Slovak legal news: RECODIFICATION OF CORPORATE LAW – part 2

Our latest Legal News 03/2021 delivered general information about the recodification of corporate law. Due to its importance and widely spread legislature, we have decided to prepare the second part of the article and inform you about specific changes and their comparison with similar institutes used abroad.

 

Ministry of Justice of the Slovak Republic is preparing a new legislation that will completely change the core of corporate law in Slovakia. You can read the general introduction to the topic in our Legal News 03/2021, concerning mainly the ideological basis and starting points; today, however, we go more in-depth and address the particular changes of selected institutes.

 

Corporate Financing

 

A very important topic included in the proposed bill is corporate financing. Today, one of the most popular ways of founding businesses is via start-ups and scale-ups. Thanks to those, many young and potentially successful entrepreneurs can enter the market and establish new businesses, which are made to “conquer the world” due to its ability to reflect the dynamically changing world of corporations. It is also essential to be flexible and, moreover, find a resource for its activity, often financially demanding.

 

Additionally, the latest trend in corporate financing is issuing securities, instead of using bank services. Finding the right investor is and will probably always be essential for corporations. A share capital for a limited liability company is currently EUR 5,000. However, this amount seems completely irrelevant because the real use for it is non-existent. Corporations are not obliged to keep this money in a separate account, nor are they obliged to use it only for exceptional cases. It is, therefore, quite common for share capital to be used immediately after it has been paid into a company’s account. Thus, the Ministry has decided to change the status quo and lower it. It is not yet known how, but it is expected that this institute will be inspired by the legislature of the Czech Republic. According to its provisions, the share capital is CZK 1 (as opposed to CZK 200,000 before their recodification).

 

Needless to say, some people argue and are more or less against lowering the amount of share capital. According to them, founding and establishing a business with such a low share capital might cause trouble – companies need resources for their activities, especially at the beginning when a company is only founded and needs to finance also the initial administrative obstacles.

 

On the other hand, a share capital of EUR 1 might also seem “cheap”. Businesses may not seem prestigious enough and, therefore, untrustworthy for potential creditors.

 

Besides the Czech Republic, we can also mention the Netherlands, where there is no institute of share capital, or Germany, which quite significantly differs from the Czech and Dutch legislation.

 

The minimum value of a share capital in Germany is not “only one euro”, and the relevant provisions are also somehow more comprehensive. Germany also allows adding money to a share capital gradually, meaning that shareholders do not immediately deposit the full amount. In the beginning, it is allowed to contribute only the minimum specified by law. Subsequently, shareholders may contribute to a share capital in various amounts of at least EUR 1.

 

Legal Forms of Companies

 

The first part of this series of our Legal News concerning the recodification of corporate law has explained the basic concepts on which the new law will be based. Today, the legislature is divided into two codes: Civil Code and Commercial Code. It is the Commercial Code that nowadays specifies the legal forms of companies – and those are about to change.

 

One of the goals of the recodification is to shrink the number of company types; the Ministry wants to achieve this by completely removing a simple joint-stock company. This company type was incorporated into the Slovak legislature via the Commercial Code Amendment in 2017. It is a legal form which combines the benefits of both a (basic) joint-stock company and a limited liability company.

 

From the young and new entrepreneurs’ point of view, a simple joint-stock company is currently considered the most beneficial legal form, especially for start-ups mentioned above. It is known for its simplicity, low share capital (EUR 1) and easy access to the movement of capital money; “simple” is also in its structure – there is no obligation to establish a supervisory board and relations between shareholders can be broadly individualized by special shareholder agreements. Until now, a simple joint-stock company’s purpose was to make it easier to incorporate and adapt foreign institutes used in corporate law; mainly tag-along rights, drag-along rights, and shoot-out rights.

 

However, the Ministry plans to incorporate the institutes as mentioned earlier into the legislature in its own provisions and, therefore, a simple joint-stock company will no longer be needed. On the contrary, a public partnership and a limited partnership, other legal forms in the legislature, will probably not change, as the real-life situations in the world of corporate law do not show any need for change. A public partnership is not frequently used, especially when compared to other company types and the Ministry, therefore, does not feel the need to do any adjusting. According to the Ministry, “the real corporate practice has not (...) revealed more fundamental requirements for regulatory interference. Rather than the corporate regime, tax regulation should be crucial.” Almost the same goes for a limited partnership, where the Ministry sees the problem that this legal form may seem unattractive to potential entrepreneurs. As a result, a relatively interesting change is proposed – the founders of a limited partnership will be able to decide whether the participation of their limited partners will be incorporated into securities and at the same time, it will allow shares to be dispersed.

 

Putting an End to Confusion?

 

We have talked enough about how widely spread the legislature of the corporate law in the previous Legal News 03/2021.

