On July 01, 2015 the proposal of the amendment of the Commercial Code prepared by the Ministry of Justice of theSlovakRepublicwas submitted to the interdepartmental commenting process. Its subject is in particular the introduction of a new form of a capital company, inspired by the French model of a simplified joint-stock company (société par actions simplifiée, SAS) that is not subject to the constraints imposed by EU company law directives for the creation of a minimum registered capital. The proposed amendment is based on the governmental Concept of the Capital Market and governmental Concept for the Support of Startups and the Development of a Startup Ecosystem in theSlovakRepublic. Said proposal follows the regulation of a “one-Euro” limited liability company, which was included in the last year’s amendment to the Commercial Code passed by the Slovak Parliament, which did not enter into force because the Slovak Parliament did not override the veto of the President of theSlovakRepublic. This post deals with the introduction of basic assumptions on which the intended amendment is based and the institutes, which should in its current form, be introduced into the legal system of theSlovakRepublic.
Shareholders’ Agreements (Agreements between the Partners)
The law already expressly provides for the possibility to modify certain rights and obligations outside the Memorandum of Association or the Articles of Association for all forms of companies. In form of a written agreement between the partners (shareholders), the parties may agree on mutual rights and obligations arising from their participation in the company, and in particular (i) the manner and terms of the exercise of the rights associated with the participation in the company, (ii) the exercise of the rights associated with the administration and management the company, (iii) the terms and extent of participation in a change of the registered capital and (iv) ancillary arrangements related to the transfer of participation in the company (including the right to join the transfer of shares, the right to request the transfer of shares and the right to demand the acquisition of shares, which are described in more detail below). Such agreements are permitted under the current legislation, but the courts did not always accept them, because of an existing controversy regarding their validity in legal theory. Agreements between the Partners must comply with the mandatory provisions of the law. A decision of a body of the company in contradiction solely with the Agreement between the Partners is not invalid.
Simple joint-stock company in general
A simple joint-stock company (abbreviated in Slovak as „jed. akc. spol.“ or „j. a. s.“) is a capital company, which combines elements of a limited liability company (the low initial capital requirements, simple structure of the company) and a joint-stock company (the portion of the registered capital is represented by a share of a certain nominal value, the sum of nominal values of shares corresponds to the registered capital). The company is responsible for the breach of its obligations with its entire property. A shareholder is not liable for the liabilities of the company. The regulation of this type of company is to a large extent based on the regulation of a joint-stock company, however some specific provisions, which mainly reflect the implementation of EU law in relation to public joint-stock companies, shall not be applied.
The shares of a simple joint-stock company will be allowed to be issued only in dematerialized form. The establishment of a register of shareholders, which will be maintained by the Central Securities Depository and publicly available on its web site, is also proposed. The value of registered capital may be as little as one euro. The flexibility of the new type of company is provided by the regulation of the possibility of expressing the nominal value of the shares in Euro-cents or a combination of Euros and Euro-cents.
Exclusion of transferability of shares of a simple joint-stock company
The transferability of shares of a simple joint-stock company will be allowed to be, in addition to its restriction, also excluded. A right to require the company to purchase the shares arises, if the Articles of Association do not specify a longer period, four years after the payment of the issue price of the shares. According to the explanatory memorandum, it will applicable mainly in the case of financial investors, who generally are not interested in longer-term investment in a company. If a shareholder becomes entitled to the purchase of shares by the company and the shareholder requests the company to purchase the shares, the company is obliged to purchase the shares at a fair price, the details of the calculation of which are specified by the Articles of Association of the company. The possibility of demanding the purchase of shares by the company is restricted if the purchase of the shares would have a negative impact on the protection of creditors of the company. The purchase of the shares in breach of this provision is with regard to its consequences, according to the explanatory memorandum, treated as a prohibited return of the contribution.
Acquisition of own shares by a simple joint-stock company
In order to support startups it is proposed that the simple joint-stock company be allowed to subscribe and acquire own shares that the company may transfer only to persons who have been employed or to natural persons conducting business under a trade license or other license, whose results of activity are intellectual property of the company. Acquisition of own shares is limited by conditions which must be fulfilled simultaneously, the most important of which are (i) the approval by the General Meeting of the subscription, (ii) the period during which the company can subscribe the shares shall not exceed 18 months, (iii) capital adequacy remains respected and (iv) the sum of the nominal values of these shares does not exceed 20% of the registered capital.
