Business Companies General definition Association of several persons (individual or legal entities) Created by agreement Purpose of which is doing business or to manage its assets Members of which provide contributions and participate in management and profits Having separate legal personality Members / shareholders Founders Persons who acquired interest in a company

Act on Business Corporations distinguishes: Business companies represented by following entities General partnership Limited partnership Limited liability company Joint stock company European company European interest grouping Cooperatives represented by following entities: Cooperative European cooperative company

Czech law divides companies into two groups The European company and the European interest grouping are governed by EC Regulations and by special national laws; will not be addressed in this course Cooperatives are not typical business entities; will not be addressed in this course All business companies under Czech law have legal personality independent of its members, i.e. may be party to legal relations, may enjoy rights and have obligations Czech law divides companies into two groups personal companies capital companies

Personal companies – general partnership, limited partnership Main features Partners (members) are personally engaged in company’s matters – all of them are authorized to act on behalf of a company No corporate bodies are created, partners decide collectively, as a rule unanimously Capital contributions into company’s assets - only voluntary Share (participation) in the company is not, as a rule, transferable Death or termination of a partner (member) affects the existence of a company Partners are fully liable for obligations of a company with their own assets

Capital companies – limited liability company, joint stock company Most of applicable EU Directives implemented into the Czech legal system Main features Mandatory contributions of partners (shareholders) into the registered capital of the company; the minimal amount of the registered capital is set forth by law Participation of each partner (shareholder), his rights and obligations are determined by the amount of his capital contribution Partners (members) are not personally engaged in the company’s matters, the corporate governance is ensured by specialized bodies the structure of which is prescribed by law Liability of partners (shareholders) for company’s obligations is limited or excluded

Establishment of a Czech company Legal act of founders (founding agreement or founding deed) Inscription into the Commercial Register (incorporation) Defects of founding act Defects causing invalidity (nullity) of a company Founding agreement was not entered into or its prescribed form was not complied with Objects of company are contrary to law Founding agreement is missing main data identifying a company, i.e. the name, contributions of members and amount of registered capital, objects of business activity Minimum amount of contributions was not complied with All founders do not have legal capacity Number of founders is less than stated by law

Invalidity (nullity) of a company May be declared only by court even after entry of company into commercial register (incorporation) Only for defects listed above As of declaration of invalidity company goes into liquidation Legal acts company entered into are not affected by declaration of its invalidity

Company’s assets, registered capital: Start-up capital necessary for company to start carrying out the business Assets contributed to company by its founders in exchange of their share in the company Value of these assets represents registered capital = information to third parties about assets of company financed from its own resources Contributions of founders into company are mandatory only for capital companies

Contributions of founders monetary, or in kind; any asset the value of which can be objectively measured (its value determined) Providing works or services cannot serve as a contribution If the company does not acquire ownership to contributed asset (in kind contribution) or its value is lower than declared when company acquired it, shareholder shall compensate company for this value Contributions cannot be returned or forgiven to partners (shareholders) during the life of the company

Acting on behalf of company before incorporation Need to enter into transactions during incorporation Anybody can act in the name of company before incorporation Acting person is bound by such transaction by himself If more persons act, they are bound jointly and severally Transactions approved by company (its members or its respective body) within 3 months after incorporation are deemed to be made by company

Share, ownership interest in the company Members (shareholders) are not owners of the company. They own share (interest) representing their participation in the company Share acquired in exchange of capital contribution (capital companies) or personal participation (personal companies) Differences in share (interest) between capital and personal companies

Corporate governance – main principles Capital companies – special corporate bodies (individual or collective) Personal companies – members directly involved in corporate governance In both types of companies persons (entities) involved in corporate governance must fulfill certain requirements and abide by certain rules of conduct Requirements Legal capacity Integrity (clean criminal record) His/her assets have not been subject to bankruptcy within last 3 years unless information about it provided to company before such person was elected/appointed

Rules of conduct Any person who accepted position as an elected corporate body is obligated to act with necessary loyalty (duty of loyalty and with necessary care and knowledge (duty of care) Test of any conscientious and reasonable person in similar position within company In case of litigation member of corporate body bears burden of proof regarding fulfillment of requirements of duty of care and duty of loyalty Duty of care corrected by business judgment rule – care and knowledge presumed

In case of breach member of corporate body Is liable for damages caused to company Shall surrender to company any benefit acquired as a result of breach May agree with company on settlement/compensation of detriment caused; such agreement subject to approval of supreme corporate body Conflict of interests Member of corporate body must notify any potential conflict of interests to corporate body he is member of, or to controlling or supreme body of company Any contract between company and corporate member must be notified to the same bodies Controlling or supreme body of company may suspend exercise of tasks of corporate member who notified conflict of interests

Expulsion of member in case of breach of duty of care and loyalty In case of company‘s bankruptcy the court may expel member of corporate body from his position if such member obviously contributed to company‘s bankruptcy by breach of his duties Court may expel member of corporate body from his position if such member has violated grossly and repeatedly his duty of care and loyalty during last 3 years

Economic development - creation of groups of companies Corporate Groupings Economic development - creation of groups of companies Interests of a group may prevail over interests of individual members of group Need for protection of minority shareholders creditors Two main concepts of legal regulation French German

French concept No need for specific regulation – protection based on prohibition of abuse of majority should suffice Rosenblum case concept – pursuing group interest is legitimate provided Affected subsidiaries are part of a structurally stabile group Group uses coherent group policy Disadvantages of being a group member are balanced by membership advantages

German concept Detailed regulation Subsidiary’s management should act primarily in its interest Shareholders must be informed about all contracts and other dealing between members of the group Czech legislation Inspired newly by French concept with certain modifications Grouping is an economic reality, effective tool for business organization Therefore the statutory regulation must primarily address only the negative consequences of control

General principles Any person who influences the behavior/activities of a company to its detriment shall compensate this detriment unless proves acting in good faith and in the interests of the company If compensation is not provided to company until the end of accounting period the damage suffered by shareholders of company should be also compensated Controlling person person that may influence appointment of main corporate bodies person holding at least 40% of votes in company based on ownership stake or any other legal basis

Group of companies One or more persons subject to uniform management of another person form a group with the managing person Corporate body of controlling person may give instructions to controlled person provided these are in the interest of the controlling person or another member of the group Corporate bodies of the controlled persons are not relieved from duty to act with due care

Controlling person is not liable for detriment suffered by controlled person due its influence if Such detriment is in interest of controlling person or another member of group Detriment is counterbalanced by appropriate compensation or other advantages

Outside shareholders protection Access to information about relations between controlling and controlled persons Obligation to prepare and make available report on relations between linked persons Report must include legally prescribed information about transactions between linked persons and consequences of measures imposed by controlling person Outside „qualified“ shareholders are entitled to have the report reviewed by court appointed expert Other than qualified shareholders have this right only if the report contains information about damage caused to controlled person that was not or will not be compensated

Outside shareholders are entitled to request controlling person to purchase their shares If control as exercised by controlling person adversely affects their position within company or their other legitimate interests For price determined on the basis of expert opinion