Increase Authorised Share Capital in Czech Republic

The most important component of a Czech company’s equity capital is the share capital, which is the sum of shareholders’ contributions to the company. The amount of share capital usually remains unchanged after the establishment of the company, but in some cases it may need to be increased.

The share capital may be increased in the following ways:

• by taking a deposit commitment to increase existing deposits
• from the company’s own resources
• by a combination of the ways of increasing the authorised capital specified in paragraphs 1) and 2).

Increase of the authorised capital by accepting a deposit liability

 An increase in the authorised capital by making new monetary contributions is only permitted after the existing monetary liabilities have been repaid in full. An increase of the share capital by making non-monetary contributions is permitted until their repayment. The partners of the Czech sro have the pre-emptive right to participate in the increase of the authorised capital of the partnership by making a monetary contribution. The partners of the partnership have the right to make a deposit in proportion to the size of their shares, unless otherwise established by agreement of all partners of the partnership. The obligation to make a deposit is accepted on the basis of a written statement, the signature must be officially certified at a notary’s office, and this statement becomes effective from the moment it is handed over to the company.

Increase of the share capital from own funds

The General Meeting of Shareholders may decide to increase the share capital of a Czech company from the company’s own funds reflected in the approved ordinary, extraordinary or interim financial statements as part of the company’s capital, unless these funds are specifically earmarked and the company is not authorised to change their purpose. Net profit may not be used to increase the share capital on the basis of the interim financial statements. An increase in the share capital may not exceed the difference between the amount of the company‘s equity capital and the amount of the company’s share capital. The authorised capital may only be increased from own funds if the part of the financial statements on the basis of which the general meeting decides on the increase has been audited by an auditor and a favourable opinion has been received. As a result of the increase of the authorised capital at the expense of own funds, the amount of contributions of the partners of the partnership changes in proportion to the amount of their previous contributions, unless the articles of association provide for the increase of shares and the general meeting has decided to form a new share. In case of formation of new shares, a new share shall be formed for each partner of the partnership in proportion to the size of their previous shares.

Actions required to increase the share capital of a Czech company

In order to increase the authorised capital of a Czech company, the following steps must be taken:

1. The shareholder(s) of the company decides to increase the share capital by means of a notarial deed defining the main parameters of the increase: who will participate (existing shareholder or additional person), the amount by which the share capital will be increased, etc. This decision must be formalised in the form of a notarial deed.
2. The shareholder(s) provides a written commitment to pay the amount determined in step 1. The corresponding amount must be transferred by bank transfer from the shareholder’s account to the company’s account. It is permissible to pay 30 per cent immediately and the remaining amount can be paid over a period of five years.
3. Once the payment has been made, the managing director of the company confirms receipt of the funds in writing. This confirmation, together with the company’s bank statement showing receipt of the funds from the shareholder’s account, will serve as proof of payment.
4. The managing director will then apply for the new shareholder contribution and the updated share capital amount to be registered in the commercial register. The documents mentioned above will be provided as supporting evidence.

Ways of increasing the share capital in the Czech Republic

Decisions to change the amount of the authorised capital of a limited liability company are made exclusively by the highest body of the company – the General Meeting of Members. In order to increase or decrease the share capital, a resolution of the general meeting of the company’s participants is required. Unless otherwise established by the charter, the decision to increase the authorised capital shall be adopted by a majority of at least two-thirds of votes of all participants, and this decision must be notarised.

Section 216 of the Business Corporations Act states that the authorised capital may be increased in any of the following ways:

• by assuming a deposit obligation to increase existing deposits or by creating a new deposit,
• from its own resources or
• By combining the two previous methods of increasing the authorised capital.

This list of ways to increase the authorised capital is complete and there are no other options. However, it is probably sufficient to choose whether the increase is to be made through new contributions (which will bring new funds to the company), through an increase in equity (which will be reflected only in the nominal amount of the share capital, but the company will not receive new funds) or a combination of both. According to the Commercial Code of the Czech Republic, the effects of an increase always take effect before the date of entry of the increase of the share capital in the Commercial Register. The Commercial Corporations Act partially deviates from this rule and, in the case of an increase of the share capital by means of new contributions only, it allows for the earlier occurrence of the effects of the increase (and the subsequent entry of the new amount of the share capital in the Commercial Register is thus only declaratory). Under the Business Corporations Act, the effects of the increase only occur (as before) at the time of the registration of the new amount of share capital in the Commercial Register in the case of an increase in share capital from own funds or a combination of both of the above-mentioned methods. On the other hand, the effects of a share capital increase carried out only by means of a contribution commitment will come into effect from the moment the contribution commitment is made and the prescribed part thereof is paid or refunded (unless a later occurrence is provided for by a resolution of the general meeting on the share capital increase). However, these effects cannot occur later than the entry of the new amount of the authorised capital in the commercial register. In this regard, it should be taken into account that the proposal to enter the new amount of the share capital in the commercial register must be submitted no later than two months from the date of the resolution of the general meeting on the increase of the share capital.

