1. Business Companies General definition
Association of several persons (individuals or legal entities)
Created by agreement
Purpose of which is doing business or to manage its assets
Members of which provide contributions and participate in management and profits
Having separate legal personality
Members / shareholders
Founders
Persons who acquired interest in a company

2. Act on Business Corporations distinguishes:
Business companies represented by following entities
General partnership
Limited partnership
Limited liability company
Joint stock company
European company
European interest grouping
Cooperatives represented by following entities:
Cooperative
European cooperative company

3. Czech law divides companies into two groups
The European company and the European interest grouping are governed by EC Regulations and by special national laws; will not be addressed in this course
Cooperatives are not typical business entities; will not be addressed in this course
All business companies under Czech law have legal personality independent of its members, i.e. may be party to legal relations, may enjoy rights and have obligations
Czech law divides companies into two groups
personal companies
capital companies

4. Personal companies – general partnership, limited partnership
Main features
Partners (members) are personally engaged in company’s matters – all of them are authorized to act on behalf of a company
No corporate bodies are created, partners decide collectively, as a rule unanimously
Capital contributions into company’s assets - only voluntary
Share (participation) in the company is not, as a rule, transferable
Death or termination of a partner (member) affects the existence of a company
Partners are fully liable for obligations of a company with their own assets

5. Capital companies – limited liability company, joint stock company
Most of applicable EU Directives implemented into the Czech legal system
Main features
Mandatory contributions of partners (shareholders) into the registered capital of the company; the minimal amount of the registered capital is set forth by law
Participation of each partner (shareholder), his rights and obligations are determined by the amount of his capital contribution
Partners (members) are not personally engaged in the company’s matters, the corporate governance is ensured by specialized bodies the structure of which is prescribed by law
Liability of partners (shareholders) for company’s obligations is limited or excluded

6. Establishment of a Czech company
Legal act of founders (founding agreement or founding deed)
Inscription into the Commercial Register (incorporation)
Defects of founding act
Defects causing invalidity (nullity) of a company
Founding agreement was not entered into or its prescribed form was not complied with
Objects of company are contrary to law
Founding agreement is missing main data identifying a company, i.e. the name, contributions of members and amount of registered capital, objects of business activity
Minimum amount of contributions was not complied with
All founders do not have legal capacity
Number of founders is less than stated by law

7. Invalidity (nullity) of a company
May be declared only by court even after entry of company into commercial register (incorporation)
Only for defects listed above
As of declaration of invalidity company goes into liquidation
Legal acts company entered into are not affected by declaration of its invalidity

8. Company’s assets, registered capital:
Start-up capital necessary for company to start carrying out the business
Assets contributed to company by its founders in exchange of their share in the company
Value of these assets represents registered capital = information to third parties about assets of company financed from its own resources
Contributions of founders into company are mandatory only for capital companies

9. Contributions of founders
monetary, or
in kind; any asset the value of which can be objectively measured (its value determined)
Providing works or services cannot serve as a contribution
If the company does not acquire ownership to contributed asset (in kind contribution) or value of asset is lower than declared when company acquired it, shareholder shall compensate company for this value
Contributions cannot be returned or forgiven to partners (shareholders) during the life of the company

10. Acting on behalf of company before incorporation
Need to enter into transactions during incorporation
Anybody can act in the name of company before incorporation
Acting person is bound by such transaction by himself
If more persons act, they are bound jointly and severally
Transactions approved by company (its members or its respective body) within 3 months after incorporation are deemed to be made by company

11. Share, ownership interest in the company
Members (shareholders) are not owners of the company. They own share (interest) representing their participation in the company
Share acquired in exchange of capital contribution (capital companies) or personal participation (personal companies)
Differences in share (interest) between capital and personal companies

12. Corporate governance – main principles
Capital companies – special corporate bodies (individual or collective)
Personal companies – members directly involved in corporate governance
In both types of companies persons (entities) involved in corporate governance must fulfill certain requirements and abide by certain rules of conduct
Requirements
Legal capacity
Integrity (clean criminal record)
His/her assets have not been subject to bankruptcy within last 3 years unless information about it provided to company before such person was elected/appointed

13. Rules of conduct
Any person who accepted position as an elected corporate body is obligated to act with necessary loyalty (duty of loyalty and with necessary care and knowledge (duty of care)
Test of any conscientious and reasonable person in similar position within company
In case of litigation member of corporate body bears burden of proof regarding fulfillment of requirements of duty of care and duty of loyalty
Duty of care corrected by business judgment rule – care and knowledge presumed

14. In case of breach member of corporate body
Is liable for damages caused to company
Shall surrender to company any benefit acquired as a result of breach
May agree with company on settlement/compensation of detriment caused; such agreement subject to approval of supreme corporate body
Conflict of interests
Member of corporate body must notify any potential conflict of interests to corporate body he is member of, or to controlling or supreme body of company
Any contract between company and corporate member must be notified to the same bodies
Controlling or supreme body of company may suspend exercise of tasks of corporate member who notified conflict of interests

15. Expulsion of member in case of breach of duty of care and loyalty
In case of company‘s bankruptcy the court may expel member of corporate body from his position if such member obviously contributed to company‘s bankruptcy by breach of his duties
Court may expel member of corporate body from his position if such member has violated grossly and repeatedly his duty of care and duty of loyalty during last 3 years

16. Economic development - creation of groups of companies
Corporate Groupings
Economic development - creation of groups of companies
Interests of a group may prevail over interests of individual members of group
Need for protection of
minority shareholders
creditors
Two main concepts of legal regulation
Informal (based on case law)
Detailed specific regulation (German concept)

17. Informal concept
No need for specific regulation – protection based on prohibition of abuse of majority should suffice
Rosenblum case concept – pursuing group interest is legitimate provided
Affected subsidiaries are part of a structurally stabile group
Group uses coherent group policy
Disadvantages of being a group member are balanced by membership advantages

18. German concept
Detailed regulation
Subsidiary’s management should act primarily in its interest
Shareholders must be informed about all contracts and other dealing between members of the group
Czech legislation
Inspired newly by informal concept with certain modifications
Grouping is an economic reality, effective tool for business organization
Therefore the statutory regulation must primarily address only the negative consequences of control

19. General principles
Any person who influences the behavior/activities of a company to its detriment shall compensate this detriment unless proves acting in good faith and in the interests of the company
If compensation is not provided to company until the end of accounting period the damage suffered by shareholders of company should be also compensated
Controlling person
Person that may influence appointment of main corporate bodies
Person holding at least 40% of votes in company based on ownership stake or any other legal basis

20. Group of companies
One or more persons subject to uniform management of another person form a group with the managing person
Corporate body of controlling person may give instructions to controlled person provided these are in the interest of the controlling person or another member of the group
Corporate bodies of the controlled persons are not relieved from duty to act with due care

21. Controlling person is not liable for detriment suffered by controlled person due its influence if
Such detriment is in interest of controlling person or another member of group
Detriment is counterbalanced by appropriate compensation or other advantages

22. Outside shareholders protection
Access to information about relations between controlling and controlled persons
Subsidiaries are obligated to prepare and make available report on relations between linked persons
Report must include legally prescribed information about transactions between linked persons and consequences of measures imposed by controlling person
Outside shareholders are entitled to have the report reviewed by court appointed expert

23. Outside shareholders are entitled to request controlling person to purchase their shares
If control as exercised by controlling person adversely affects their position within company or their other legitimate interests
For price determined on the basis of expert opinion