This content is from: Local Insights

Related persons

Certain transactions of Czech corporations and limited liability companies may only be made with the consent of the general meeting of the respective company and under arm's length terms. They include: (i) entering into an agreement on provision or acceptance of a loan from related persons (members of statutory bodies, proxies, attorneys-in-fact, or their close relatives); (ii) securing obligations from related persons; or (iii) transferring assets to related persons free of charge. This limitation also applies to entities that are authorized to act on behalf of related persons.

Non-compliance with these provisions would render the agreement absolutely invalid (that is, the agreement would be invalid ab initio).

A controlling entity does not require the consent of the general meeting to provide loans to a controlled entity or to secure a controlled entity's obligations (although these transactions must still be at arm's length).

Another limitation is based on Article 11 of the Second Directive 77/91/EEC. Under Czech law, if a corporation or a limited liability company, or an entity controlled by it, acquires assets from or transfers assets to its founder or shareholder (or a person acting in concert with the shareholder) or its related persons, or from an entity with which it forms a concern, for a consideration of at least one-tenth of its subscribed capital, the value of the assets must be determined by a court-appointed expert. If the company's acquisition is made within three years of incorporation, it must be approved by the general meeting. A free-of-charge transfer of assets to a shareholder is always subject to consent of the general meeting.

The absence of an expert valuation would result in an absolute invalidity of the agreement. There is no general consensus on the consequences of making the above transfers at a price different from that determined by the expert valuation. According to a stricter interpretation of the relevant provisions, non-compliance would result in an absolute invalidity of the agreement. Under a more liberal interpretation, the expert's value is not binding upon the parties of the transaction and the sole liability would rest with the statutory bodies for potential damages caused to the company by agreeing to a transaction at an unfavourable price. In the absence of the required approval by the general meeting, the agreement would be ineffective until approval is granted.

The valuation and approval obligations do not apply to acquisitions or divestments effected in the normal course of the company's business, to acquisitions or divestments effected at the instance or under the supervision of an administrative or judicial authority, or to stock exchange acquisitions or divestments. There is no time limitation of the valuation obligation with respect to transfers from or to the founder of the company, irrespective of whether the founder is still a shareholder of the company.

All the above obligations regarding arm's length terms, general meeting approval and expert valuation apply analogically to grants of guarantees. In August 2005, the Czech Supreme Court held that guarantees securing monetary obligations do not need to be valued, because the value of the guarantee always corresponds to the value of the secured monetary obligation. However, this judgment is based on a misunderstanding of the subject matter of the valuation, which should be the value of consideration the company granting the guarantee would receive for providing the guarantee under arm's length terms. This value must reflect the probability of enforcement of the guarantee at hand (taking into account the risk of failure of fulfilment of the secured obligation and existence of other security instruments). Due to the faulty reasoning of this judgment, it is not generally relied upon and valuation of guarantees is still recommended by most practitioners.

Paul Sestak and Michal Pravda

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