The Ministry of Justice has set several goals for its term in office. One of those is also a significant recodification of law governing the existence and functioning of corporations. They significantly affect public life, therefore, all of us.
Currently, both the professionals and the general public have the opportunity to comment on this proposal in an inter-ministerial comment procedure; however, this area of law is so wide and complex, it can be difficult to understand fully. Therefore, our article will show you what the Ministry is proposing, the possible consequences of these changes, and also provide a comparison on how certain legal institutions apply abroad.
Almost one year after the Government´s program statement, Ministry of Justice presented a proposal concerning new corporate law.
In January 2021, Minister of Justice, Mária Kolíková, presented the first written materials concerning the new legislation, following an ambitious goal – to change the corporate law's current status, which overall does not reflect dynamics in the context of the real world.
The bill is now undergoing an inter-ministerial comment procedure. Afterwards, the bill will be written into articles which are to be discussed by both the Ministry and the general public. The proposed bill´s starting point is to change the course of corporate law, which is currently regulated by provisions of public law and change those towards civil law. Corporations are an essential part of business, which greatly affect and hugely influence its attractivity and economic competitiveness of Slovakia.
Current situation – a possible stumbling-point?
The law concerning corporations is currently regulated by two codes, Act no. 513/1991 Coll., Commercial Code, as amended ("Commercial Code") and Act no. 40/1964 Coll., Civil Code, as amended ("Civil Code"), which undoubtedly makes it difficult to navigate in a complex legal system. Besides, the Commercial Code provisions in its current wording are confusing and unsystematic, which can be seen, for example, in the number of cross-referencing provisions. Also, corporations are a dynamically functioning element in the field of living law, which cannot be based on only fixed and unchanging doctrines. On the contrary, the starting point for its (not only) legal regulation is economic practice and companies' real functioning in everyday life.
The mentioned codes can be considered obsolete – as an example, we can use their date of entry into force. The Commercial Code has amended almost fifty times since 1991 and the Civil Code entered into force much earlier, in 1964. Therefore, the Ministry of Justice is currently planning several reforms and amendments to existing laws.
Perhaps the most fundamental will be the new Civil Code, which, however, does not include a separate corporations’ regulation, similarly to the Czech Civil Code and the Czech Act on Business Corporations. It is clearly visible that a new, special regulation of companies' legal forms is needed.
EU law also doesn´t help with the corporate law current situation. The fundamentals of the proposed recodification should also show an effort to avoid adopting EU law provisions; they currently significantly complement the legislation of companies. The aim of the proposal is to transform EU law into the domestic one.
In addition to legal dualism in national legislation, the Ministry will probably have to deal with excessive bureaucracy, which especially interferes with corporate law. This inability to reflect on current law situation is further accentuated by the fact that certain application problems have not been solved by case law.
Hence the needed regulation, efforts to patch the holes have resulted in the adoption of several confusing mandatory provisions, which are currently difficult to distinguish from non-mandatory provisions due to the broad, non-conceptual and confusing regulation already mentioned. As a result, the current legislation is often even contradictory.
Within the recodification, the Ministry also follows-up on the recent proposal of a new map of Slovak courts, which provokes a lively discussion in the legal world. We have informed you about it in our Legal News 01/2021. Although this reform seems elaborate and complex, the question remains, whether it is a good idea to condition the new regulation of companies on such a fundamental judicial reform.
The submitted materials for the recodification say that "a necessary part of creating a new framework of corporate law must be, in addition to recodification, the specialization of courts (causal jurisdiction) and judges in corporate law, which is already envisaged by the Ministry’s proposals on the court map." We should add that this is not necessarily a bad thing. Increasing efficiency is undoubtedly the new legislation's aim, to which the new judicial map can clearly help.
Legislature of EU Law
In a modern globalized world, cross-border cooperation is more urgent day by day. The Slovak Republic also participates in this “movement” as a member of the European Union. This comes hand in hand with adopting legal acts of the European Parliament and the Council. In particular, the European Union's activities in recent years have opened the door to better regulation of corporate law.