Resolution of the general meeting of the Czech company

The relevant resolution of the general meeting to increase the company’s share capital must contain at least the following information:

• the amount by which the authorised capital is increased,
• the term of the deposit commitment,
• identification of the type of shares, if the new deposit is for a new share,
• where applicable, a description of the non-monetary contribution and the amount included in the partner’s share issue price, and the
• the deadline for filing a master certificate or obtaining a new master certificate if the company issues master certificates.

Assumption of the deposit obligation

As in the Commercial Code, the obligation to make a deposit is assumed by means of a written statement. The signature of the partner or third party accepting the deposit commitment must be formally authorised. Since the declaration is unilateral, it is only effective from the moment it is delivered to the company.

The basic requirements for the content of the statement of deposit commitment include:

• A determination of the amount of the contribution attributable to the new share and the amount of the new share or the amount of the increase in the contribution attributable to the existing share and the amount of that share and any premium on the contribution,
• a description of the non-cash contribution and the amount included in the share issue price,
• the time period for fulfilment of the deposit obligation, and
• any statement by the prospective partner that he/she is joining the partnership agreement.

If the commitment to increase the share capital or make a new deposit is not made within the deadline set by a resolution of the general meeting, the resolution of the general meeting to increase the share capital shall be cancelled and the deposit obligation shall be terminated. In this case, the company shall be obliged to return the paid-up issue prices together with ordinary interest to the authorised persons without undue delay.

Other cases of termination of deposit obligation

In addition to the above-mentioned case of failure to fulfil the deposit obligation within the time limit set by the resolution of the general meeting, the resolution of the general meeting to increase the share capital shall be cancelled and the deposit obligation shall be terminated also in the following cases:

• the proposal for registration of the share capital increase in the Commercial Register is not submitted within 2 months from the date of the general meeting’s resolution on the share capital increase,
• a court judgement rejecting the proposal to register the share capital increase in the Commercial Register, or
• after 2 months from the date of entry into force of the court decision rejecting the proposal to register the share capital increase in the Commercial Register (if the proposal is not resubmitted within the same period).

Even in these cases, the company will return the issue prices paid, together with the usual interest, to the authorised persons without undue delay. On the other hand, it should be noted that once an increase in the share capital has been registered in the Commercial Register, the depositor is obliged to fulfil his deposit obligation even if the resolution of the general meeting on the increase in the share capital or the declaration of acceptance of the deposit obligation is invalid or void. This, of course, does not apply to cases where the invalidity of the decision of the general meeting to increase the authorised capital is recognised by the court.

Cash deposits and their return

In practice, the most common increase of the authorised capital by way of cash contributions is only permissible after the existing cash contributions have been repaid in full. The new Law on Commercial Corporations provides for an exception to this rule if the increase is carried out through the creation of new shares. Thus, if the share capital is increased (instead of increasing the amount of existing contributions) by creating new contributions (regardless of whether these new contributions are acquired by a current partner or a third party), the increase can be made even before the “old” contributions are fully repaid. Of course, it is still possible to increase the authorised capital by means of non-monetary contributions until the monetary contributions have been repaid in full.

When increasing the authorised capital of a partnership by making monetary contributions, the partners have a pre-emptive right to participate in the increase of the authorised capital (assuming the obligation to make a contribution) in proportion to the size of their shares, unless otherwise established by by agreement of all partners. The partnership agreement may exclude or limit the preemptive right of the partners, as well as determine the proportion in which the partners have the right to assume the obligation to make a contribution. If a partner fails to exercise the pre-emptive right of purchase within the prescribed period of time, waives it by submitting a written application with a certified signature (or an application made at a general meeting) or if the pre-emptive right of purchase of partners is excluded by the partnership agreement, the obligation to make a deposit may be assumed by any partner, including any other partner, with the consent of the general meeting. Given that in such a case the distribution of shares in the company will change (which will affect the rights of each shareholder), the consent of all shareholders of the company will be required for the general meeting to pass the necessary resolution. The situation for the partners and the company has been simplified by adjusting the procedure for making cash contributions. When a limited liability company is formed, cash deposits are still returned to a special bank account opened by the deposit manager. However, the Business Corporations Act expressly provides that this provision does not apply to increases in the authorised capital.

