Corporate / M&A

Czech Republic: New Ways of Cross-Border Transfer of Company Seat

On 1 January 2012, the Amendment to the Act on Transformations (the AT Amendment) came into force. In addition to major changes related to all types of transformations, the AT Amendment also introduced seat transfer within the EU out of and into the Czech Republic. Notwithstanding certain application challenges, companies are already using the new way of cross-border transfer of seat.

Before the new reg­u­la­tion, trans­fer of seat was legal­ly pos­si­ble only if there was a spe­cial inter­na­tion­al treaty in place with the respec­tive state. As there is no such treaty, the AT Amend­ment estab­lished a new instru­ment under Czech law.

Trans­fers into and out of the Czech Repub­lic dif­fer in the doc­u­ments required and in pro­ce­dure. This is because, due to prin­ci­ple of sov­er­eign­ty, the Czech law can­not com­plete­ly reg­u­late steps to be tak­en in oth­er coun­tries (eg, regard­ing project approval).

The trans­fer may also include a change of legal form of the com­pa­ny.

European dimension

This instru­ment was intro­duced into Czech law on the basis of the Carte­sio case, where the ECJ deduced the pos­si­bil­i­ty of seat trans­fer with­in the EU. Such an ini­tia­tive on the part of the Czech leg­is­la­tor is sur­pris­ing, con­sid­er­ing that it often has dif­fi­cul­ties with manda­to­ry trans­po­si­tion of direc­tives.

Anoth­er pos­si­ble cause is the fact that the Euro­pean Par­lia­ment has been try­ing to per­suade the Euro­pean Com­mis­sion to cre­ate a pro­pos­al of the 14th com­pa­ny law direc­tive reg­u­lat­ing the pos­si­bil­i­ty of cross-bor­der trans­fer of seat. It is there­fore pos­si­ble that the Czech leg­is­la­tor, pre­dict­ing the neces­si­ty of future trans­po­si­tion of the pre­pared direc­tive, has tak­en a proac­tive stance on this issue.

Transfer into the Czech Republic

Trans­fer of seat into the Czech Repub­lic is sub­ject to sev­er­al require­ments. The trans­fer must be pos­si­ble under the law of the state in which the legal enti­ty cur­rent­ly resides and under the law of the state gov­ern­ing the inter­nal legal rela­tions of the legal enti­ty. The for­eign legal enti­ty must also change its legal form into one known under Czech law, and the company’s inter­nal legal rela­tions must be gov­erned by Czech law. In addi­tion, the AT Amend­ment requires the inter­est­ed com­pa­ny to not be in liq­ui­da­tion or sub­ject to insol­ven­cy pro­ceed­ings.

The AT Amend­ment empha­sis­es above all the prin­ci­ple of reg­is­tered cap­i­tal main­te­nance (ver­i­fi­ca­tion of its existence/amount). If, as a con­se­quence of the trans­fer, the com­pa­ny changes its legal form to a lim­it­ed lia­bil­i­ty com­pa­ny or joint-stock com­pa­ny, the company’s assets must be eval­u­at­ed by an expert. The amount of reg­is­tered cap­i­tal can­not be high­er than the val­ue of assets deter­mined by the expert report. If the equi­ty cap­i­tal does not equal the amount of reg­is­tered cap­i­tal in the open­ing bal­ance sheet on the date of incor­po­ra­tion, the share­hold­ers must pay the dif­fer­ence with­out undue delay.

Transfer from the Czech Republic

For trans­fers abroad, the AT Amend­ment allows that the company’s statutes and legal form be gov­erned by Czech law from the trans­fer onwards. This is of course only pos­si­ble if there is no oth­er legal reg­u­la­tion in the state of the new seat. Even in this case, it is nec­es­sary to change the legal form to one reg­u­lat­ed by the state into which the com­pa­ny is trans­fer­ring its seat. The AT Amend­ment pro­hibits trans­fer of seat if the com­pa­ny is in liq­ui­da­tion or insol­ven­cy pro­ceed­ings.

Besides the stan­dard require­ments nec­es­sary for any com­pa­ny trans­for­ma­tion, the AT con­tains spe­cial require­ments. Among oth­ers, issues relat­ed to pro­tec­tion of employ­ees, cred­i­tors and share­hold­ers must be reflect­ed in the trans­for­ma­tion project. The time peri­od for trans­for­ma­tion project pub­li­ca­tion is dou­ble that of oth­er kinds of trans­for­ma­tions.

Conclusion

The oppor­tu­ni­ty to trans­fer com­pa­ny seat is cer­tain­ly wel­come. Clear­ly, some prob­lems may arise in its appli­ca­tion, espe­cial­ly in con­nec­tion with the effects of seat trans­fer or chang­ing found­ing doc­u­ments. Its use is also lim­it­ed by the legal reg­u­la­tions of oth­er EU mem­ber states.

All the legal require­ments in the AT Amend­ment are jus­ti­fied, ade­quate and pro­por­tion­ate in terms of legal cer­tain­ty of com­pa­nies in EU mem­ber states that have busi­ness rela­tion­ships with the trans­ferred com­pa­ny. Com­pa­nies should also not be allowed to avoid their respon­si­bil­i­ties in their state of ori­gin.

Over­all, the new instru­ment is an inter­est­ing option for cross-bor­der seat trans­fer. The future will show whether com­pa­nies will choose this path or the proven meth­ods of cross-bor­der merg­er or Soci­etas Europaea.

This instrument was introduced into Czech law on the basis of the Cartesio case, where the ECJ deduced the possibility of seat transfer within the EU. Such an initiative on the part of the Czech legislator is surprising, considering that it often has difficulties with mandatory transposition of directives.