Czech Republic: Revolution in Bonds
→ Veronika Odrobinová
→ Petra Konečná
The Bonds Act has been significantly amended (the Amendment). From 1 August 2012, new rules for the issuance of bonds and other matters are in place. The most important changes are the simplification of the process of bond emission and cancellation of the supervision of the Czech National Bank (including sanctions). On the other hand, investors should be more cautious when intending to invest in bonds because of limited regulatory involvement.
The aim of the Amendment is to mitigate the administrative burden connected with the issuance of bonds, to expand the issuance of the bonds on the Czech market and to deregulate so-called “private bonds”.
A bond is defined as any security incorporating the right for repayment of a due amount. Furthermore, the Bonds Act is now applicable only to bonds governed by Czech law, regardless of their issuer or place of issue.
Individuals as issuers
Individuals can now also issue bonds – a revolutionary development. Before, only legal entities and foreign natural persons holding banking licences had this right. The aim of this change is to provide an alternative financing for own business or private activities. Notably, the new statutory regulation does not only refer to individuals-entrepreneurs but also to private individuals.
Certificated bonds may no longer be issued as bearer bonds; “anonymous bonds” were cancelled. Only registered bonds may now be issued in the certificated form. In addition to the transfer endorsement, the change of the holder must be recorded in the list held by the issuer for the transfer to be effective.
Limited Czech National Bank supervision
The duty of the issuer to submit the emission conditions for the approval of the Czech National Bank was cancelled – which previously applied even if the prospectus was not required. It is sufficient if the emission conditions have been properly made available, for example on the carrier of information such as CD, DVD, which allows their preservation and reproduction.
Accordingly, if the issuer intends to change the emission conditions, no review of the Czech National Bank is required even if the changes are substantial. It would mean much more vigilance of the investors also during the period from the acquisition of bonds until their repayment.
The Czech National Bank will therefore no longer supervise the emission of bonds as long as the issuer is not required to publish the prospectus under the general regulation of the public offer of securities. Therefore, there is now a distinction between “private” and “public” bonds. For “public” bonds, the emission conditions can only refer to the prospectus. So, the duplicity of emission conditions and prospectus is removed. The bonds will be private if they are, for example, offered to fewer than 150 addressees in the Czech Republic.
The Czech National Bank used to supervise the observance of various statutory requirements and, in case of breach, could impose a fine of up to CZK 20 mln (ca EUR 800,000). All sanctions provisions have been deleted. Thus, administrative offenses from before 1 August 2012 that have not been fined by that date cannot be sanctioned. Any breach of duties stipulated in the Bonds Act may thus be sanctioned only by means of private law, such as actions for fulfilment of duties, claims for damages, and so on.
Certain types of bonds remain subject to special conditions where certain supervision and sanctions have been retained; for example, communal bonds, public bonds or mortgage bonds. Further requirements may apply for certain types of issuers, such as investment companies or investment funds.
Substitute bond holders meeting
Another significant change is the implementation of substitute bond holders meetings in case of a change of emission conditions. If the meeting did not have a quorum, a substitute meeting with the same agenda may be convened within six weeks. No quorum applies for the substitute meeting. This should allow the issuer to change the emission conditions if the bond holders do not participate in the bond holders meetings. Such an option may have a major impact on the position of the bond holders.
Another important change is the introduction of the remote bond holders meeting, as long as this is regulated in detail in the emission conditions.
More changes to come
Further changes are in the pipeline. After 1 January 2014 when the new Civil Code should come into effect on, the regulation will slightly change again due to the changes in general legal principles of Czech law.
These changes should streamline the issuance of bonds and eliminate the related administrative burden, which has made bonds a less frequently used instrument. The issue, in particular of private bonds, should become a flexible instrument for fund raising. But investors would have to rely only on their assessment and the emission condition when making the decision to invest in bonds, especially private bonds.