Recodification of Commercial Company Law

Current situation – a possible stumbling block?

Company law is currently governed by two codes – Act No. 513/1991 Coll., the Commercial Code (hereinafter referred to as the “Commercial Code”) and Act No. 40/1964 Coll. Civil Code (hereinafter referred to as the “Civil Code”), which undoubtedly makes it difficult to navigate the complex legal system. In addition, the provisions of the Commercial Code in its current wording are unclear and unsystematic, as can be seen, for example, in the number of provisions that refer to each other. Furthermore, commercial companies are a dynamically functioning element belonging to the field of living law, which is not based solely on fixed and immutable doctrines. On the contrary, the basis for their (not only) legal regulation is economic practice and the real functioning of companies in everyday life.

In some respects, the aforementioned codes can be considered outdated in their own way. One example is the date of their entry into force: the Commercial Code, which has been amended almost fifty times, dates back to 1991. The Civil Code came into force much earlier, on April 1, 1964. The Ministry of Justice is therefore currently planning a number of reforms and amendments. Perhaps the most significant will be the new draft Civil Code, which, however, does not provide for separate regulation of commercial companies, similar to the legal regulation of the Civil Code and the Act on Commercial Corporations of the Czech Republic. It naturally follows from this that new, special regulation of the legal forms of commercial companies is clearly necessary.

The imperfections in commercial company law are also contributed to by European Union law. The starting point for the proposed recodification is to avoid adopting European provisions that currently significantly supplement the legal regulation of commercial companies. The aim of the proposed draft is to transform EU law into domestic legislation.

The proposer of the recodification also follows up on the recently introduced new judicial map, which has sparked lively debate in the legal community. We informed you about this in our Legal News 01/2021, which is available here. Although this reform from the Ministry of Justice seems to be extremely well thought out and comprehensive, the question remains as to how reasonable it is to make the new regulation of commercial companies conditional on such a fundamental reform. All the more so as it is currently causing controversy and strong emotions among lawyers.

The submitted materials on the recodification of commercial companies state that “in addition to recodification, the specialization of courts (causal jurisdiction) and judges in the area of corporate law, which is already envisaged in the proposals of the Ministry of Justice of the Slovak Republic concerning the judicial map, must be an essential part of the creation of a new framework for commercial company law.” It should be added that this is not necessarily a negative thing. Increasing efficiency is undoubtedly the goal of the new legislation, and the new judicial map can clearly help to achieve this.

Finally, to quote the submitter again: “(…) commercial company law (…) can only constitute a high-quality regulatory framework if there is high-quality case law that reflects the development of the business environment,” which is impossible to disagree with.

Proposed changes – possible changes for the better?

Commercial companies as part of private law

Perhaps the most significant change in the draft bill is the change in the concept of commercial company law. The process of establishing a commercial company, including the resolution of potential conflicts of interest and the protection of creditors or investors, is to be addressed primarily by instruments of private law.

The main basis for dividing companies into private and public ones should be the application of the autonomy of the will of the subjects of these rights, i.e., the consolidation of the independent status of the subjects. Ultimately, this will involve consolidating the powers of the authorities while protecting creditors and important minority shareholders.

In the case of the division of companies, we can mention the legal regulation of commercial companies in Italy, which is also mentioned by the submitter in the available materials. It is in Italy that we can observe a division between private capital companies and public joint-stock companies. Another example is the German legal regulation, where the establishment of commercial companies is not subject to public law provisions, but again to private law.

The area of contractual relationships relating to statutory regulation is also to be regulated in more detail. Within this area, the new bill is to regulate issues related to:

• the disposal of business shares;
• restrictions on transfers;
• preemptive rights;
• the regulation of the effects of transfers of shares in a company.

This will therefore be a regulation of contractual relationships of a corporate nature only. Given that the draft is currently undergoing inter-ministerial consultation, it will be important to wait for the specific wording of the paragraphs.

Forms of commercial companies

As mentioned above in the article, the basis for commercial company law is provided by the Commercial Code and the Civil Code. The Commercial Code defines specific legal forms of commercial companies – general partnership, limited partnership, limited liability company, joint-stock company, cooperative, and simple joint-stock company.

