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.

Individuals can now also issue bonds – a revolutionary development. Before, only legal entities and foreign natural persons holding banking licences had this right.