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Beyond Borders: Eversheds Sutherland's ICR insights series. EU Mobility Directive – Legal Update – Czech Republic

  • Czech Republic
  • Corporate
  • Labor law and trade union issues

24-11-2022

Country specific – Czech Republic

This country specific outline contains further information regarding the implementation of the provisions of the EU Mobility Directive into Czech law and provides further local insight.

For further information and to access any of our other country-specific briefings that we have prepared, please refer to the bottom section of our general briefings page here.

Cross-border mergers, divisions and conversions

Status of implementation

The Czech draft proposal (the “Proposal”) implementing Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (the “Directive”) is pending after proposed by the Ministry of Justice on 22 August 2022. Following the comment procedure to the Proposal, the Proposal will have to pass both Lower and Upper House of the Parliement, i.e. Chamber of Deputies (Poslanecká Sněmovna) and the Senate (Senát). Given current legislative progress, it is not expected that the Czech Republic will implement the Directive via Proposal into its national legislation before the implementation deadline of 31 January 2023. The effective date of the new legislation thus remains unclear.

Summary of Czech current and future legal landscape

The Directive harmonises the process of cross-border relocation, merger and division. Although the Czech legal system allows these types of cross-border transactions (and also other such as transfer of company’s assets or change of registered seat) even without the transposition of the Directive due to the proactivity of the Czech legislators going beyond the scope of the previous directive (EU) 2017/1132. In any case, some rules and guarantees provided to the potentially affected persons do not yet meet the requirements of the Directive. In this regard, the Czech legislation is rather exceptional in the EU, as most member states have not been active in this way and have a longer legislative way to go.

With the implementation of the Directive, the Czech Republic will have a unified legal framework with the Member States for mergers, divisions and conversions (change of the legal form) across border within the EU/EEA, safeguarding rights of creditors, employees and (minority) shareholders. We expect that unification of these important structuring tools will further facilitate cross-border transactions.

Furthermore, the Proposal reflects practical knowledge, and a partial modification of some rules is proposed, which causes problems in practice (e.g. modification of the decisive date or the appointment of an expert). The whole process, whether cross-border or intra-state becomes more unified and also better follows principles the recent changes to the Czech private law and public registers.

Permitted companies and geographic scope

In the Czech context, the cross-border transaction can take place between Czech legal entities and natural persons (in case of transfer of assets) and legal entities and natural persons from the other EU/EEA Member States. Under the Directive, these cross-border transactions are principally limited to EU/EEA Member States and/or citizens and Czech Republic does currently not permit those transactions with legal entities and natural persons outside of the EU/EEA (with exception of transfer of the registered seat).

Timing

With implementation of the Directive timing of the transactions in the Czech Republic will become comparatively faster due to changes to rules on protection of creditors. On the Czech side simplified, non-complex cross-border transaction (i.e. a transaction involving companies with (each) only one shareholder, no employees and no secured assets) may now take approximately 4 months to complete (at minimum), given the prescribed 3-month creditor opposition period from the date conversion project becomes available. More complex cross-border transactions could take up to 6-12 months for actual implementation, particularly, as formalities in the EU/EEA Member State of exit and entry will both need to be complied with.

The Directive provides particular changes to an extensive legal framework, transaction timing and (largely) harmonised legal process for cross-border transactions and introduces specific changes safeguards for creditors, employees and (minority) shareholders. For any further guidance and advice on these matters, please do reach out your local Eversheds Sutherland contact.

Competent authority, pre-transaction certificate and anti-abuse check

As for any domestic Czech conversion, merger or division, in the Czech Republic, the civil-law notary is the designated competent authority that supervises and executes the Czech realisation of the cross-border transaction. In that capacity, the civil-law notary must attest, by means of the issuance of a so-called pre-transaction certificate, that all the Czech requirements for the cross-border transaction have been complied with and that the cross-border transaction has successfully been executed so far. This is a material formality in the end stage of the Czech part of the cross-border transaction (if outbound). As part of its pre-transaction certificate due diligence, the civil-law notary will have to conduct an anti-abuse check. The notary will not issue the pre-transaction certificate and will not authorise the cross-border transaction if it determines that the transaction has been set up for unlawful or fraudulent purposes aimed at evading European or national law.

While the Czech notary plays a central role in any cross-border transaction and executes the requisite notarial deeds, it is almost always necessary to render pre-transactional advice on all related legal aspects and prepare all relevant/ancillary documents. We offer full scope these services and have co-operating notaries with experience in cross-border transactions at Eversheds Sutherland in the Czech Republic.

Effective date, method and manner of inbound cross-border transactions

Inbound cross-border transactions (i.e. inbound conversions, mergers and divisions) become effective in the form, manner and on the date as prescribed by Czech law. Inbound cross-border transactions must be executed in the form of a notarial deed (via certificate for registration in the Czech commercial register) before a Czech civil-law notary. Upon execution of the notarial deed, notary will perform direct entry of the cross-border transaction into the Czech commercial register and thus becomes legally effective instantly and usually reflected in the commercial register the following day.

Miscellaneous

A new form of division is introduced into the Czech law via Proposal, namely the so-called division (spin-off) by separation into a newly formed subsidiary (this is the sole form for cross-border transaction) or an existing subsidiary, or a combination thereof. In contrast to division by spin-off, the dividing company becomes the sole shareholder of this newly formed company, or the dividing company acquires a share in the existing company. Furthermore, in contrast to the previous regulation, the possibility to relocate the registered seat to or from a non-EU or EEC member state is explicitly stated. This change responds to the fact that such relocation of the seat has already been successfully completed several times in practice.

As mentioned above, there are some other changes to the current Czech legislation, which are incorporating actual best practices and new approach into the Czech law itself such shortening of the period between decisive date and registration of the conversion in the commercial register, simplification of the appointment of expert, or new obligation to file a notice for creditors, employees and partners on their rights in the collection of documents. However, these changes mostly concern intra-state transactions.

Key local contacts

Should you have any questions or in case you require any assistance in this regard, please do not hesitate to contact us.

Other country specific

For reference, please find other country-specific information we prepared as part of this Insight Series here.