The latter, simple joint-stock company , is to be omitted from the recodified legislation.

The simple joint-stock company was only introduced into the Commercial Code with the amendment that came into effect in 2017. It is a legal form of commercial company that combines elements of a limited liability company with elements of a joint-stock company.

From an accessibility perspective, this legal form is currently considered advantageous, especially for start-ups – it is characterized by disposability, low minimum capital (1 euro), and the movement of capital. It is also simple in its structures – there is no obligation to establish a supervisory board, and relations between shareholders can be regulated by special agreements.

Its goal to date has also been to adapt Slovak legislation on commercial companies to institutions used abroad – the so-called Tag-Along Right, Drag-Along Right, and Shoot-out. This is mainly because these institutions, known from abroad, needed to be brought to Slovakia. However, the submitter considers this legal form of commercial company unnecessary after the planned recodification and proposes its complete removal.

Financing of commercial companies

The current problem that the new legislation must address is the financing of commercial companies. These dynamically reflect current events in the world. Currently popular are the aforementioned start-ups and scale-ups, which open up opportunities for many young potential entrepreneurs who, due to the nature of their business, do not need a high initial investment in their companies. Another trend is a change in how companies raise funds—the banking sector, which was once commonly used, is now often replaced by the issuance of securities.

An interesting proposal by the submitter to resolve this dilemma is the possibility of adjusting the share capital for limited liability companies. Currently, the share capital of a company is EUR 5,000, which may hinder potential market players from setting up their own companies. Share capital is not the only cost that a company must incur before it is actually established. Other costs include, for example, the fee for entry and registration in the commercial register and notary fees for the verification of signatures.

Given that the current amount of initial capital may deter potential competitors, the chances of existing companies dominating the market are increased. All this may ultimately create an environment consisting only of existing companies, thus monopolizing the market in a certain way. This is a negative that cannot be justified in any way—a healthy competitive environment is the basis for quality, which should be the goal of every commercial company.

We find inspiration for this change in the neighboring Czech Republic. According to our neighbors’ legislation, the minimum share capital is CZK 1. This change results from the new Civil Code; previously, limited liability companies had to contribute CZK 200,000 to the share capital . However, this change may seem misleadingly simple for one simple reason. It is not recommended to establish a standard limited liability company with such a low registered capital. Companies need resources to finance their operations, especially in the period from their establishment until they start generating profits. There is also the problem of a kind of “lack of prestige” – a company with a registered capital of CZK 1 (or EUR 1 in the case of adoption of the provisions) may be perceived negatively. Naturally, the question arises as to what impression such a low value creates and whether this step could potentially lead to mistrust on the part of potential future creditors. The Netherlands, which does not even recognize the concept of share capital, is also worth mentioning in this context.

The legal regulations of the Federal Republic of Germany are also worth mentioning. These differ significantly from those in the Czech Republic. The minimum value of the initial capital is not “just one euro,” and the relevant provisions are also somewhat more complex. Germany allows for an interesting “gradual replenishment“ of share capital, which means that a limited liability company does not have to deposit the minimum share capital amount immediately. What makes this provision remarkable is that it is not necessary to immediately deposit the entire amount of the share capital into the company’s account; it is possible to contribute only the minimum amount specified by law. Subsequently, the partners can contribute various amounts of money greater than €1 to the minimum share capital.

Concern law

It will be interesting to see how the legislator approaches the codification of group law, another area within the recodification of commercial companies. Group law, i.e., a purpose-built set of rules governing legal relationships within business groups (concerns), is currently absent from Slovak legislation. The Ministry of Justice’s step towards recognizing its existence is not enough. For example, the legislation of the neighboring Czech Republic has regulated group law since 2000 through an amendment to the Commercial Code, not to mention the more distant German or French versions of the legislation.

However, as the wording of the recodification is not yet known, we can only speculate as to which of the aforementioned legal systems will form the basis for our new legislation.

