General meeting’s consent to transfer or pledge part of a business establishment

Under the presently valid Corporations Act, general meeting’s consent is required for a transfer or a pledge of a business establishment or such a part thereof that would mean a significant change to the existing structure of the business establishment or a significant change to the company’s scope of business or activity. Because of the absence of the legal definition of a part of a business establishment, this provision causes serious interpretation difficulties: it can be construed materially, i.e. as a significant part of assets, or formally and materially, i.e. as an independent organisational unit at the same time meeting the condition of significance/materiality for the existing structure of the business establishment or the scope of the company’s business or activity. The correct interpretation of the part of a business establishment term is important namely because if the general meeting’s consent is not obtained in cases where such consent is required by law, this may render the legal act invalid (void).

In its judgement no. 27 Cdo 2645/2018, the Supreme Court supported the formal and material concept: a part of a business establishment shall mean an independent organisational unit (a branch) of a business enterprise with a certain degree of significance/materiality for the company. The Supreme Court thus confirmed the conclusion previously formulated by the High Court in Prague, as noted in past November’s Tax and Legal Update. Both interpretations differ from the majority opinion in professional literature, where the concept is understood materially, i.e. as a significant/material portion of assets.

The extensive interpretation of the concept, i.e. the material approach, gives more control and protection to members/shareholders, yet to the detriment of legal certainty and security of company dealings. Without a detailed analysis often requiring considerable efforts and funds, it may be virtually impossible for third parties to determine whether the transfer of a certain part of assets is subject to the general meeting’s consent. In its judgement, the Supreme Court stated that based on grammatical and logical interpretations the meaning of the term has to be construed more narrowly: the general meeting’s consent shall thus be required for a transfer of a branch of a business establishment (i.e. a part of a business establishment that demonstrates economic and functional independence) that at the same time meets the condition of significance/materiality in terms of the business establishment’s structure or the company’s scope of business or activity.

Using this interpretation, it may also be concluded that if one of a company’s many branches is being transferred with all of them having the identical scope of business and turnover, the general meeting’s consent shall not be required, as the materiality condition will not be met. Other transfers or pledges of significant components of a business establishment (such as machinery or buildings) are decided on by the company’s statutory body, within business management.

The Supreme Court also noted that had the legislators intended to subject all significant transactions involving the company’s assets to the general meeting’s consent, they would have done so explicitly, for instance using the part of assets term. In this respect, please note that an amendment to the Corporations Act that aims to resolve this interpretation uncertainty by replacing the part of a business establishment wording with a part of assets and liabilities is presently being discussed in the Chamber of Deputies. This may mean a shift back to the material concept. Preparing any transactions involving company’s business establishment will therefore continue to require increased prudence in the future as well.