 

It is true that Commercial Code already regulates a number of institutes but the fact that the corporate law provisions are doubled in numerous codes is resulting in internal inconsistency and weakens the law’s effectiveness.

 

It is essential to establish provisions which will be applicable to every company type. The Ministry reflects this need and includes these changes to the current regulation – the new law aims to unify the position of partners and company bodies. The exact wording is yet unknown, but according to the Ministry’s materials, the adoption of a uniform and specific legislation for exercising their rights is expected.

 

Voting of shareholders and decision-making by company bodies is another area that awaits more detailed regulation. In this case, it will focus mainly on the provisions concerning the transfer of assets and property rights to other entities, and the rules for the exercise of voting rights will be specified for the shareholders. Moreover, legislation and case law do not currently offer answers to many questions, such as the attendance of a shareholder together with his legal counsel at a General Meeting. From a company bodies’ standpoint, the rules are expected to be stabilized with regard to their conduct on behalf of a company as well as the conduct of a collective body.

 

The proposed bill is intended to also reflect a change in so-called per rollam voting. A more detailed definition of the possible invalidity of resolutions of a General Meeting should be included as well.

 

The legal status of company bodies is about to change as well. The basis for it will be made out of the new Civil Code, which is currently in the making. Civil Code will define “the duty of loyalty and required care of a member of the body in the exercise of his powers.” The Ministry also proposes “the possibility of delegating decision-making within a collective body of a legal entity.” It is also expected that members of company bodies will perform their office free of charge.

 

Last but not least, new corporate law is about to establish the rules for transactions with affiliated parties and the adjustment of the application of the so-called business judgment rule.

 

Concern Law

 

Another interesting area of the proposed bill is concern law which will regulate the legal affairs, connections, and relations within a group of companies. In Slovakia, concern law had never been at the center of the stage, until now. However, the legislature of our neighboring countries had, and still has, quite a history in the concern law legislation. As an example, we can mention the Czech Republic (concern law since 2000) or Germany.

 

As the exact wording is yet unknown, we can only assume which of the above-mentioned legislatures will be used as a model by our Ministry. In Germany, provisions of the concern law are included in the Aktiengesetz, translated as Stock Corporations Act.

 

However, its characteristic transparency of relations and the protection of minority shareholders and creditors face criticism at home, mainly due to excessive bureaucracy and complexity, which ultimately runs counter to the very purpose of corporate law, and thus to facilitate the operation of businesses. On the other hand, for instance, France has adopted a different approach, which is based on ex ante control of the negative consequences of groups.

 

We can also observe similarities in the Italian legal system and even in the Anglo-Saxon legal culture – in Great Britain. Besides mentioned, Slovak concern law should not only reflect the current situation but also somehow prescribe how the concern law should look like. It will be essential to follow the final wording of the legal provisions, currently absent in both the Slovak legislature and also the Ministry’s proposal.

 

What the Law Says About Companies “In Need”

 

The Ministry also takes into account the possibility of financial problems of companies. The ways of financing have already been discussed earlier in this article. However, we had not answered the elephant in the room – what if a company runs into financial trouble?

 

To deal with this question, the Ministry is proposing a uniform regulation on the protection of a company’s property. This will be associated with, for example, the recasting of the institute of prohibiting the return of deposits, or the associated regulation of the rules prohibiting its circumvention. In this case, the bill is pointing the finger at capital companies.

 

The recodification will concern more detailed provisions regulating the institute of crisis in companies. With this term, we can find another, closely linked and a similar one, which is bankruptcy. The problem with these two institutes is mainly based on the fact that they are regulated, and the terms themselves are defined, in two different codes. In the materials concerning the recodification submitted, the Ministry talks about the possibility of change and proposes further regulation of this institute.

 

In this case, Austrian regulation is used as an example, namely the Act on the Preservation of Equity adopted in 2004, which is the most similar to the Slovak legislation. It was this law that formed the basis for the Slovak first codification but the problem is that ours took over only some of the provisions, which made the legislation more rigid compared to its Austrian version. Fortunately, the awaited recodification is about to change that.

 

Renewed Joint Stock Company and Limited Liability Company

 

Besides the changes in share capital, the Ministry is about to make other changes in the process of founding a corporation. A lower amount of share capital is not the only change, the recodification is about to introduce so-called optional reserve funds.

 

The only part which will not be revolutionary is the one concerning forms of deposit, which will not change – deposit in the form of works and services will still not be allowed. From our previous Legal News article, you may remember the Directive of the European Parliament and the Council No. 2019/1151 of 20 June 2019, according to which the establishment of a limited liability company should be easier and quicker, allowing for the possibility of establishing a company online.

