On the 16th of April 2008 Act No. 125/2008 Coll., on Transformations of Commercial Companies and Cooperatives, was published in the Collection of Laws of the Czech Republic. The Act became effective on the 1st of July 2008 (the "Transformation Act").

The Act reflects not only the duty of the Czech Republic to implement in its laws the Directive of the European Parliament and the Council 2005/56/EC, on Cross-Border Mergers of Capital Companies (the "Tenth Directive"), but also the fact that a complex regulation of transformation of commercial companies has to date been missing in the Czech legal system.

In the course of drafting the Transformation Act which is divided into five chapters, the authors have relied on the taxonomy of the German Act on Transformation of Companies. Chapter One contains general provisions applicable to all kinds of transformation of commercial companies and cooperatives, the next four chapters provide for the specific types of transformation, namely domestic and cross-border mergers (Chapter Two), division/split (Chapter Three), transfer of assets to a member (Chapter Four), and finally a change in the legal form (Chapter Five).

The Transformation Act strives to make the process of company transformation easier by cancelling the duty to prepare and execute two sets of notarial deeds as regards capital commercial companies and cooperatives; (the first notarial deed used to be required to evidence the approval of the draft Agreement on Merger/Division/Take-Over of Assets, while the second notarial deed for the acceptance of the actual Agreement). The only requirement now is to provide for a notarial deed evidencing the decision of the General Meeting of a limited liability company or a joint-stock company, or, alternatively, of the cooperative members' meeting on the transformation; such decision to be accompanied by a transformation project; a notarial deed evidencing the decision is required also in case of a member's decision on take-over of assets of a general partnership.

A decision on transformation of capital companies (corporations) must be adopted by a qualified majority, namely by at least three-quarters of votes of members attending the General Meeting of the limited liability company, or, alternatively of shareholders in case of a joint-stock company, and two-thirds of votes of members present at a cooperative members' meeting, unless the Memorandum of Association or the Statutes provide for a greater majority of votes. If a joint-stock company is to be divided with an uneven exchange ratio of shares, the decision on transformation must be approved by votes of shareholders holding shares with an aggregate nominal value amounting to at least 90% of the registered capital of the company to be dissolved or divided. In case of transformation of a personal commercial company (partnership), the Act now requires approval of all members.

The Transformation Act has made the process of company transformation easier also due to the fact that in comparison with the original regulation it repealed the duty of the Supervisory Board of a limited liability company or the Supervisory Board of a joint-stock company or the supervisory committee of a cooperative to prepare a report and to review the transformation project.

The transformation project continues to be of a contractual nature and must be prepared by all the involved companie or cooperatives, published in the Commercial Gazette and subsequently approved in the same wording.

The Report on Transformation prepared by the statutory body of the company, which is not required in case of a limited partnership and a general partnership, now need not be prepared if (i) all members of the involved commercial company or cooperative agree with it not being prepared, (ii) the dissolved limited member of liability company or joint-stock company merges with its sole shareholder, or (iii) all members of the limited liability company are its Executive Directors.

In certain cases, an expert appointed by the court becomes involved in the process of the company transformation. The appointment of an expert is mandatory in order to (i) perform an appraisal of the company at all times in case of a merger by amalgamation and in case of a change in the legal form into a limited liability company or a joint-stock company and in certain cases of a merger by consolidation; in case of a division accompanied by incorporation of new companies or upon consolidation, an appraisal of assets of the dissolved company is required (in case of a split off, the appraisal relates only to the split off part), (ii) review the transformation project, which is required at all times in case of mergers of Czech joint-stock companies and cooperatives, save for a few exceptions; in case of a merger of a limited liability company a review of the transformation project is required only if it is requested by one of the members; the same rules apply to division; and to (iii) review the amount of adequate compensation provided in case of purchase (buy out) of shares by the succession company, upon leaving the company pursuant to the Transformation Act or upon transfer of assets of the dissolved limited liability company or joint-stock company to the receiving (succession) member.

The transformation takes legal force on the date of its registration in the Commercial Register. In compliance with the requirement of legal certainty and also with the Tenth Directive the process of transformation is absolutely irreversible from a legal point of view after registration thereof in the Commercial Register regardless of how much the law was possibly breached. In other words this means a ban on any challenging or analyzing the transformation project after registration thereof in the Commercial Register.

The Transformation Act introduces into Czech law the regulation of cross-border mergers. While the Tenth Directive provides exclusively for cross-border mergers of capital companies (corporations), the Transformation Act, stretches even further, influenced by a judgment issued by the European Court of Justice in the matter SEVIC Systems AG, dated the 13th of December 2005 (C-411/03), relating to rights of companies arising under the freedom to settle (Articles 43 and 48 of the Treaty Establishing the European Community). Pursuant to the Transformation Act all Czech commercial companies (i.e., also general partnerships and limited partnerships) and cooperatives may take part in cross-border mergers.

The concept of cross-border mergers is based on the principle of collision of at least two national laws pursuant to which the personal status of involved companies is governed. The preparatory phase of a cross-border merger will at all times be performed according to the laws to which each of the involved companies is subject, and the actual completion of the cross-border merger will then be governed by the laws of the country in which the succession company has or will have its registered office. If, for example a cross-border merger is to take place between a Czech joint-stock company and a German joint-stock company, and if the succession company is going to have its registered office in the Czech Republic, then in the preparatory phase the German joint-stock company will be governed by the German laws, while the Czech joint-stock company will be governed by the Czech laws, and the final phase will be governed by the Czech laws as well.

The law, however, does not require the succession company established through a cross-border merger, whether it already exists or whether it will be newly established, to situate its registered office in any of the member countries where any of the involved companies has its own registered office. Therefore it is not excluded that a cross-border merger between a Czech joint-stock company and a German joint-stock company will result in a succession joint-stock company with its registered office in the Netherlands.

Pursuant to the Transformation Act only cross-border mergers of the same or similar legal form are permitted in compliance with the Tenth Directive, unless national laws of member countries of all entities involved in the cross-border merger approve combined cross-border mergers.

The Tenth Directive stipulates that each member country is obligated to appoint a public authority body that will be obligated to review whether in case of a cross-border merger, the rule of law was protected and all official rules and regulations applicable to protection of rights of members, creditors, and employees of the involved companies have been observed. The Transformation Act has conveyed such powers to notaries who issue certificates on observance of all statutory regulations and duties.

While the Tenth Directive governing cross-border mergers vests certain powers also to employees of the succession limited liability companies and joint-stock companies, the Transformation Act provides such rights also to employees of cooperatives.

The effects of a cross-border merger take legal force as of the date when the merger is entered in the Czech or foreign (Commercial) Register. The subsequent deletion of the extinct Czech company from the Czech Commercial Register has only declaratory effects.

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.