Single Member Companies Unchained. Hallelujah!

As some may have guessed, common sense changes are on the horizon thanks to the new Corporations Act.

The case of single member limited liability companies is, without exaggeration, one of the most absurd in Czech commercial law.

Before

The situation is like an infomercial with a before and after.

The opening is a black and white scene of unhappy investors, managers and lawyers before recodification.
The entire matter started – as usual – in 1989 with the more or less innocent 12th Directive of the Council of the European Communities, whose main goal was to allow the formation of single member limited liability and joint-stock companies. Member States prohibiting single member companies were to enable them under the Directive, which also allowed Member States to lay down special provisions or sanctions.

What remains a mystery in the annals of Czech legal history is how the simple provision in the 12th Directive became Section 105(2) of the current Czech Commercial Code: a truly great example of a useless and expensive rule in Czech commercial law.

Rather than permitting single member companies, Section 105(2) ended up restricting them, and rather harshly at that. Not only did it prohibit an individual from being a sole member of more than three limited liability companies. It also banned single member limited liability companies from themselves becoming a single member in another limited liability company. This rule in legal jargon was coined the “ban on chaining”.

Those who failed to follow the rules and concentrated all their shareholdings in the hands of a single person risked the invalidity of the agreements under which the shareholdings were concentrated. This despite the fact that the 12th Directive and the 2009 Single Member Company Directive (which replaced it), unambiguously ordered Member States to adjust their laws precisely to allow the concentration of 100% of shareholdings in a limited liability company in a single party.

Those who followed the rules did not concentrate their shareholdings in the hands of a single person and so, for the sake of caution, limited liability companies usually had two members with a ratio of voting powers of 99.9999 : 0.0001, both such members being companies controlled by the same parties, with the minority member acting only as a dubious “ornament”. I doubt that a single Czech lawyer has ever explained to a client why we have this rule. Managing legal vehicles such as this is certainly more difficult since all general meetings require two extracts from the Commercial Register instead of one and two powers of attorney for the members.

All this in the name of allowing single member companies!

After

Recodification promises nothing but happy faces and an end to the need for expensive lawyers trying to avoid the ban on chaining.

Section 11(1): A capital company may be formed by a single founder. Section 11(2): A capital company may also have a single member as a result of concentrating all shareholdings in a single member’s hands. (Act on Corporations)

The question is why it has taken so long.