Although their personal scope is limited solely to limited liability companies and notified joint-stock companies, future legislative changes in domestic company law are likely to be in a similar spirit.
Specifically, we are talking about three documents from 2019:
Directive on Preventive Restructuring Frameworks and Insolvency
Directive of the European Parliament and of the Council no. 2019/1023 of 20 June 2019 aims to eliminate possible differences between national laws and practices on restructuring, bankruptcy and other related institutes.
The directive is intended to enable entrepreneurs to run into business in financial difficulties as well. The means used for this would be the restructuring of companies by adopting changes in the composition, structure and conditions of their assets, liabilities, or the implementation of operational changes.
In particular, these provisions are intended to ensure that businesses' possible financial problems are addressed at an early stage, thus ultimately avoiding unnecessary bankruptcies and job losses.
Directive Regarding the Use of Digital Tools and Processes in Corporate Law
On 20 June 2019, Directive No. 2019/1151 of the European Parliament and of the Council which amends an earlier regulation from 2017 regarding the use of digital tools and procedures was adopted. Digital tools can effectively help when starting an economic activity, especially when setting-up a company or its branch in a country other than its founder's home country.
Given the fact that nowadays it is possible to perform a number of tasks in the comfort of home and without the need to travel (which is currently not only recommended, but often mandatory), it is only natural that the legislator reflects this dynamic development in corporate law, even on the online establishment of companies, or their electronic registration.
However, there is also risk associated with possible abuse and fraud. According to the Directive, Member States should ensure that both national and cross-border users have at their disposal a secure electronic identification pursuant to Article 6 of Regulation (EU) No 910/2014.
In addition, it also regulates the principle of so-called "once and it´s done", meaning that companies are not required to submit the same data to public authorities more than once. All this aims to reduce costs and the burden on entrepreneurs.
Directive Regarding Cross-Border Transformations, Mergers, and Divisions
This Directive of the European Parliament and of the Council No 2019/2121 of 27 November 2019 states in its introductory provisions that there is no uniform definition in EU law of the conflict criterion determining which national law would be applicable to a company. In accordance with the previous legislation, this is a matter for each Member State individually. At the same time, the directive points to the lack of a legal framework for cross-border transformations and divisions, which, of course, leads to further fragmentation and uncertainty. This fact alone is unfavorable for businesses and it is also associated with another problem – insufficient protection of creditors, minority shareholders and employees.
Proposed changes – are they for the better?
Recodification of Civil Code
As already mentioned in the introduction of this article, the Ministry of Justice is working on a new Civil Code, where more detailed provisions concerning legal entities are currently absent, as a result of which an analogous interpretation is disproportionately often used in many legal issues of companies.
For this reason, the new Civil Code is about to contain provisions that are to form the basis for the establishment, creation, name, including its protection, and internal structure of individual bodies within a legal entity, decision-making within such bodies, actions of legal entities towards third parties, liability of members of the board, liquidation, and dissolution. At the same time, a change in the primary forms of legal entities is also envisaged, while for companies the general regulation of legal entities and special regulation of associations of persons will apply as the alternative.
What does this mean for the recodification of corporate law? The new law will be limited to the legal regulation of those institutes, for which special provisions are required in relation to the legal forms of companies; and at the same time, according to the Ministry, it will apply mainly to “capital” companies.
On the other hand, after the recodification, we shall find a much more specific and detailed regulation of contractual relations of a corporate nature in the legal system. These will be issues of disposition of shares, the rights attached to them and the special agreements of the shareholders; the recodification should also include laws regarding concerns (holdings). We will introduce these institutes in more detail in the second part of this issue of Legal News.
The Ministry is undoubtedly aware of the problem of the fragmentation of the legal order mentioned above.