 

We have also mentioned the proposal of cancelling the legal form of a simple joint-stock company. Even though this legal form will not be present in the recodified provisions, its benefits are to be transformed into other remaining company types. It will be, for example, by taking over the option of incorporating a share into securities – a company will have the opportunity to decide whether to do so and, at the same time, it will have the space to adjust shareholders’ rights associated with securities. A shareholder will also have the possibility of having multiple separate shares in a company, enabling their individual disposal and encumbrance.

 

Another topic which makes the recodification important is the division of joint-stock companies into private and public ones. The regulation of the public ones will be present in the legislature concerning the capital market, i.e., bonds and shares. It would be misleading to assess that the division of public limited liability companies alone is sufficient. Everyone should bear in mind that in the case of joint-stock companies, we are talking about an extremely complex regulation. The division is likely to make sense in light of the fact that most of the joint-stock companies in Slovakia are private, which means that shares are not traded on the capital market.

 

The present proposal does not envisage a change in the status quo in this direction, but the issue for it will be to address the protection of minority shareholders and creditors of a joint-stock company. It should, thus, be resolved through private law with a focus on the protection of a company’s own sources of financing and the liability of members of a company’s bodies. In the context of joint-stock companies, it is possible to consider the amount of share capital; this is also discussed by professor Patakyová in the Commentary on the Commercial Code. She refers to it as the central institute of joint-stock company law, but it is also necessary to perceive it through the lens of the European law, which has been considering a binding reduction of share capital to EUR 1 for a long time.

 

The recodification is intended to enable the founders of a company to choose between two options: a monistic structure and a structure with a board of directors and a supervisory board. If the founders decide on the latter, the bill is proposing to take over the provisions of the German law for cases like this.

 

In Germany, joint-stock companies are regulated by the Aktiengesetz, which we have already mentioned above. It entered into force in 1965 and has been amended several times. However, even more interesting is the fact that the original wording dates back to 1937 and the current regulation is more or less based on it. Regardless of its age, the act is more detailed, deals with a larger number of situations and is not as brief as the Slovak law of joint-stock companies. For example, the mentioned board of directors and the supervisory board are quite different and talked about in more detail. For example, in the case of a board of directors we can point out the important issue of representing a joint-stock company externally by the members of the board of directors. Unless agreed otherwise, they are the ones doing so together.

 

The aim of a supervisory board is the same as in Slovakia; when talking about the legislation of both countries, we speak of a supervisory board as a supervisory body. However, we observe differences when comparing the composition of members of a supervisory board. In Germany, the provisions on this issue are more complex than those in Slovakia, the legislator pays more attention to them and takes into account various potential situations that may arise. Therefore, the Slovak legislation might implement more of the German provisions into this recodification.

 

The recodification also plans to cancel so-called numerus clausus shares; it will not be possible to issue bearer shares in book-entry form and the cancellation of the gradual establishment of joint-stock companies is expected as well.

 

Cooperatives After Recodification

 

The statistics show how clearly disproportionate the structure of each individual company types are. More than 95% of all companies are limited liability companies, a few per cent represent joint-stock companies, and the remaining ones together with cooperatives are on the very tail. But it is no wonder. Just by taking a look at the cooperatives – in recent years, they have been “separated” from the rest of the companies, because of the legislation.

 

At first, let’s talk about the name itself. Cooperative. Unlike other companies, it must explicitly mention the term cooperative; this may also indicate the potential direction of this legal form – cooperatives are characterized by equality between members, reflected, for example, in voting within a cooperative. While in the case of other companies, the amount of a contribution sets the tone and gives more voting power to certain members during general meetings, while in case of cooperatives, equality can be observed as one vote per member. Similarly, the management and administration of a cooperative is based on co-decision principles.

 

Probably the most striking is its very purpose. Ordinary companies aim for profit, while in cooperatives it is the satisfaction of the needs of its members. This legal form is created upon voluntary association of assets of five (or, when talking about legal entities, two) persons, mostly in order to run a business more efficiently or safer.

 

Needless to say, these differences are questioned by many. Perhaps the most important in this context is the finding of the Constitutional Court of the Slovak Republic, which repeatedly emphasized the difference with other commercial companies. The Ministry, therefore, decided to address this issue as well, according to its own words: “The special regulation will take into account the peculiarities of some cooperatives and the connection with other regulations.”

 

These are all issues that the Ministry will have to deal with before the bill proceeds to the Parliament. The paragraph wording of the proposed bill is to be known by 30 June 2022. It is certain that the recodification of companies law will affect a large number of Slovak citizens and will be a truly significant change in terms of both quantity and quality.

 

Falath & Partners

Ján Falath

partner, associate
T: +421 905 866 438
E: falath@falathpartners.sk

www.falathpartners.sk

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