General meeting’s consent with substantial asset transfers surrounded by dilemmas
One of the powers of the general meeting of a limited liability or joint-stock company is to give consent to transfer or pledge a business establishment or its part “that would result in a substantial change to the company’s existing structure, scope of business or activity”. In practice, this provision of the law is troublesome as companies are unsure as to when the general meeting’s consent is actually required.
The professional public has adopted three possible interpretations of the provision. Problems arise mainly in situations where significant assets not comprising a separate branch/organisational unit (for instance, a large set of real property, a company’s sole machinery or crucial patent) are being transferred, but their transfer nonetheless substantially changes a company’s structure, its business or activity.
The High Court in Prague shed some light on the issue in August this year, although just temporarily. It held that approval by the general meeting is only required when part of a business comprising a separate branch or organisational unit is being formally transferred, while at the same time substantially changing the existing structure, scope of business or activity of the company (the material criterion). Two criteria thus have to be met – a separate branch, and a substantial change. This means that transfers of material assets, unless at the same time involving a transfer of a part of a business establishment, or more precisely a separate branch/organisational unit, would only be regulated within the statutory bodies’ fiduciary duty (the concept of due managerial care).
Notably, an amendment to the Corporations Act is currently being debated in the Chamber of Deputies, which is bound to change the rules of the game just clarified by the High Court yet again. Effective 1 January 2020, the law is to explicitly stipulate the requirement of a general meeting’s consent for transfers or pledges of “a business establishment or such parts of assets and liabilities that would mean a substantial change to the company’s actual business or activity”. This means that lawmakers have taken the material standpoint. A general meeting’s consent will thus be required when transferring substantial assets, regardless of whether they comprise a separate branch. According to the explanatory report, under certain circumstances, a trade secret or a registered trademark may also be such part of assets and liabilities.
With legislation taking this direction, companies will likely opt to be more careful. This means scrutinising thoroughly each and every transfer of assets as to whether it requires a general meeting’s consent.