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New regulation on mergers and other transformations of commercial companies and cooperatives

Act No. 125/2008, Coll., on Transformations of Commercial Companies and Cooperatives, taking  effect 1 July 2008, supersedes the existing regulation of intra-state transformations in the Commercial Code and newly regulates certain transformations with foreign elements, i.e. cross border mergers and transfer of assets to a foreign participant.

Basic changes to current regulations

Even though changes to the existing conception were not planned, the new regulation introduces a number of differences. In particular it replaces the wording of existing agreements or resolutions on individual types of transformations by the term “project”. Transformation projects must be in writing and are prepared by statutory bodies of involved companies or cooperatives. After publication, it must be in the identical wording approved by the determined body concerning the type of company and kind of transformation. The form of a notarial record is prescribed for the approval of transformation and the project then constitutes an annex thereto. The transformation is no longer required to be reviewed by the Supervisory Board or Cooperative Inspection Committee. Unlike the existing regulation, projects may also contain advantages for members of the bodies and experts.

Participants in certain forms of transformations who disagree are newly permitted to leave a company or cooperative within 30 days following approval of the project. This applies, for example, to a shareholder that disagrees with an intra-state merger during which a limited liability company is supposed to be the successor company. To strengthen shareholders’ rights, no statute of limitations is established in respect of the right to settlement, supplementary payment for exchange of shares, right to settlement for takeover of assets and certain other claims. In a number of cases interest is applied to amounts outstanding. Detailed regulation concerning invalidity of the transformation is contained in the act. Where a new joint-stock company is established, employees are represented on the first Supervisory Board pursuant to the new regulation. From the viewpoint of merging companies, certain cross merger scenarios are admitted such as consolidation of two limited liability companies in a joint-stock company and vice versa.

Cross-border merger

The foreign participant in this merger means only a corporation having its registered office in another EU member state or EEA state. From the viewpoint of the legal form, the act sets forth a requirement for an identical legal form of the dissolving successor corporation, unless legal regulations of all member states in which the participating corporations have their registered offices (including regulations of a potential third state of the future registered office of the successor company) permit intra-state mergers of such legal forms.

For cross-border mergers, the act stipulates a significantly broader protection of employees. This applies in particular to information duties of the involved companies; basic information such as the merger impact on employees or the method how they are involved in the matters of the successor entity must be stated in the merger project. The draft project, reports on the merger and a number of further data must be provided to employees before publication of the project simultaneously with the information on their right to provide comments on the above.

Employees of the successor corporation also have the so-called right of influence containing the right to elect and be elected to the Supervisory Board or, as the case may be, the inspection committee in case of cooperatives. This right is acknowledged by law to a broader extent than what the Commercial Code currently stipulates for employee membership on the Supervisory Board of joint-stock companies; this also applies to successor companies in the form of limited liability companies or cooperatives if any of the dissolving corporations had more than 500 employees in the most recent six months prior to publication of the project and the right of employees’ influence also existed in such corporation. Statutory bodies of the involved companies are obliged to ensure establishment of the so-called negotiating committee that represents employees during negotiations on the extent of their right of influence.

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