Will this amendment spell the end of white horses, speculative mergers, hesitation on how to use other capital funds and transformation of cooperatives?
The Slovak Parliament’s amendments to the Commercial Code, Criminal Code and ten other laws, effective as of November and January 2018, are dealing with a number of changes, most important of which are:
- increased responsibilities of statutory bodies and shareholders criminal liability for transferring a company to a “white horse”,
- stricter merger rules,
- clear rules for the creation and distribution of capital funds and
- practical inability to transform a cooperative (in Slovak: družstvo) into a company.
Unfortunately, parts of the amendment are rather vague, which may result in an excessively broad interpretation by state authorities but also “toothless” provisions.
A/ Increased responsibility of statutory bodies and shareholders (effective from January 1, 2018)
The current scope of liability of statutory bodies is extended to factual directors, i.e., persons who are not statutory bodies, but actually perform their competencies without having been appointed to that function (e.g., a person controlling a “white horse” who was appointed as an executive director). It will be interesting to see how it can be proved that a certain act was not made by the “white horse” executive director but rather the factual director.
A shareholder with a majority share (the controlling person) in a company in bankruptcy will be directly liable to the creditors of the company (the controlled entity) in cases where the creditor’s position has deteriorated due to transactions made in favour of the controlling person or decisions made by the controlling person (e.g., the decision of the general meeting of a company to provide a guarantee). The law also presumes bankruptcy (and hence the possible liability of a shareholder) if the bankruptcy has not been declared due to a lack of property, or if the bankruptcy or execution has been suspended for that reason. A shareholder will be able to disclaim liability for damages if it proves that it acted in good faith for the benefit of the company.
The new crime of fraudulent liquidation, effective as of 1 November 2017, covers situations where a shareholder, trying to avoid a standard liquidation procedure of their company, transfers their shares to a “white horse” who becomes a new formal shareholder. Everyone in the loop, i.e., the white horse, the old transferring shareholder and the person who identified or “provided” the white horse, may face imprisonment of up to 15 years depending on the damage caused to the creditors. In reality, it might be challenging to prove who “provided” the white horse.
B/ Stricter rules on mergers (effective from November 8, 2017)
These forms of dissolution of the company without liquidation will require compliance with the following conditions:
- the value of the successor’s registered capital must exceed its liabilities,
- the successor or the acquiring company may not be in liquidation and
- the merging companies have not been declared bankrupt or in restructuring and no winding up procedure is pending.
The first condition – liability value lower than registered capital value – must be proven by the auditor’s report. Companies that are not required to verify financial statements by an auditor must also provide an auditor’s certificate indicating that the receivables and liabilities of the company being acquired correspond to the economic reality.
Members of the company’s bodies (not only statutory bodies, but also members of the supervisory board or other competent bodies) who are engaged in a merger in breach of the above conditions shall be directly liable to the creditors of the merged companies.
C / Rules for the creation and distribution of capital funds (effective from January 1, 2018)
These highly anticipated rules will do away with the currently unclear regulation on the creation and especially distribution of other capital funds in a limited liability company and a joint stock company.
Generally speaking, capital funds created by contributions of shareholders shall only be used for: (i) registered capital increases or (ii) distributions among shareholders. However, it will not be possible to distribute other capital funds among shareholders if the company is, or would be, in crisis as a result of such distribution. If these rules are breached, the shareholders will be obliged to return the distributed funds to the company and the statutory body members shall guarantee it.
D/ Practical inability to merge or transform large cooperative to another form of company (effective from January 1, 2018)
Currently every member of a cooperative has one vote at the member’s meeting unless Articles of Association stipulate otherwise. As of January 1, 2018, each member will have one vote (regardless of Articles of Association or its share) while taking decisions regarding merger or transformation or another form of liquidation of the cooperative.
This is a quick summary of the upcoming changes. If you need more details or have any questions, please contact us.