Companies

Corporate law

Corporate law is part of commercial law and deals primarily with the establishment, operation and changes within companies (corporations). It therefore does not address the company’s external relations but internal affairs.

Transformations of companies 

Transformation of a legal entity is a process that results in a change in the legal entity’s legal identity. The provisions of Section 174(1) Act No. 89/2012 Sb., Civil Code, as amended (“Civil Code”) provide exhaustively that transformation of a legal entity means:

• merger
• demerger
• change of legal form

In addition to this general legislation, the Czech legal environment provides for a detailed regulation of transformation of business corporations in Act No. 125/2008 Sb., on transformations of trading companies and cooperatives, as amended (“Act on Transformations”), which stipulates in Section 1(2) that a transformation of a business corporation means:

• merger
• demerger
• transfer of assets and liabilities to a partner
• change of legal form
• cross-border relocation

The transformation process is quite complex and sometimes difficult to navigate safely. Our law firm is fully prepared to assist you in the implementation of all types of transformations. The process begins with the development of a transformation project. The transformation project is subsequently deposited in the Collection of Documents and the relevant notices required by law are published. It is often required to have the assets and liabilities affected by the transformation valued by an expert opinion. In the transformation process, you will usually have to cooperate with accounting and tax advisors. If interested, we can help you secure those from our collaborating entities. In the case of a standard transformation process, each transformation must be approved by the members of the companies involved. The transformation then takes effect upon the transformation’s registration in the Commercial Register. 

Merger of companies 

The most common forms of transformation include merger and demerger of a company. In the case of a merger, one or more companies are dissolved and their assets and liabilities are transferred to a single company as a legal successor. We distinguish a merger by the formation of a new company, where at least two business corporations are dissolved, forming a new company and transferring all their assets and liabilities to it, and a merger by acquisition, where at least one business corporation is dissolved and its assets and liabilities are transferred to another existing company. 

Demerger of a company 

Demerger, unlike merger, is a process where all the assets and liabilities of the company being demerged are transferred to several different companies or part of the assets and liabilities of the company being demerged is transferred to one or more other companies. In the case of a transformation of a company by demerger, we distinguish a demerger by split-up and by spin-off. In the event of a demerger by split-up, the demerging company is dissolved. The assets and liabilities of the dissolved company are then transferred to at least two successor companies. By contrast, in the event of a demerger by spin-off, the company whose assets and liabilities are subject to the demerger is not dissolved. The company retains a part of its assets and liabilities and a part of its assets and liabilities is transferred to at least one successor company. 

A merger is characterised by a single successor company at the end of the entire transformation process and the dissolution of at least one of the companies involved, whereas a demerger may not result in any dissolution of a company involved at all. 

Transfer of assets and liabilities to a partner

When transferring assets and liabilities to a partner, the company is dissolved without liquidation and its assets and liabilities pass on to one of the partners, also referred to as the “acquiring partner”. Other partners (if any) are only entitled to a cash settlement from the acquiring partner. However, not every partner can become an acquiring partner. In accordance with Section 340 of the Act on Transformations, only a person who is an entrepreneur pursuant to the Act on Transformations at the time of drawing up the project of transfer of assets and liabilities and at the time of filing the application for registration of the transfer of assets and liabilities in the Commercial Register can be the acquiring partner.

In the case of a personal corporation (unlimited liability company and limited partnership company), the transfer of assets and liabilities to a partner is possible only if there is a sole partner remaining in the company and the participation of the others has ceased. In the case of a stock corporation (limited liability company and joint-stock company), the transfer is only possible if the acquiring partner has at least a 90% share in the registered capital and voting rights of the company. In the case of a cooperative, the assets and liabilities cannot be acquired by a member. 

Change of legal form

When changing the legal form, the legal entity changing its legal form is neither dissolved nor terminated. The assets and liabilities of this company do not pass to a legal successor nor does the share in the legal entity, the change concerns only its internal legal relations and the legal status of shareholders.

The change of legal form is based on the principle of permeability of legal rules, which means that a company can change its legal form to any other company or cooperative. A cooperative may become a company. A joint-stock company can therefore transform into a limited liability company and vice versa.

There are statutory restrictions on when a change of legal form can occur, for example, a bank must always be a joint-stock company pursuant to Act No. 21/1992 Sb., on banks. In addition, it follows from the nature of individual companies that a single-member stock corporation cannot be transformed into a personal corporation or a cooperative as these cannot have a single member.

Only the company changing its legal form is a party to the transformation.

Due diligence

Legal audit or legal due diligence is a process used primarily in acquisitions and mergers of companies. Legal due diligence is not the only way to screen the target company (target). For example, it is possible to conduct financial, tax, market, operational due diligence and more. Due diligence precedes the acquisition process as it always initiates it. The aim of due diligence is to obtain information and facts to make an informed decision as to whether the acquisition is suitable and financially viable for the interested party. 

Purpose of legal due diligence

In most cases, legal due diligence is performed by the buyer as the buyer is interested in obtaining as detailed information as possible about the operation and internal conditions of the acquired company to avoid being unpleasantly surprised after the acquisition by any negative facts present in the target company. As part of due diligence, we screen the company and its internal conditions, often going back several years depending on the nature of the facts being examined, from its inception to the present. Legal due diligence focuses on individual areas – corporate law, law of obligations, labour law, property law or public law. For example, the examination determines whether the company has in order the instruments of incorporation, documents for the transfer of ownership rights in the company, acquisition titles to movable and immovable assets or whether the company’s contracts with employees are properly concluded. At the same time, we verify that the company holds all the permissions to carry out the business and does not violate any legal regulations. An important part of legal due diligence is to examine all the company’s liabilities that could indirectly impose a financial burden on the buyer in the future. On the basis of the examination of all the documents and information provided, a detailed analysis is prepared for the purposes of the interested party, which evaluates all the facts established and provides recommendations on how to avoid potential risks in the transaction. Due diligence should be characterised by the complexity of its execution, where it is usually proceeded from the most important issues to the less important ones.

Legal due diligence should be an integral part of any major acquisition transaction. It very often helps buyers to reveal the “skeletons in the closet”, even in a company that appears healthy and prosperous on the outside. Due diligence also serves as a fundamental basis for the preparation of the entire acquisition documentation, where the mutual rights and obligations of the parties can be set based on the conclusions of the legal due diligence. 

What issues do we typically handle for clients in relation to companies?

• How to establish a company properly?
• How to establish a cooperative properly?
• How to prepare documents for the general meeting and ensure its proper conduct?
• How to proceed in the liquidation of a company
• Organisation of general meetings
• Representation at general meetings
• Appointment and removal of the statutory representative, supervisory board, board of directors and their chairmen and related documentation (service contract, affidavit), assistance to the company’s governing body in the management of the company
• Areas of responsibility of the governing body
• Preparation and negotiation of agreements between shareholders and partners
• Increase or decrease in the company’s registered capital
• Transformations of companies, including mergers, demergers, changes of legal form or transfer of assets and liabilities to a partner
• Advice on business groups and law relating to business groups
• Advice on entering the capital market
• Arrangement of registration in the Commercial Register
• Arrangement of business permits
• Legal audit