Bell tolls for unfavourable provisions of Section 196a. New act bids them adieu
Such intimacy, however, is not always welcome since Czech lawmakers did not adopt into local law relevant European rules without error. It appears, though, that the upcoming recodification may bring some improvements.
The recent amendment to the Commercial Code partially accommodated the needs of businesses. Thanks to the amendment, when providing financial security it is no longer necessary to insist on arm’s length conditions and, in certain cases, the consent of the general meeting is not required. The amendment expanded Section 196a to include a new sixth subsection, which allows a purchaser to acquire ownership even if the given assets were transferred in conflict with sections 1 to 3 of the cited provision, of course only on the assumption that the purchaser acted in good faith.
A ruling of the Supreme Court from February this year is critical. The court stated that a transfer agreement would not automatically be deemed invalid if the value of the transferred assets was not determined on the basis of an expert opinion in accordance with the law. The decisive factor should be whether the price set forth in the agreement is less advantageous to the company than the arm’s length price that is usual at the given place and time, i.e. whether the agreed price was in fact disadvantageous for the company. Commenting on the case, Martin Šolc, a founding partner of law firm Kocián Šolc Balaštík, noted that the Supreme Court’s new viewpoint is critical for assessing the risks of earlier transactions.
Regulation yes, but more meaningful
The good news is that nothing similar to today’s Section 196a can be found in the new Act on Commercial Corporations (the “Act”), which should come into effect together with the new Civil Code on 1 January 2014. This, however, does not mean that future transactions falling under Section 196a will be left unregulated. The aim of those rules, however, is to protect the company’s interests rather than, as today, to ensure certain formal steps are fulfilled. Some new features worth noting include the following measures.
As concerns acquisitions of a company’s assets by the founders and shareholders, the Act regulates in particular events where the assets are acquired within two years after the company is established. Where the legal financial limit is exceeded and certain legal exceptions cannot be applied to the transfer, an expert opinion and approval by the general meeting is required. In this respect, the Act proceeds from the so-called the Second Directive standard. Violations of the new rule will continue to be sanctioned, but the transfer would not be deemed absolutely invalid.
Another rule superseding Section 196a in certain respects concerns conflicts of interest. The rule applies in particular to deals between members of bodies or authorized representatives of commercial corporations (or persons related to them or influenced or controlled by them) and by the corporation itself. The Act introduces a reporting duty applicable to such transactions and the supreme body or the inspection body of the corporation will be permitted to prohibit the deal.
What about creditors?
Creditors do not go unprotected. The Act increases their security by other means, including by introducing an insolvency test, which means payments for services or deliveries shall be prohibited if, as a result, the company would become bankrupt, thus leaving creditors at risk. Bankruptcy would be assessed pursuant to the Insolvency Act in respect of insolvency as well as of excessive debts. Creditors would thus be sufficiently protected since such protection would be based on the actual status of the company’s assets and the liability of its executives.