The amendment to Act No. 125/2008 Coll., on Transformations of Companies and Cooperatives (Transformation Act) effective from 19 July 2024, which implements Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 (the “Directive“), has brought significant changes to both domestic and cross-border transformations.
The amendment is primarily aimed at adapting the Transformation Act to the requirements of the Directive and facilitating cross-border transformations of capital companies within the EU, while responding to the experience of past transformation practice and removing certain interpretative ambiguities.
The significant changes:
New form of demerger (conversion)
Newly, it is possible to divide a company in such a way that a certain part of its assets is transferred to one or more newly formed companies or existing companies, or in combination to newly formed or existing companies. The shareholder of the successor company(ies) becomes the company being divided, not its shareholders.
The new rules apply to both domestic and cross-border transformations. However, the Transformation Act goes beyond the Directive, which only regulates this type of transformation with the creation of new companies. Cross-border conversions without the creation of new companies may cause problems if the foreign legislation does not provide for this form of demerger.
In practice, it is a new alternative to the establishment of a company by a single shareholder by a non-cash contribution or an increase of the share capital by a non-cash contribution. The advantage over a contribution in kind may be that, if the share capital of the successor company is not increased (which must be explicitly stated in the transformation project), the obligation to have the converted assets valued by an expert’s report is eliminated.
Adjustment of way of fulfilling publication obligation
The amendment abolishes the obligation to publish the notice on the deposition of the transformation project in the Commercial Bulletin; the publication obligation can be fulfilled by either:
Publication by deposition of documents in Collection of Documents
- The transformation project, including the notice to creditors, and employee representatives, is deposited in the Collection of Deeds
- If the person involved in the transformation has a website, it is obliged to publish the notice to creditors, and employee representatives on its website as well (factuality is decisive, if the company has a website, it publishes it there as well)
Publication via website (electronic form)
- The transformation project is published on the website together with a notice to creditors, and employee representatives;
- The person involved in the transformation shall make an entry about the ongoing transformation in the Commercial Register in the Other Facts section (the fact about the ongoing transformation is now to be displayed similarly to the fact about the ongoing insolvency when consulting the Commercial Register)
- Notice to creditors, and employee representatives to be filed in the Collection of Deeds
The deadline for fulfilling the publication obligation remains unchanged; the publication obligation must be fulfilled at least one month before the date on which the conversion is to be approved.
Protection of shareholders with suspended or without voting rights
The rules on the suspension of voting rights under the Companies Act do not apply when deciding on transformation. If the Transformation Act makes a shareholder’s right conditional by voting against the approval of the transformation (e.g. the right to redeem shares, the right to withdraw from the company), this condition will be fulfilled in the case of a shareholder with suspended voting rights (e.g., due to non-compliance with the UBO registration) by expressing disapproval with the transformation at the general meeting or outside it.
The expression of consent or disapproval is not considered to be an exercise of voting rights.
The same applies also to the shareholders with non-voting shares who shall have the right to express their approval or disapproval with the transformation at the general meeting on its approval.
Modification of valuation rules
The requirement for the appointment of an expert by the court is removed. The person involved in the transformation shall select an expert from the list of experts. This will simplify and shorten the transformation process.
At the same time, in all cases where the valuation of the assets by an expert is required for the purposes of the transformation, it may be replaced entirely by a valuation in accordance with the rules for the valuation of non-cash contributions when increasing the share capital of a joint stock company. Thus, when valuing the assets, the fair value of the assets can be determined by a generally recognized independent expert (e.g., in the case of real estate, a reputable real estate agency).
Changes in creditor’s protection
Creditors of future or contingent claims may now also claim sufficient security if they arose before the publication of the transformation project, which is intended to extend protection to creditors of claims arising from long-term contractual relationships, such as lease agreements.
If the creditor does not agree with the party involved in the transformation on the method of securing the claims, the creditor must exercise its right to sufficient security before the court within a limitation period of 3 months from the publication of the transformation project. The additional security is established directly by a court decision if the creditor certifies that the transformation will impair the recoverability of its claim. However, the filing of a creditor’s application for the establishment of additional security does not prevent the registration of the transformation in the Commercial Register.
Changes in cross-border transformations
The amendment clarifies the rules for different forms of cross-border transformations. It is now possible to transfer a registered office from a non-EU or EEA Member State to the Czech Republic, as well as from the Czech Republic to such a third country.
It also introduces an obligation for the notary to verify whether the purpose of the cross-border transformation is not abusive or fraudulent, aimed at avoiding or circumventing national or EU legislation or at committing criminal activities. If the notary finds such a purpose, he/she shall be entitled to refuse to issue a certificate for the cross-border transformation. A complaint may be lodged with the Chamber of Notaries against the refusal to issue a certificate; any disputes arising from the relationship between the notary and the applicant for a cross-border transformation certificate will be settled in civil court proceedings.
According to the transitional provisions, transformations initiated before the effectiveness of the amendment (the decisive factor for the assessment will be whether the transformation project has already been drawn up) will be completed in accordance with the legislation in force before the amendment, unless they decide to complete the process under the new rules.
