July 2009 – From 20 July 2009 an important amendment to the Commercial Code[1] is effective. This amendment breaks the complete prohibition of financial assistance in the acquisition of an interest in a company which would provide the financial assistance[2].
Even after the amendment to the Commercial Code the prohibition applies both to limited liability companies (“LLCs”) and joint stock companies (“JSCs”).
Under the amendment, responsibility for the examination of the whole transaction is assumed by members of an executive body. The question whether the option to provide financial assistance under the below specified conditions will be used will therefore largely depend on the willingness of the members of an executive body to assume the responsibility for legal compliance of the transaction in a situation where a number of legal questions relating to this issue have not been clarified.
If the members of an executive body are not willing to assume this responsibility, the prohibition of financial assistance can still be dealt with by methods already tested in practice (especially by way of an upstream merger).
1 LLCs
Conditions under which financial assistance can be provided are less stringent for LLCs. nless articles of association provide for other conditions[3], the following conditions shall apply for LLCs:
(a) financial assistance is provided on arm’s-length basis[4],
(b) the provision of financial assistance will not cause an immediate bankruptcy to the company,
(c) the company’s accounting records show no unsettled loss,
(d) the executive director shall prepare a report[5]: (i) with substantive justification of the provision of financial assistance including the specification of the company’s benefits and risks arising therefrom, (ii) specifying the conditions under which financial assistance will be provided, and (iii) explaining why the provision of financial support is in the interest of the company, and
(e) the provision of financial assistance has been approved by the general meeting[6].
2 JSCs[7]
For JSC the following conditions shall apply:
(a) the provision of financial assistance must be allowed under the statutes,
(b) financial assistance is provided on arm’s-length basis[8],
(c) the board of directors will examine financial eligibility of the person[9] to which financial assistance is provided,
(d) a prior consent must be given for the provision of financial assistance by the general meeting[10] on the basis of the board of directors’ report,
(e) the board of directors will prepare a report[11]:
(i) with substantive justification of the provision of financial assistance including the specification of the company’s benefits and risks arising therefrom,
(ii) setting out the conditions under which financial assistance will be provided including the price for which shares will be acquired by the recipient of financial assistance,
(iii) with conclusions on the examination of financial eligibility, and
(iv) explaining why the provision of financial assistance is in the company’s interest,
(f) if shares are acquired from a company providing financial assistance with the use of the same financial assistance then the price for which these shares are acquired must be fair[12],
(g) the provision of financial assistance shall not cause any decrease of the equity capital below the level of the registered capital plus funds which under the statutes or the law cannot be distributed among the shareholders minus the amount of the registered capital which has not been paid up yet,
(h) the company will create a special reserve fund in the amount of the provided financial assistance[13] and
(i) the provision of financial assistance will not cause an immediate bankruptcy to the company.
If financial assistance is to be provided to a member of an executive body of the company, a person controlling the company, a member of its executive body or a person acting in concert with any of the previously mentioned persons, the report under item (e) will be reviewed by a reputable expert independent on these entities who will be appointed by the supervisory board. In his/her report the expert will evaluate the correctness of the board of directors’ report and provide an express statement on whether or not the provision of financial assistance is in conflict with the company’s interests.
By Jitka Logesová (Partner) and Petr Měštánek (Professional Support Lawyer)
[1] http://www.sbirka.com/POSL4TYD/NOVE/09-215.htm
[2] Section161e of the Commercial Code – A company may not grant advance payments, loans and credits for the purpose of acquiring its shares, and it may not secure credits or loans for such purposes or other obligations (debts) relating to acquisition of its shares.
[3] Articles of association may only make the conditions more stringent but not less stringent.
[4] A question is how arm’s length will be established and what criteria (e.g. for a loan) need to be taken into account in addition to interest rate. Establishment by way of an expert opinion could be an option.
[5] The report is to be filed in the collection of documents maintained by the Commercial Register.
[6] General meeting’s consent is not a prior consent, therefore, in accordance with the standard decision-making practice of the Czech Supreme Court its absence causes ineffectiveness (but not invalidity).
[7] Conditions not applicable to LLCs are in italics.
[8] A question is how arm’s length will be established and what criteria (e.g. for a loan) need to be taken into account in addition to interest rate. Establishment by way of an expert opinion could be an option.
[9] This is a new concept whose content will have to be found through practical application.
[10] The general meeting’s consent is a prior consent, therefore, with regard to the recent rulings of the Czech Supreme Court invalidity ex tunc can be expected if the consent is absent.
[11] The report is to be filed in the collection of documents maintained by the Commercial Register.
[12] It is not clear how the fair price will be determined. An expert opinion could be an option.
[13] An interesting question is by what amount the reserve fund will have to be increased if financial assistance is provided in the form of security – would it have to be increased by the value of the security or value of the secured receivable?