCE, its liquidation and bankruptcy proceedings. A European cooperative company must be entered in the Business Register if its registered offices are or will be located on the territory of the Czech Republic. In the case of these companies, the essentials which must be entered in the Business Register are data laid down by special regulations applying to cooperatives and special data depending on the internal structure of the cooperative company.

COMPARISON OF CZECH AND EU LAW

The harmonisation of company law is essential for creating the Single Market for Financial Services and Products. Czech company law is in compliance with these essential regulations applying in the European Union.

Karolína Salamonová, Lawyer
White & Case, Lawyer’s Office



Useful links:
www.mpo.cz – Ministry of Industry and Trade (in Czech and English)
www.justice.cz – database of the Commercial Register (in Czech and English)
www.form.cz – forms of offices, e.g. the Fnancial Authorities and Trade Licence Offices
Trade Licence Offices – on the web sites of municipal authorities

MERGERS AND ACQUISITIONS IN THE CZECH REPUBLIC

Mergers and acquisitions were incorporated into the Czech legal framework in the 1990s to enable businessmen and entrepreneurs in the Czech Republic to expand or restructure their business activities.

This provision assumed greater importance especially after accession to the European Union, when the Czech Republic was obliged to implement EU laws and regulations, including legal norms allowing "crossborder mergers". Merger and acquisition procedures are defined primarily by the Commercial Code, accounting and tax laws, rules for the protection of economic competition, and by several special provisions that apply to certain sectors, such as banking, insurance, and financial services. Foreign natural persons and legal entities are not restricted in the Czech Republic in their right to hold shares in companies and may acquire and sell up to 100 % of the registered capital of both limited liability companies (s.r.o.) and joint stock companies (a.s.). They can also operate in companies of other legal forms. The transfer of a share in an s.r.o. company must be entered in the Companies Register (www.justice.cz). Shares in joint stock companies can be acquired freely, but the shares of certain joint stock companies are registered in the Securities Centre, or the Central Securities Registry (register of shares which do not exist physically, and their existence and their holders are only recorded in books). The ownership of such shares changes only by means of an entry in the particular books. When shares are traded on the official securities market (the Stock Exchange or a regulated off-exchange market) in the Czech Republic or another EU member state, the acquirer is duty-bound to notify the company (issuer) and the Czech National Bank (regulatory body) if a specified limit of the share in the company’s voting rights has been exceeded. A buyer who has acquired a controlling stake in the company must then offer to purchase the shares of the remaining shareholders. 

RIGHT TO BUY OUT SHARES

 A shareholder who owns 90 % or more of the registered capital of a joint-stock company (the majority shareholder) can ask this company within three months of the acquisition to acquire the shareholding of the minority shareholders. The transfer of these shares is decided, on the basis of the prior consent of the Czech National Bank, by the General Meeting of the company in exchange for a consideration, the amount of which must be documented by an expert’s opinion. ❙ OFFER TO BUY OUT SHARES In the case of joint-stock companies, whose shares are quoted and one or more shareholder acting in collusion hold more than 95 % of the shares the Czech National Bank, on the basis of an application made by a minority shareholder supported by significant circumstances by the Czech National Bank may impose on such a shareholder the duty to make a bid to the minority shareholders to purchase their shares. 

TAKE-OVER BID

In the case of joint stock companies, an investor can prepare a take-over bid and present it to the shareholders; a bid showing the investor’s intention to take control of the company must be public. The bid must be binding for at least four weeks, but not more than 10 weeks. All shareholders must be given equal treatment. During the period of the validity of the bid another person may make a rival bid, which, however, such a bid must be at least 2 % higher. If the first bidder wants to beat the rival bid, his price must be at least 2 % higher than that of the rival bid. A bid to take over a company the shares of which are listed on the official securities market may be published only with the prior consent of the Czech National Bank. 

PURCHASE OF AN ENTERPRISE

An acquisition can have the form of the purchase of an enterprise or its part, by means of which the buyer acquires all rights, relations, assets and liabilities relating to the running of the business. The consent of the general meeting is required for making a contract for the transfer of the company. 