It is now possible to deposit the amount corresponding to the new cash contribution directly into the (current) account of the company or even in cash in the company’s cash office (subject, of course, to the cash payment limit). Thus, it is no longer necessary to open a special bank account for the return of cash contributions when increasing the authorised capital, as was previously the case.

In addition, the minimum cash deposit refund required for submitting a proposal to register a share capital increase in the Commercial Register has been cancelled. Whereas under the Commercial Code, at least 30% of each cash deposit had to be returned before submitting a proposal to register a company in the Commercial Register, as well as before submitting a proposal to register a share capital increase in the Commercial Register, the Commercial Corporations Act only stipulates this condition during the company formation process.

Thus, when increasing the share capital, it is possible to set a lower minimum amount of cash deposits to be paid before submitting the proposal for registration of the new share capital in the Commercial Register. In this case, the set portion must be paid in such a way that the directors can submit a proposal for registration of the new share capital in the Commercial Register no later than two months after the general meeting has passed the resolution to increase the share capital.

The only restriction that will continue to apply in this context is that the cash contribution must be repaid in full no later than 5 years from the date of the commitment to make the contribution (which applies to both the incorporation of the company and the increase of its basic share).

As the Business Corporations Act authorises limited liability companies to issue participating securities – ordinary shares – it also contains major changes to the process of marking a new deposit on ordinary shares or exchanging them for new ordinary shares in connection with a share capital increase. The Managing Director must, without undue delay, invite holders of ordinary shares whose shares have been issued to surrender them within the time limit set by the general meeting for the designation of a new deposit amount or exchange them for ordinary shares with a new deposit amount, or invite them to purchase new ordinary shares issued to increase the authorised capital.

Decrease of the authorised capital of the Czech Company

As a result of a resolution to reduce the company’s share capital, the amount of each shareholder’s contribution is reduced in proportion to his or her previous contributions. As a result of a resolution to reduce the share capital, the company may also extinguish its contribution if it has another contribution, or if it represents an issued share, or if the company has invalidated its share certificate. The general meeting of shareholders, with the consent of all shareholders, may resolve to reduce their contributions unevenly. The directors must publish the resolution to reduce the share capital within 15 days of its adoption on two consecutive occasions at an interval of 30 days. At the same time, the directors must invite in writing known creditors of the company whose claims against the company arose prior to the adoption of the resolution of the general meeting on the reduction of the share capital to register their claims against the company within 90 days of the publication of the last announcement. The company will provide a creditor who has timely filed a claim against the company with sufficient security for that claim or satisfy the claim, unless otherwise agreed with the creditor.

The effects of a reduction of the share capital arise from the moment the new amount of the share capital is entered in the Commercial Register. A reduction of the share capital is entered in the Commercial Register by a court or notary only in the following cases:

• it is proven that the time limit pursuant to Article 236 (2) has expired, if no creditor has filed his claim within the time limit,
• a statement has been filed by the company that it has no creditors entitled to security or satisfaction of its claims,
• the company’s loss is documented at least in the amount corresponding to the reduction of the share capital to cover the loss,
• the claim is satisfied or sufficiently secured or an effective arrangement under section 237(1) has been proved,
• the company has submitted an effective agreement with creditors entitled to satisfaction or security for their claims to satisfy that right, or
• reasonable security has been proved by virtue of a court order under section 238.

In the case of a declaration by the company under section 2, sub-paragraph b), or an agreement under section 2, sub-paragraph e), the period specified in section 236, paragraph 2 ( publication of the resolution to reduce the share capital within 15 days of its adoption twice consecutively at an interval of 30 days ) is not required.

The Company will only dispose of the amount corresponding to the reduction of the share capital once the reduction of the share capital has been entered in the Commercial Register. When reducing the share capital, the focus is on the protection of the company’s creditors. The provisions on creditor protection do not apply if the company reduces the share capital in order to cover losses. The general meeting decides on the increase or decrease of the share capital by means of a resolution, which must be notarised.