New obligations of legal entities that are members of the bodies of other companies

An amendment to the Commercial Corporations Act (hereinafter referred to as “ZOK”) which is to enter into force on 1 January 2021 will, among other things, tighten the conditions for membership of legal entities in elected bodies of limited liability companies, joint stock companies and cooperatives (hereinafter referred to as “capital companies and cooperatives”).

The new regulation stipulates the obligation for legal entities that become members of elected bodies of capital companies or cooperatives to authorize without undue delay after their election a single natural person who meets the requirements and preconditions for the performance of the function in question to represent them in these bodies. For capital companies and cooperatives, the general regulation contained in Section 154 of the Civil Code will in fact be excluded.

An important element of this new regulation is the rule that only one natural person must be an agent. In the future, it will not be possible, for example, for the so-called chaining to take place within the representation of a legal entity, where the legal entity is represented in the position of a member of the elected body by another legal entity, which is further represented by other legal entity and so on. As a result of the chain, it was often difficult to trace the natural person who actually acted for the company and absurd situations could occurred where the original legal entity could become its own representative. At the same time, controversial situations, where a legal entity would authorize more natural persons to represent it in the elected body, which would increase the number of persons who make up the body, and each of these persons could also show a different will, will be eliminated.

The proposed regulation does not apply to partnerships (public companies and limited partnerships). In their case, membership in the statutory body is associated with their share in the company and the termination of office due to the non-empowerment of a particular natural person cannot occur. In addition, unlike capital companies and cooperatives, it will be possible for legal persons in elected bodies to authorize more natural persons.

New obligations of legal entities in elected bodies

As mentioned above, a legal entity that will be elected to a body of a capital company or cooperative after 1.1.2021 will be newly obliged to: (i) without undue delay after this election authorize one natural person to represent the legal entity in the elected body in question; (ii) to have this person registered as an agent in the Commercial Register.

It will be possible to register a legal entity as a member of an elected body in the Commercial Register after January 1, 2021 only together with its agent (the authorization of a natural person is therefore a condition for making an entry in the Commercial Register). If this registration does not take place within 3 months from the date of the establishment of the function of a legal entity in the elected body, this function will automatically terminate.

In the event that the authorization of a natural person representing a legal entity as a member of an elected body expires, the legal entity is obliged to authorize and have a new natural person registered in the Commercial Register to replace the original agent. As in the case of the obligation above, the legal entity will have a period of 3 months from the date of expiry of the previous representative's authorization and if the new representative does not register within the specified period, the legal entity will cease to function as a member of the elected body.

Legal entities that are or will become members of elected bodies of capital companies or cooperatives before 1.1.2021 will not escape the abovementioned obligations either. They will run a three-month period from the entry into force of the amendment to fulfil the above obligations, i.e. it will end on 1.4.2021.

Unresolved issues of the new regulation

However, the question is how effective the new regulation will be in practice. The registration of a member of an elected body in the Commercial Register has only a declaratory character (i.e. the creation of a function is not conditioned by an entry in the Commercial Register) and a legal entity elected to a body of a capital company or cooperative may therefore perform the function before its entry in the Commercial Register.

It could therefore be argued that the new regulation also allows a legal entity to be a member of an elected body of a capital company or cooperative and to fully perform this function for three months (before it ceases to function under the new ZOK regulation) without having to authorize a specific natural person to represent them. Within this three-month period, only provision § 154 of the Civil Code would apply to that legal entity, i.e. the current regulation with all its shortcomings (e.g. chaining, see above). Theoretically, it would be sufficient for a capital company or cooperative to choose a legal entity as a statutory body every 3 months, which will then be their full-fledged statutory body without being affected by the new regulation.

Although in such a case the relevant capital company or cooperative is exposed to the risk of a fine according to the Public Registers Act up to CZK 100,000 and, in the extreme case, its cancellation, in practice it has been shown that these sanctions are not frequent (and are always preceded by a call to remedy the defective condition).

Therefore, if the new regulation is to prevent the functioning of intentionally created corporate structures using chaining, etc., for which the formal implementation of the election of a statutory body four times a year may be easily feasible, it is uncertain whether it will actually achieve the intended consequences.

In view of the above, it will be interesting to see how the practice and especially the register courts will deal with the new legislation.

 Authors: Jiří Mačát a David Fabián

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