INVESTMENT IN A TRADING COMPANY 

The acquisition of an interest in a trading company or a share in a joint-stock company can have the form of a capital or non-capital investment the subscription of which must be decided by the General Meeting. The registration of such an increase in capital is made by a Commercial Court, and in the case of non-capital investment an independent valuation by a person appointed by the court must be submitted. 

TRANSFORMATION OF COMPANIES

(MERGERS, TRANSFER OF ASSETS TO A PARTNER, DIVISION, CHANGE OF LEGAL STATUS)
In Czech legislation, mergers fall within the category of trading company transformation, which also includesthe splitting of a company, the transfer of assets to a partner and the change of the company’s legal status. The transformation of a company is also admissible when the company is in liquidation or is undergoing bankruptcy proceedings. When a foreign trading company is involved, transformation is possible by employing the so-called European Company (Societas Europea) status. Perhaps the most frequent form of transformation is merger either by amalgamation (one of the companies continues its activities, the others cease to exist and their assets and liabilities are transferred to the continuing successor company), or consolidation (all of the companies cease to exist and their assets and liabilities are transferred to a new successor company). From the economic aspect the important feature is the non-transferability of cumulated tax losses of the extinct companies to the successor company. This is only possible in case the losses in question were first assessed for the tax period in which the Treaty of Accession of the Czech Republic to the EU came into force (i.e. for tax periods as from 1 May 2004). Losses assessed for the preceding tax periods remain nontransferable. Mergers take place on the basis of merger contracts, which must be approved by the General Meeting in advance. The crucial point of any merger is the determination of the exchange ratios of the shares and possibly other aspects of property arrangements following the merger. Mergers become legally effective on the day of their entry in the Companies Register, but from the taxation and accounting points of view the companies operate as a single entity from the merger date, which in fact precedes all steps and decisions on the merger. In certain cases, the merger procedure can be simplified significantly by the agreement of all shareholders or partners. Mergers are also possible among companies of different legal status and they can involve more than two companies. The transfer of assets to a partner is a legal form of company transformation, whereby the shareholder or partner, who must be a Czech legal entity and must own more than 90 % of the company’s registered capital, may transfer the assets of the company to himself, provided he has the consent of the General Meeting. He is bound to provide fair compensation to all other minority shareholders or partners. 
The division of a company can have the form of division (i) with the founding of new companies, (ii) merger, (iii) splitting off with the establishment of new companies, (iv) splitting off with the combination of forms (i) and (ii) or (iii) and (iv). In the case of division with the establishment of new companies or merger, the company being divided becomes extinguished without liquidation, in the case of its division by splitting, the company being divided does not become extinguished. Czech legislation also allows for the legal status of a company to be changed provided the company does not cease to exist and merely alters its internal legal status and organisation. 

REGULATION

In the case of mergers and acquisitions, the interests of minority shareholders are protected by the obligation of companies to provide timely information and in the majority of these transactions by the requirement to obtain the opinion of an independent expert to establish, whether the parameters of the transaction, the price in particular, are fair towards the minority shareholders. Mergers and acquisitions in the Czech Republic are also governed by special legislation. For example, prior consent of the competent bodies (the Czech National Bank, the Ministry of Finance) must be given for a merger or an acquisition contract concluded by a bank or an insurance company to become effective. Mergers and acquisitions also come under the jurisdiction of the Office for the Protection of Competition. Its permission is required

- when the total net turnover of the participants in the transaction exceeded CZK 1.5 billion (approx EUR 53.1 million) on the market of the Czech Republic in the last accounting period, and when the net turnover of at least two of the merging participants exceeded CZK 250 million (approx. EUR 8.9 million) on the market of the Czech Republic in the same period, or 
- when the total net turnover of at least one participant in the transaction exceeded CZK 1.5 billion (approx. EUR 53.1 million) on the market of the Czech Republic in the last accounting period, and when at the same time the global net turnover of another participant also exceeded CZK 1.5 billion. Mergers and acquisitions always involve a fairly complicated process, which requires finding answers to commercial, legal, accounting, tax and other questions. We are ready to help you solve these questions in case of need.

Jaromír Hořejší, Vladimír Veleba, Eugen Oehm
KPMG Česká republika, s.r.o. 

Taken from Doing Business