On the 1st of January 2021, an amendment to the Business Corporations Act (Act No. 33/2020 Coll.) came into force, which brought fundamental changes in corporate law. This article presents the practical implications of one of them, concerning the condition of approval of the transfer or pledge of the plant and part of the assets by the general meeting of the company (Sections 190(2)(i) and 421(2)(m) of the Corporations Act). In which cases and whose approval is needed?
Once upon a time
Prior to the 1st of January 2021, the relevant provisions concerning the condition of the General Meeting's approval of the transfer or pledge of the plant read as follows: 'The General Meeting shall have the power to approve the transfer or pledge of the plant or any part thereof which would entail a material change in the existing structure of the plant or a material change in the company's business or activities'.
The term "part of the race" posed an interpretative problem. Whether it should be understood as a "formal" concept, where a part of the plant would be interpreted as a separate organizational unit (branch) within the meaning of Section 503 of the Civil Code, or as a "material" concept, where a part of the plant means any property component of the plant, the transfer of which would entail a material change in the existing structure of the plant or a material change in the object of the company's business or activity. The parties to the transactions were thus in uncertainty as to whether the specific transfer agreement was subject to the approval of the general meeting.
The Supreme Court solved this problem of interpretation in its decision 27 Cdo 2645/2018, dated 29 May 2019, which leaned towards the so-called formal-material interpretation. This means that at the same time the formal prerequisite must be met, i.e. it must be a separate organizational unit that also meets the material features, i.e. its transfer would mean a substantial change in the existing structure of the plant or a substantial change in the subject of the company's business or activity.
However, this short period of legal certainty came to an end when the amendment came into force.
Here we go again
After the amendment, the consent of the general meeting is subject to the transfer or pledge of the plant or such part of the assets that would constitute a material change in the actual object of the company's business or activity.
The term "part of the plant" has thus been replaced by "part of the assets", thus definitively abandoning the formal interpretation. After the amendment, a part of the assets will be interpreted only materially, i.e. it will be assessed only whether a given transaction may constitute a material change in the actual (not formal) object of the company's business or activity. However, this will be very difficult to assess in some cases.
The amendment has prepared another unpleasant surprise for us. According to the original legislation, there was a consensus that the condition of the general meeting's consent to the transfer or pledge of the plant or part of it applied only to the transferor's (alienator's) company, not to the acquirer's company. However, this also seems to be changing. The Explanatory Memorandum to the amendment states that the transfer is understood to be both a sale and a purchase, and thus the consent of the general meeting will also (or only) have to be obtained from the purchaser in qualified cases. This entails additional costs and increases legal uncertainty.
Similarly, the new regulation also applies to pledgees (in cases of forfeited pledge or negotiations of a security transfer). Even a pledge of a plant may result in a substantial change in the actual business or activity of the pledgee. In such cases, it will therefore be necessary to obtain the consent of the general meeting of the pledgee for the pledge.
What to do if consent has not been given
In cases where the transaction is not approved by the general meeting in violation of the law, such contracts will suffer from a defect for which the beneficiaries (the company and the shareholders) may bring an action before the court within the statutory time limit for its nullity. Thus, in practice, even in disputed cases, the approval of the general meeting will be required, which will increase the cost of the entire transaction.
If you have already entered into such an agreement after 1 January 2021 without the approval of the general meeting, this can be remedied. Consent can also be granted retrospectively, which will cure the defect in the contract. Provided, of course, that one of the beneficiaries has not already objected to its lack of validity in court and both parties agree to such a procedure.
Author: Aneta Koubková
The Article has been published on © EPRAVO.CZ.