Change of business entity

The text gives details of the two basic methods of the change of the business entity – the transfer of an interest in a company and the transfer of a certain part of the business activities. In addition, the text contains other information and useful links relating to these issues.

Change of business entity

The interest transfer is governed by rules stipulated in Act No. 89/2012 Coll., the Civil Code (hereinafter referred to only as the “NCiCo”), Act No. 90/2012 Coll., on Commercial Companies and Cooperatives (Act on Business Corporations, hereinafter referred to only as the “ABC”) and accompanying legislation relating to private law reform, that is to say Act No. 91/2012 Coll., on Private International Law.

In view of the vast extent of this topic we will focus only on the most frequently used methods and the most common legal forms of businesses operated in the Czech Republic by foreign entities – a limited liability company and a joint stock company.

One of the legal acts which may result in the creation or cessation of participation in a company is the transfer of an interest in a company, which is represented by the transfer of an ownership interest in a limited liability company or the transfer of shares or other securities of a participating nature in a joint stock company, resulting in a change of the ownership right in relation to the company.

A seemingly similar change is the transfer of a certain part of the business activities of a company. However, this occurs without a change in its ownership structure and is based on an enterprise purchase agreement.

Changes relating to the company structure occurring as a result of the acquisition of an interest in a company are to be recorded in the Commercial Register.

The transfer of an ownership interest is a complicated process, which for the sake of the safety of both sides requires the conclusion of the relevant contracts. Therefore the individual parties of the transaction are usually represented by their legal agents, most frequently by solicitors, whose list, including their relevant specialisations, is available on the website of the Czech Bar Association.

Transfer of an Interest in a Limited Liability Company

This is the most common way of how a shareholder’s participation in a company is established and possibly also terminated. The transfer of an ownership interest in the company is performed on the strength of a written agreement with officially certified signatures. The ABC does not regulate the ownership interest transfer agreement as a special type of agreement and therefore the provisions in the NCiCo on the purchase of movables items contained in Section 2085 et seq. are to be applied.

If the shareholder’s interest is represented with a common certificate, its transfer will require an endorsement (similarly as when transferring registered shares), which must include the unambiguous identification of the transferee.

Transfer of an Interest in a Joint Stock Company

The transfer of shares regardless of their form or type is always based on an agreement, which represents a legal reason (title) of the transfer. Nonetheless, the law modifies the conditions of share transfer depending on their form or type.

A share transfer agreement or more precisely a purchase agreement is governed by the provisions of the NCiCo relating to purchase, specifically the purchase of a movable item, because by operation of law shares are movable items. A share transfer agreement does not necessarily have to be in writing, registered shares are transferred by endorsement. The purchaser (transferee) of a share becomes the holder of the share even if the seller was not entitled to transfer this security (share), if in view of all of the circumstances he had good faith in the entitlement of the transferor (seller) to transfer the ownership right on the basis of a proper title provided the acquisition occurred in cases stipulated in Section 1109 of the NCiCo, that is to say:

  • at a public auction,
  • from an entrepreneur during his business activities in the ordinary course of trade,
  • for a payment from somebody who the owner entrusted the item with,
  • from a non-legitimate heir, who had probate granted,
  • when trading an investment instrument, security or deed issued to the bearer, or
  • when trading in a commodity market.

Before the force of the NCiCo, share transfers were regulated by the Securities Act, which was replaced by the relevant provisions of the NCiCo and ABC. Therefore, based on the above, if a share transfer occurs on the strength of an agreement, this agreement is governed by the relevant provisions of the NCiCo and ABC.

Purchase of a Business Enterprise

Another change in an entity carrying out business is the transfer of business activities to another person, i.e. the purchase of an enterprise as an economically functional unit without influencing the ownership structure of the company. The purchase of an enterprise represents a transfer, for a consideration, of an organised set of assets, which was created by the entrepreneur and which of the entrepreneur’s own choice is used for operating his activities, that is to say, it forms a business enterprise in accordance with the Civil Code. Regarding the enterprise, a refutable legal presumption applies, specifically that an enterprise consists of everything which is usually used for its operation.
An enterprise is transferred on the basis of an enterprise purchase agreement.

Actual Transfer

The transfer of the ownership right to an enterprise takes place on the strength of an enterprise purchase agreement. A purchase of an enterprise is regulated in Section 2175 et seq. of the Civil Code. The basic rules for the purchase of the enterprise are as follows:

  • The agreement does not have to be concluded in writing.
  • The seller is bound to notify his creditors and debtors that he has sold the enterprise and to whom.
  • The seller guarantees the repayment of the debt, unless the creditor gave his consent to the purchaser assuming the debt.
  • The purchaser acquires the ownership right to the enterprise as a whole. The ownership right acquisition occurs at the point of the Commercial Bulletin posting the information about a document substantiating the purchase of the enterprise having been filed in the Collection of Deeds or from the effective date of the agreement, if the purchaser is not entered in a public register.

The purchase of an enterprise may be a relatively complicated transaction and therefore it is advisable to seek the help of a local solicitor or a different legal expert. Tax implications should be assessed by the Ministry of Finance.

Sources

The following governmental and non-governmental institutions and web portals offer further information and useful services relating to the transfer of an interest in a company.

Personalised Help and Advice

The Enterprise Europe Network is a large network (with 600 host organizations and 4,000 full-time staff) providing information and advice for entrepreneurs through its local partners.

Legal text

The document was produced by cooperation betweenMgr. Zuzana Schejbalová, a solicitor with the Legal Office of Doleček Kahounová Sedláčková, Your Europe – Business (EU portal for companies) and BusinessInfo.cz.

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