Slovak Republic: Shareholder-company relationship

Author: | Published: 21 Sep 2017
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Futej & Partners

Address

Radlinského 2 811 07 Bratislava Slovakia

Telephone

+421/2/5263 3161

Fax

+421/2/5263 3163 Visit Website

A shareholder's interest in a limited liability company is expressed as a membership interest in an amount determined by its capital contribution. A capital contribution (cash or in kind) is understood to be a shareholder's investment in the company, and it becomes the property of the company. Except where capital is reduced when certain legal conditions are met, a shareholder is not entitled to seek return of its capital contribution unless the shareholder is terminating its participation in the company.

In the past, shareholders sometimes exploited loopholes in the restrictions on the return of capital contributions by entering into legal transactions (contracts) under which they benefited from actions performed by the company under terms and conditions not customary in the ordinary course of business. This included, for instance, loans to shareholders, guarantees for shareholders' liabilities, and gifts to shareholders. This type of 'extraction' of funds from the company weakened the position of creditors in respect of satisfaction of their claims against the company, and also weakened the position of the other shareholders of the company. A change occurred in 2016 with the aim of putting an end to the siphoning off of money from companies and enhancing the legal certainty of their creditors.

There is now a broader concept of the restriction on the return of capital contributions. It includes not only the return of a cash or in kind capital contribution made by a shareholder, but also any transaction conducted between a company and its shareholder (or benefitting the shareholder) where there is no adequate consideration received by the company (prohibited return of capital contribution or concept of arm's length transaction). Any such action performed by a company to benefit a shareholder with no adequate consideration (not at arm's length) is deemed a prohibited return of capital contribution, for example, non-repayable or disproportionate loans. Actions performed by a company to benefit a third party without adequate consideration for the company, where the shareholder was the primary person responsible for that performance, is also prohibited. These are cases where the company performs an obligation in place of a shareholder, for instance, by assuming a guarantee for the shareholder's obligations, succeeding to the shareholder's debt, or providing pledges and other forms of security. It should be noted that a shareholder is not only a person who actively participates in the company as a shareholder at the time the prohibited action is performed. A person is also deemed a shareholder even when their participation in the company ceased up to two years before and up to two years after the prohibited action benefitting the shareholder was performed.

A prohibited return of capital contribution is applicable not only to shareholders, but also to transactions with parties related to a shareholder, or with a person acting on behalf of a shareholder.

An essential element for declaring a violation of the prohibited return of capital contribution is assessing whether the performance rendered to a shareholder was adequate - in other words, whether the transaction took place on an arm's length basis. Assessing this adequacy must particularly take account of fair market price or the price at which the company customarily renders the performance of similar actions for other parties in the ordinary course of business.

As a result of participating in the prohibited return of capital contribution, the person who unjustly benefits from the action to the detriment of the company (such as a shareholder) must surrender the amount unjustly obtained to the company. The amount this person must return to the company is the difference between the amount gained through the rendered performance and the amount deemed to be adequate.

The company may not release the obliged person from the obligation of returning the unjustly obtained amount, and directors are required to recover for the benefit of the company the amount unjustly obtained by that person. If the amount is not returned to the company, for example if the directors fail to pursue recovery, all the directors are deemed jointly liable to the creditors. The term directors here means directors who (i) were serving as such at the time the capital contribution was returned to the respective shareholder (or for the benefit of that shareholder); and/or, (ii) were serving as directors at the time the company obtained the right to recover the capital in question but did not exercise that right, when they knew or should have known about this obligation.

The implementation of director liability opens the door for creditors who cannot recover their claims against the company alone for various reasons, including depletion of cash caused by a violation of the prohibited return of capital contribution. It should be noted that violating the prohibited return of capital contribution does not render the respective transaction invalid or ineffective.

Daniel Futej and Rudolf Sivák

Futej & Partners
Radlinského 2
811 07 Bratislava
Slovak Republic
T: +421/2/5263 3161
F: +421/2/5263 3163
E: futej@futej.sk
W: www.futej.sk