Brief Overview
1. New Civil Code
A new Civil Code and associated laws will come into effect on 1 January 2014, thus bringing major changes to the conduct of business in the Czech Republic. The new regime will also affect current business and legal relationships.
It is structured in several major pieces of legislation. The Civil Code provides the basic terms and principles of all private law, personal and corporate issues, family law and contractual law. The Corporations Act governs the establishment and functioning of business companies. There are numerous accompanying acts such as the Act on International Private Law and the Law on Certain Court Proceedings and a major amendment to the Civil Procedural Code governing court proceedings and cross-border legal relationships. The new regime represents a major overhaul of the entire private law system in the Czech Republic, emphasising the freedom of contracts and principle of the responsibility of contracting parties as well as the flexibility of legal forms and organisational arrangements of corporations and associations. The new laws are generally perceived as having the potential to provide a flexible and business-friendly environment despite the number of changes needed to put the new regime in place.
As the changes are extensive and, as such, it will be prudent to prepare in advance - this applies not only to domestic entities but also to anybody doing business in the Czech Republic. The following text presents an overview of the main changes that are relevant from a business perspective.
2. Corporations
Flexibility of the Commercial Registry
The current rigid court procedure for the registration of corporations and any subsequent changes including merges will be replaced by a more flexible regime. Also, public notaries will be allowed to review filings and enter relevant records into the Commercial Registry, including the establishment of new companies.
Proxy voting and delegation
New proxy voting and the conduct of general meetings in the electronic form and other forms of "remote voting" and delegations will be enabled.
Company boards
Legal entities will be allowed to become members of boards of directors, however, there should be a natural person appointed to represent such entity. Proxy voting by board members will henceforth be allowed.
Czech companies will be fully allowed to choose whether they will create single management boards or continue with the current two- tier system of separate statutory bodies and supervisory boards. For companies with more that 50 employees, the mandatory representation of employees on the supervisory board will be abolished where currently one third of the members should represent employees.
A minimum number of members of companies´ management and supervisory boards may enable a single member of the board. Unlike today, there will be no statutory limitations of the length of a term of board membership. Certain modifications will affect the responsibilities of the managers of companies under threat of insolvency should they clearly fail to make all reasonable efforts to prevent such insolvency.
Shares
Corporations will be provided with flexibility in their structuring of diverse classes of shares and business shares with varied scopes and an embodiment of rights will be attributed to individual share classes. Limited Liability Companies will be allowed to issue business shares in the form of securities, however, certain limitations on the transfer of the titles of such securities will be maintained.
Company capital
The minimum capital of LLCs will be 1 CZK. Unlike today, companies will be allowed, under certain conditions, to abandon their reserve funds and use the money for the financing of their activities.
3. Transactions
Single set of rules
Unlike today, whereby two sets of contract legislation stood side by side (the Civil Code and the Commercial Code), with which it is sometimes challenging to determine which rules apply to what element( s) of business relationships, the new regime brings a major simplification - a single set of contracting rules covering contracts and principles. The Civil Code now concentrates on one aspect; consumer contract regulations.
Contractual process
The new laws provide for a more flexible contractual process as well. Generally, they reduce the need for full formal written contracts where an oral agreement or other forms of agreements exist among contracting parties.
Also, minor changes offered to a contract proposal made by a party are not considered as a new proposal, thus contracts may be concluded based on amended proposal. Of course, should the party receiving the amended proposal disagree with the proposed minor changes, then it should communicate such position without undue delay.
Given the non-mandatory nature of most of the provisions of the new Civil Code, it will be possible to flexibly customize the terms and condition of any contract among business parties; even to stipulate the rules for a given contractual process.
Pre-contractual liability
The new civil code explicitly provides a set of rules for pre-contractual liability and distinguishes forms of false action during contract negotiations while such rules have been inferred only from case law up to now.
General commercial terms
A "knock out" rule as a result for the battle of forms is introduced to the Czech law. If agreed in a contract while respecting certain legal requirements, contracting parties are entitled to alter or adjust commercial terms. Exceptional provisions of general commercial terms must be expressly accepted by the contractual partners.
Security
The new law provides for floating charges as well.
There are certain changes to security arrangements. For example, in the case that an insured asset representing security is damaged, the insurance company may pay the insurance benefit directly to the creditor.
Certain restrictions on the realization of security will be removed - for ex ample, in cases of security in the form of title transfer, the creditor will be allowed to keep the security as full owner should the debtor default on its obligation.
There are numerous security changes regarding real estate - for instance, it will be possible to provide third party real estate as security while the security takes effect at the moment the debtor becomes the owner registered in the (land) cadastre or completely restrict the provision of specific real estate as security in the future.
Other changes
The full assignability of a contract as a completely new legal institute is hereby introduced into Czech law, as well as the general regulation of institutes such as laesio enormis (a party to a contract may rescind it if it receives less than the fair value of the consideration), restraint of trade or the legal doctrine "matters thus standing" (rebus sic standibus).
Specific rules apply to unintelligible or extra disadvantageous provisions contained in standard forms of contract, as used in business practice for the conclusion of a contract. The Civil Code provides a clear distinction of liability ex lege and ex contracto distinguishing consequences for defaulting and non-defaulting parties and remedies available to parties in each respective case.
According the new legislation, creditors may require compound interest in respect of their receivable, if agreed in the contract.
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.
