To what extent may the rights of members of limited liability companies be restricted?

The Corporations Act in effect from 1 January 2014 allows corporations to create special types of ownership interests; in other words, corporations are allowed to connect their ownership interests with various types of rights and duties as well as modify, or even entirely withdraw, these rights and duties. Inspired by the German legal framework, the admission of special types of interests constituted a small revolution in corporate law, arousing enthusiasm over the legislator’s broadmindedness but also considerable doubts about the limits of the new freedom.  

The legal regulation does not prescribe any detailed rules for the creation of special ownership interests. As the limits have not been set, the general and the professional public often disagree about what rights can be connected with special interests and especially what rights can be withdrawn. General legal principles arising from the Civil Code and relating to the prohibition of the violation of goods morals and the prohibition of unjust favouritism or discrimination of a member of a corporation can provide some direction. Despite the absence of an explicit regulation, few of us would challenge the possibility to modify (restrict) the voting right of a member (or to remove it under certain circumstances, which is explicitly allowed by the law) or the amount of a share of profit or liquidation balance. But where is the limit of such restrictions or modifications? German legal regulations do not allow the simultaneous withdrawal of a right to a share of profit, a right to a share of liquidation balance and the voting right. Would these arguments have any legal force in our environment?

The legislator tried to address some of these issues in the proposed amendment to the Corporations Act by explicitly determining the limits for the creation of special ownership interests in limited liability companies. If the amendment is passed in its current wording, any doubt about to what extent ‘proprietary rights’ rights pertaining to a share can be restricted will be dispelled. The amendment clearly stipulates that an ownership interest must always be connected with at least one right of the following three: the right to a share of profit, the right to a share of liquidation balance or the voting right, each in its full extent. It also stipulates that at least one ownership interest in a limited liability company must be connected with the voting right. This relatively logical provision should ensure that the general meeting remains the functional body of a corporation. The amendment also protects members of limited liability companies holding interests without voting rights: to avoid any potential doubt, the law explicitly states that when adopting a decision to change the memorandum of association, the consent of a member whose rights are affected by such a decision is always required.

Understandably, the amendment does not list all rights that are never to be withdrawn from members of limited liability companies. We agree that such a change to the wording is unnecessary and would not have brought any more legal certainty. The determination of the extent and limits in specific cases therefore remains an issue of legal interpretation. 

The latest amendment only clarifies the existing rule applicable to the creation of various types of ownership interests. As in the case of joint-stock companies, the law explicitly prohibits the creation of ownership interests in limited liability companies associated with a right to a certain amount of interest irrespective of the company’s results of operations. However, we would have arrived at the same conclusion without the new amendment.

Despite our western neighbour’s tradition, the above rules are still quite new in the Czech environment and we will just have to wait and see how they will prove themselves in practice. The use of various types of ownership interests aims to help a corporation adapt as much as possible to the needs of its members. Variable ownership interests may, among other things, compensate for the strong or weak position of such members and the newly defined limits for the creation of special ownership interests may help apply them in practice.