The novelization to the Business Corporations Act – the rights of shareholders

On the first of January 2021, the Novelization (No. 33/2020 Coll.) to the Business Corporations Act (No. 90/2012 Coll.) entered into force. One of the areas mainly affected by the novelization is the exercise of rights of the shareholders on the general meetings of business corporations.

The validity of resolutions approved by the general meeting and the objections to them

It is from now on required from the shareholders to file an objection to invalidate the resolution of a general meeting. It was not clear from the past regulation if the shareholder must justify his objections. It was also unclear whether the exception to the restriction on the right to object to the invalidity of a resolution of the General Meeting for shareholders absent from the General Meeting opens the possibility for them to object to invalidity for any reason. Both these uncertainties were solved by the ruling of the Supreme court and reflected in the novelization.

From now on the objection must be justified. The goal of this change is not to put a burden on the shareholders backs, a short and concise description of the circumstances due to which the shareholder considers the resolution of the general meeting invalid (e.g., the general meeting did not have a quorum). The shareholder does not have to ask for the objection to be included in the minutes, the minute taker must include it without further ado. The shareholder can, therefore, raise the question of the invalidity of the resolution even if the objection is not mentioned in the minutes. In such a case, we strongly recommend ensuring a witness testimony of one of the other participants of the general meeting.

The right to object to the invalidity of the resolution of the General Meeting remains with the shareholder, even if he could not file the objection for a serious reason. Such a situation might be when the shareholder did not get invited to the general meeting at all. The novelization also allows the shareholders to exclude the obligation to object from the Articles of association. If this happens, the shareholders may object to the invalidity of the resolution of the general meeting without having to file an objection.

Third parties at general meetings

The current legislation does not allow another person to be present at the general meeting with the shareholders unless such a possibility is reserved in the articles of association or is authorized by an ad hoc resolution.[2] From now on the shareholders will have an option of being accompanied by a third party if the articles of association do not exclude or modify such an option. For limited liability companies that were established before 1 January 2021 and whose articles of association do not regulate the presence of other persons at general meetings, the new wording of the law will not apply until 1 January 2023, so that these companies have enough time to amend the articles of association.

According to the novelization, the third-party accompanying the shareholder is bound by the same rule of confidentiality as the shareholder. This confidentiality can be ensured, for example, by an agreement between the shareholder and the person, or with the company itself. If the person is by law bound by confidentiality, it will be sufficient to prove just that he is such a person. That could be a tax advisor or a lawyer for example.

Voting rights, submission of proposals and counterproposals

The novelization changes the voting rights. It will now be possible to create shares without voting rights. There must always be at least one share connected to the voting right. In the case of joint-stock companies, it will also be possible to issue shares without voting rights, provided that their volume does not exceed 90% of the company's share registered capital. In the event of a decision to change the type of shares into non-voting shares, such a decision shall be subject to the consent of all shareholders concerned. However, shares that do not have a right to a share in the profits or a right to a share in the liquidation balance cannot have their voting rights revoked.

The novelization also introduces the possibility to limit the shareholder's voting right for important reasons stated in the articles of association. This change derives from the possibility of issuing shares without the right to vote. This may be the case, for example, when a vote is taken to adopt a resolution approving the transfer of a shareholder's share. Similarly, it is possible to define restrictions on the voting rights of shareholders in the articles of association of a joint-stock company. In addition, the novelization extends in certain cases the restrictions on the exercise of voting rights by limited liability companies also to shareholders who act alike with a shareholder who cannot exercise the right to vote.[3]

Shareholders who do not participate in the General Meeting will no longer be able to exercise their voting right after the novelization unless they agree on a different arrangement in the Articles of Association. Until now, shareholders who were not present at the General Meeting could additionally exercise their voting right in a written form within 7 days from the General Meeting. They were thus favored over other shareholders, and this provision was a reason for many problems in practice.[4] From now on, the shareholders will only have the opportunity to express their consent to the resolution of the General Meeting regarding changes to the articles of association, which will interfere with their rights and duties.

According to the current regulation, the shareholders submitted proposals and counterproposals before the General Meeting. The complicated and rather confusing Act was the target of criticism, so the novelization simplified it. The second paragraph of section 362 ZOK was deleted, which clarified that proposals and counterproposals may be made by shareholders during the General Meeting itself, and not only in advance. After the novelization, the (counter) proposals do not have to be justified, however, this may reduce the chance of their acceptance.

Conclusion

The novelization introduces significant changes to the rights of shareholders. Probably the biggest changes concern voting rights, it is now possible to create shares without voting rights, the novelization gives the possibility to define in the articles of association and articles of association the reasons why a shareholder cannot vote and deprives shareholders who do not attend the general meeting to vote additionally. Other changes concern in particular the participation of third parties in general meetings and the raising of (counter) proposals. Other changes concern the participation of third parties in general meetings and the raising of (counter) proposals. Overall, the legislator aims for simplification, the incorporation of some case law conclusions, and the removal of redundant provisions.

 Author: Dominik Beran 

The Article has been published at © EPRAVO.CZ.

[1] The first uncertainty was ruled in the Supreme court file numbers 27 Cdo 787/2018 a 27 Cdo 2363/2019, the second one in the Supreme court resolution file number 27 Cdo 787/2018.

[2] This conclusion was drawn by the courts under the effectiveness of the Commercial Code and was enforced even after the effectiveness of the ZOK due to the absence of a different regulation.

[3] This is, for example, a situation where a vote is taken on a non-monetary contribution of a shareholder, or on the exclusion of a shareholder, or on the submission of a motion for his exclusion by a court. Shareholders who agree with this shareholder can be expected to vote in his favor.

[4] The additional voting partner was considered present at the General Meeting. His late vote could thus affect, for example, the quorum of the General Meeting or the required majority of votes for the adoption of a resolution.