Ancillary agreements of the shareholders' agreement
Despite the fact that these agreements are also possible for other types of companies, the law expressly regulates such agreements and mechanisms of their functioning in case of the simple joint-stock company. In some cases, in the case of a simple joint-stock company, it is possible to negotiate the respective rights as rights incorporated in the shares and registered in a special register, which reinforces their effects in relation to third parties and preserves them in case of a transfer in relation to the transferee of shares even following such transfer. If the right arising from an ancillary arrangement is to be registered, the form of a notarial deed is required for its establishment.
a) Tag-along (the right to join the transfer of shares)
The right to join the transfer of shares (tag-along) may be negotiated as a registered or an unregistered right. The right to join the transfer of the shares entitles the shareholder (obligee) to transfer their shares together with the shares of another shareholder (obligor). The right to join the transfer of shares corresponds to the obligation of the obligor who has undertaken, that in case of a transfer of shares under a contract, he will allow the shares of the obligee to be transferred to a third party under the same conditions. The consequences of a breach of the registered and the unregistered right to join the transfer of the shares are stipulated differently. If the right to join the transfer of the shares registered under a special legislation is breached (i) the obligee is entitled to demand that a third party, who has acquired shares of the obligor, acquires the respective shares under the conditions under which he acquired the shares from the obligor, (ii) the obligee is entitled to demand that is obligor acquires the respective shares of the obligee, under the conditions under which the obligor transferred the shares to a third party, or (iii) the obligee’s right to join the transfer of shares shall be preserved if he does not exercise the rights under (i) and (ii). If an unregistered tag-along right was breached, the obligee is entitled to demand that is obligor acquires the respective shares of the obligee, under the conditions under which the obligor transferred the shares to a third party. If the obligee does not exercise most of those rights within one year of the infringement, the rights shall cease to exist and the obligee shall only, in case of a registered tag-along right, have the right preserved against the person who acquired the shares.
b) Drag-along (the right to demand the transfer of shares)
The right to demand the transfer of shares (drag-along) may be negotiated as a registered or an unregistered right. The right to demand the transfer of the shares entitles the shareholder (obligee) to demand from another shareholder (obligor), that he, at the time of the transfer of shares of the obligee to a third party, also transfers his shares. If the right was registered under a special legislation and the purchase price for the obligor is deposited into notarial escrow or a letter of credit for the benefit of the obligor is established and the fulfillment of these conditions is affirmed by a notary, the obligee is authorized to transfer the respective shares to a third party acting on behalf of and for the account of the obligor. If an unregistered drag-along right was breached, (i) the person who acquired the shares may demand that the obligor transfers to him the respective shares in accordance with the law and under the conditions under which he acquired the shares from the obligee, or (ii) the right to request the transfer of shares of the person who acquired the shares is preserved.
c) Shootout (the right to demand the acquisition of shares)
The right to demand the acquisition of shares may be negotiated only as unregistered. According to the explanatory memorandum this agreements serves mainly to deal with situations in a company where the shareholders got into a stalemate. The right to demand the acquisition of shares entitles the shareholder (obligee) to determine the price per share and ask another shareholder (obligor), that he transfers the shares at the determined price. The shareholder who first delivers his proposal to determine the price per share to another shareholder is considered to be the obligee. If the obligor does not accept this proposal in the agreed upon time limit, the obligee is entitled to demand that the obligor acquires his shares under the same conditions.
The proposed amendment brings a long awaited legislative introduction of institutes associated with greater flexibility of relations in the beginning of, during the existence and at the termination of participation in companies. At the same time it presents, in the simple joint-stock company, a new form of participation in the market competition in order to attract and facilitate business innovation opportunities. It will therefore be interesting to follow the ongoing legislative process and any changes that it might create in this context.
The author of the article is Simon Šufliarský, associate in Konečná & Zacha's office in Bratislava