For this reason, it works with the possibility of creating a separate code, which will regulate the general legislation of legal entities, or legal forms of companies. In addition, it proposes the adoption of the new Commercial Register Act and, along with provisions governing unfair commercial practices and unfair competition. This code should also reflect the misleading advertisement practices aimed at potential customers.
Companies as Part of Private Law
Perhaps the most significant change in the proposed bill is a change in the understanding of company law. Instruments of private law should address the process of establishing a company up to the resolution of potential conflicts of interest and the protection of creditors and investors.
The division of companies into private and public ones will be based on the application of the autonomy of will of the subjects of these rights, i.e., the strengthening the independent position of the subjects. Ultimately, it will strengthen the authorities' powers while protecting creditors and important minority shareholders.
In this context, it is worth mentioning Italian companies' legislation, where a division can be observed when comparing private capital companies and public limited companies. German legislation can also serve as an example. There, public law provisions do not regulate corporations' formation, but, again, they are regulated almost exclusively by private law.
The area of obligations related to the statutory regulation will also be governed in more detail, such as the following issues:
• disposition of business shares;
• restricting transfers;
• pre-emption right;
• adjusting the effects of transfers of shareholdings on companies.
It will, therefore, be an adjustment of obligations of a corporate nature only. Given that the proposal is currently in an inter-ministerial comment procedure, it will be important to wait for a more specific wording in actual articles.
Corporations in 21st Century
As a positive phenomenon prevalent globally, digitalization has become fully apparent, especially during the past year. Due to the pandemic, the number of actions that had to be done in person was reduced to a minimum and replaced by communication in the online space. It is only natural that the Ministry will implement it in the planned recodification.
Some of the Ministry’s proposals are as follows:
• digitalization of public administration for the registration of companies;
• exercise of shareholders´ rights online;
• expanding the possibilities of corporate financing.
The expansion of the possibilities of corporate financing in the digital world can be observed via crowdfunding – mass financing of companies via the Internet. It opens up wide space for the public, having the opportunity to contribute to those companies using crowdfunding, which provides preferential access to their products and services, offers premium content or other benefits in return. It is important to realize that opening up funding opportunities in the digital world has also negative aspects, potentially posing a risk. This is probably why the Ministry reflects this trend in the proposal – it separates the more benevolent way of raising capital in the online world from the traditional raising of funds. Therefore, the proposed law aims to implement provisions that will regulate digital financing in detail.
The exercise of shareholders' rights from distance is closely linked to the fact that most documents today appear in the means of online communication, not in paper form. The current legislature may, therefore, seem rigid in the context of this progressive world, although, the Commercial Code currently allows for participation and voting at a General Meeting by electronic means. This, however, applies only to shareholders of joint-stock companies. Additionally, professor Patakyová in the Commentary to the Commercial Code emphasizes that online transmission of the meetings is possible only under the condition of approval of the amendment to Articles of Association or Bylaws. The recodified company law should set out generally applicable criteria after which any means of communication can be used.
The arrival of the corona crisis has somehow accelerated the digitalization process. In the neighboring Czech Republic, distance participation in general meetings is possible during the ongoing pandemic. It is allowed by the so-called Lex Covid, but at the same time, certain conditions must be met in order for the shareholders to be able to verify their identity. Provisions of a similar wording are also effective in Slovakia. From 19 January 2021, according to Act no. 62/2020 Coll., the Slovak Lex Covid, it is also possible to vote electronically at the General Meeting, even if electronic voting is not regulated internally by the company's Articles of Association or its Bylaws. However, these measures only apply during this period. However, it is a good sign that the Ministry has already begun to deal with something similar; to the future recodification proposal, it will only be a benefit.
However, there are also situations involved in distance proceedings that the legislation will have to foresee, especially those of technical problems, such as internet outages or platform congestion.
These are some of the issues that the Ministry of Justice will have to deal with. The paragraph wording of the proposal is to be known by 30 June 2022, while the proposal can be commented until 26 February 2021.
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