In its decision no. 29 Cdo 3068/2013 dated 19
June 2014, the Supreme Court of the Czech Republic
("SCCR") once again ruled on the issue of the
irreversibility of the legal effects of registration of
transformation in the Czech Commercial Register.
This decision was published with the following legal summary:
"In case of registration of transformation of business
corporations or cooperatives (Section 1(2) of the Act on
Transformations) in the Czech Commercial Register, the principle of
registration irreversibility applies without any exceptions. The
fact whether the registration of the transformation in the Czech
Commercial Register was made on the basis of a determined
decision of the court maintaining the Czech Commercial Register or
(even through a mistake of the court) on the basis of a decision
that did not come into force yet is not significant for predicting
the legal effects of the transformation in Sections 57 and 59(1) of
the Act on Transformations.
[...]
Whatever possible defects there may be in the transformation
process (including breach of law that could result into the
annulment of the resolutions of the General Meeting approving the
transformation), these will not be grounds for annulment of the
registration or the resolutions of the General Meeting after the
registration of the transformation in the Czech Commercial Register
(Section 57(1) of the Act on Transformations); an exception would
only be when, for example, the General Meeting did not take place
at all and the minutes of its meeting have been forged."
Factual description
Factually, the decision provides that the surviving European
Company (Societa Europaea) as a consequence of a merger
acquired the equity of the dissolving joint-stock company
("Company") and a private limited
liability company.
To the appeal of the Company, the Court of Appeal decided to annul
the decision of the Court of First Instance approving the
registration of the merger. The Court of Appeal came to its ruling
based on the fact that the submission on registration of the merger
had been applied for by an unauthorised representative on behalf of
Company. The decision on granting such a mandate had been made by
the chairman of the Board of Directors of the Company, who had been
ordered by the preliminary measure to refrain from acting as a
member of the Board of Directors, including from acting as a
chairman of the Board of Directors. Moreover, the Company had been
ordered by the preliminary measure to refrain from the
implementation of the approved resolution of the General Meeting,
including the approved merger project. During the course of the
appeal, the Court of First Instance further decided on the
annulment of the "legal force"of its decision approving
the registration of the merger, and completely removed the
registration of the merger from the Czech Commercial Register.
Also, during the course of the appeal, the Company withdrew the
submission on registration of the merger in the Czech Commercial
Register on the grounds that it was filed by a person who was not
entitled to do so.
The Court of Appeal based its argumentation on the fact that the
irreversibility of registration of the merger in the Czech
Commercial Register can occur only with the determined decision of
the court maintaining the Czech Commercial Register. The appellants
in contract argued that from 1 January 2012 no provision in the law
legislation – as opposed to Section 131(3)(c) of Act no.
513/1991 Coll., Commercial Code, as effective on 31 December 2011
– excludes the possibility of annulling the final
registration of a merger in the Czech Commercial Register. In
addition, Section 57 of the Act on Transformations clearly shows
that after the registration, it is not possible to cancel the
registration, regardless of whether the relevant
decision of the court maintaining the Czech Commercial Register
became determined or not. According to the
appellants, the purpose of Section 57(1) of the Act on
Transformations is – in accordance with Article 22(1) of
Directive 2011/35/EU of the European Parliament and of the Council
of 5 April 2011 concerning mergers of public limited liability
companies – specifically to protect the rights of third
parties, and not to protect companies participating in the merger.
The appellant further added that the course of procedure of the
Court of First Instance, which ruled on the subsequent annulment of
the "legal force" of its decision, does not
change the fact the effects of the merger had been already
established.
Legal assessment of the SCCR
Against this factual background, the SCCR clearly – and in
accordance with the existing case law – concluded that the
precondition for the establishment of the effects of the merger is
its registration in the Czech Commercial Register, regardless of
the extent of possible infringements. In other words, the
registration of the merger in the Czech Commercial Register is
absolutely irreversible from a legal point of
view. The SCCR based its reasoning on the requirement of
(i) the protection of third parties, and (ii) legal certainty and
the practical impossibility of reversing companies' affairs
into the state in which they had been prior to the registration of
the merger in the Czech Commercial Register.
The SCCR finally concluded that "...any defects in the
merger process (including any breach of law that could lead to
the annulment of the resolution of the General Meeting,
approving the merger) will not establish grounds for the
annulment of the resolutions of the General Meeting or
registration of the merger in the Czech Commercial Register after
it is completed.
Consequences of the decision of the SCCR
Although the decision of the SCCR may give the impression that it
clearly leads to the end of the discussions regarding the
(ir)reversibility of the legal effects of the registration of a
merger in the Czech Commercial Register, it actually merely
confirms the current line of interpretation.
Considering the initial argument is the principle of the protection
of third parties and that the SCCR in its underlying decision
expressly addressed (only) the defects of the resolution of the
General Meeting by which the transformation itself had been
approved, the possibility of breaking" the effects and legal
relationships established by the merger remains fully
preserved if and to the extent asserted defect relates to the facts
occurring prior to the consummation the merger (see decision of the
SCCR no. 29 Odo 1315/2006 dated 24 June 2008. In this decision, the
SCCR permitted breaking" the legal affairs established upon
the division of a company by referring to defects in the preceding
process of the transfer of assets to a sole shareholder
("squeeze-out")).
However, in its decision analyzed herein, SCCR is apparently
withdrawing from the requirement to ensure legal certainty and
argument of factual impossibility to reverse the affairs of the
companies into the state prior to the registration of merger in the
Czech Commercial Register.
Conclusion
In the sense of the foregoing, one can assume that the approach of
the SCCR regarding the issues of irreversibility of legal effects
of the registration of a merger in the Czech Commercial Register
remains unchanged. This stance will undoubtedly be applicable
within the new Czech civil law rules introduced from 1 January
2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.