In Germany, corporate law can be found mainly in the provisions of the Stock Corporation Act. However, its characteristic transparency of relationships and protection of minority shareholders/creditors faces criticism in the domestic environment, mainly due to excessive bureaucracy and complexity, which ultimately contradicts the very purpose of group law, namely to facilitate the operation of business entities. At the end of the day, its application may not only be disproportionately complex, but also less effective and unsuccessful.

A comparison can also be made with the legal regulations of the French Republic, whose corporate law is based on preliminary control of the negative consequences of corporations. The situation is similar in the Italian Republic, and even in Anglo-Saxon legal culture – in Great Britain.

The issue that the submitter will have to deal with continues in European law, mainly due to the inconsistent regulation of the states themselves (the aforementioned France, Germany, Great Britain, or the absolute absence of legal regulation, as is the case in Slovakia, for example).

It will be crucial to monitor the final form of the provisions themselves that the recodification will bring. Slovak legislation should not only describe the current situation, but also have a prescriptive character, i.e., in addition to reflecting the current situation of groups in Slovakia, it should also create an environment that will shape their activities in a way that benefits not only the entities subject to this specific legislation, but also other potential future addressees. In its judgment ref. no. 29 Cdo 3661/2010, the Supreme Court of the Czech Republic defined the purpose of group law as follows: “The purpose of group law is to protect the legitimate interests of persons who may be threatened or affected by relations between connected persons (…)”. Based on the conclusions of the Supreme Court of the Czech Republic, we can conclude that the purpose of the aforementioned right has two important aspects, namely:

• to limit risks (e.g., business risks); and at the same time
• bring benefits (e.g., tax benefits).

In simple terms, to facilitate the activities of its target groups.

The 21st century for commercial companies

Digitalization, as a positive phenomenon prevailing in the world, has been particularly evident over the past year. Many tasks that had to be done in person were reduced to a minimum due to the pandemic and replaced by online communication. Electronization, automation, and digitization are a natural requirement that the submitter will seek to implement in the upcoming recodification.

The Ministry’s own material presents digitization to the public in three areas:

• the electronization of public administration activities in the registration of commercial companies;
• remote exercise of shareholders’ rights;
• expansion of financing options for commercial companies.

The expansion of financing options for commercial companies in the digital world can be observed through internet crowdfunding. In the relevant section of the article, we presented possible changes in the areas of financing so-called eseročiek, but digitization is mainly associated with crowdfunding, i.e., mass financing of companies via the internet. This opens up opportunities for the general public, who can contribute to selected companies. In return, these companies provide, for example, preferential access to their products and services, or offer premium content and other benefits. It is important to realize that opening up financing opportunities in the digital world also has negative aspects that potentially pose a risk. This is probably why the proposer reflects this trend in the proposal – separating the more benevolent method of raising capital in the online world from traditional fundraising. The proposed law thus prepares for the implementation of provisions that would regulate the sphere of digital financing in detail .

The remote exercise of shareholders’ rights is closely linked to the fact that most documents today appear in information and communication media, not in paper form. The current legal system may seem rigid in the context of this progressive world – although the Commercial Code currently allows participation and voting at general meetings by electronic means, , this only applies to shareholders of joint-stock companies . Furthermore, Prof. Patakyová emphasizes in her Commentary on the Commercial Code that online transmission is only possible subject to the approval of an amendment to the articles of association. The recodified normative regulation of commercial companies should establish generally applicable criteria, upon fulfillment of which it will be possible to use any means of communication.

In the neighboring Czech Republic, remote participation in general meetings is permitted during the ongoing pandemic. This is allowed by the so-called Lex Covid, but certain conditions must be met so that shareholders can verify their identity. However, remote proceedings also involve situations that the legislation will have to anticipate. These include, for example, technical problems such as internet outages or platform overload.

These are all issues that the Ministry of Justice, as the proposer, will have to deal with. The wording of the draft is to be known by June 30, 2022; comments on the draft can be submitted until February 26, 2021.

The Ministry itself creates space for open discussion in its materials—this is a huge legislative change that will affect many entities. The law is intended to regulate a number of institutions, their establishment, dissolution, and change. In addition to those selected by us, the submitter’s materials contain many others from various directions and spheres of this specific area. Therefore, we will critically monitor and thoroughly examine each subsequent step taken by the Ministry.