February 2018 - The Slovak Commercial Code has recently been amended, with the new measures put into effect gradually in November 2017 and January 2018. The aim of the amendment is, among others, to stop certain fraudulent practices (identified by the public authorities in the past) related to liquidations, reorganisations and bankruptcy of businesses, to increase the protection of creditors and to tighten the rules on the liability of directors and shareholders. On the other hand, these new measures may complicate mergers (and similar reorganisations) for businesses in general, and they introduce certain new obligations that the directors and shareholders of Slovak businesses should be aware of.
In order to complete a merger, the following new tests must be met on the effective day of the merger (i.e. the date on which, for accounting purposes, assets and liabilities of the wound-up company transfer to the successor company):
- the value of successor company's liabilities must not exceed the value of its assets (whereas subordinated liabilities such as shareholder loans do not enter the calculation); presumably, this test will require additional statements by the independent valuator preparing the valuation of the participating companies;
- participating companies must not be subject to liquidation, restructuring, bankruptcy or court proceeding on dissolution.
In addition, each company being wound-up must deliver a notice and a draft merger agreement to the (i) tax authority and (ii) to the pledgee, if there is an existing pledge over the company's shares. These documents must be delivered at least 60 days prior to the General Meeting at which the merger should be approved. The tax authority and the pledgee do not have the right to stop the merger, but must at least be informed as proposed.
Before a merger can be registered in the Commercial Register, an auditor must prepare a report on the merger and its implications. The report shall be attached to the petition to the Commercial Register. If the petition is not filed within 30 days from the General Meeting approving the merger, the Commercial Register will consider the merger void and will not proceed with the registration.
Responsibilities of Directors
The amendment further intends to attack the practice of appointing so-called "white horses" (i.e., persons with no property acting as formal directors and covering for the actual decision makers) to the statutory bodies of Slovak companies. All responsibilities and liabilities of directors under the Commercial Code will now also extend to other persons who can be considered "de facto directors", i.e. persons who in fact act as members of statutory bodies without being formally appointed to such bodies. These persons:
- shall have the same responsibilities as standard directors; and
- in case of breach of their responsibilities, they will be liable to the company and to its creditors to the same extent as formally appointed directors.
All directors who are appointed to their positions after 1 January 2018 must provide to the Commercial Register specimen signatures and specific acknowledgement of their appointment, verified by a notary public.
In addition, former directors' duties are now expressly extended to the provision of cooperation and information to courts, tax authorities, the Social Insurance Agency and to other relevant public authorities in relation to the period during which they have been in the office of a director.
Piercing the corporate veil
This is a completely new concept never before formally recognised in Slovak legislation, however a well-recognised doctrine in common law. Piercing the corporate veil in principle means that under certain circumstances a shareholder may be held liable for a company's liabilities.
Under the amended Commercial Code, this concept applies (for the moment) in rather limited circumstances related to bankruptcy. Specifically the controlling person shall be liable to the controlled person's creditors for damages caused by the bankruptcy of the controlled person, provided the controlling person significantly contributed to the bankruptcy.
The controlling person may get rid of such liability provided it proved that it acted (i) with due care in an informed manner and (ii) in a good faith that it was acting in favour of the controlled person.
Therefore, the controlling person may become liable e.g. if it impels the controlled person to provide a loan to a doubtful debtor and thus causing bankruptcy of the controlled person, usually based on the instruction of the General Meeting to the director of the controlled person.
The controlling person under the Commercial Code is a person that holds majority of voting rights or, based on an agreement with any other person, can exercise the majority of voting rights in the controlled person. The above concept should thus, in our view, not affect the ultimate shareholders who may hold shares several layers above the direct shareholders of the affected Slovak company. However, since this is a new concept in Slovak legislation, the courts' approach towards the liability of ultimate shareholders has yet to be tested.
Other capital funds
The amendment also sheds more light onto the concept of "other capital funds", which has been subject to disputes among legal practitioners for years. "Other capital funds" have been used by some businesses and their shareholders as a substitute for registered capital. In other words, they represent additional funds injected by shareholders to increase the equity of the company without increasing the registered capital. Until now, there were no rules regarding the creation and use of such capital funds.
New rules clarify that companies may create other capital funds only if it is specifically provided for in the company's Articles of Association. In addition, other capital funds may be distributed to shareholders only in case:
- it is permitted by the Articles of Association;
- the company is not in crisis nor would it get into crisis by such distribution;
- the amount to be distributed was announced in the Commercial Journal at least 60 days prior the distribution.
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.