Domestic conversion of companies and cooperatives - MERGER

Act No. 309/2023 Coll. on the Conversion of Companies and Cooperatives and on Amendments to Certain Acts (Act) entered into force on 1 March 2024. What the new regulation of domestic transformation - mergers has brought us and how these changes affect us, we will tell you in this article.

According to the Act, conversion is a merger or division of a company. A merger is referred to as a process involving a merger of companies.

Transformation project – merger

A merger is a process involving a merger of companies. Under the old legislation, this process was called merger and merger. The main legal act of these processes was the preparation of the draft terms of merger or the merger agreement.

The new legislation of the Act replaces the above-mentioned acts with a new institute, the so-called conversion project.

The whole process of transformation of a company in the form of a merger could be summarized in the following steps:

1. Preparation of a proposal for a business transformation project.
2. Notification to the tax administrator of the preparation of the proposal for the conversion project.
3. Notification to creditors and lien creditors of the preparation of a proposal for a conversion project.
4. Publication of the proposal for a conversion project in the Commercial Gazette or deposit in the Collection of Deeds in the Commercial Register.
5. Approval of the draft conversion project by the general meeting of the company.
6. Auditor's report.
7. Filing an application for registration of the conversion of the company in the Commercial Register.

Preparation of a proposal for a business transformation project.

The merger process starts with the preparation of the design of the conversion project. The conversion project has the following general requirements within the meaning of § 8 of the Act:

• business name, registered office and organisation identification number (IČO), if assigned, of the participating companies,
• the proposed name, registered office and legal form of the company to be formed as successor company,
• the shares of the shareholders of the participating companies in the successor company or the amount of the members' contributions in the successor company,
• an indication of the date from which the transactions of the companies which will cease to exist shall be treated, from the point of view of accounting, to be made for the account of the successor company, which may be fixed at the earliest by reference to the first day of the financial year in which the proposal for the conversion project is drawn up, provided that the accounts drawn up on a date prior to that date have not been approved by the competent authority; in the case of separation, these effects occur only in relation to the assets and liabilities to be transferred to the successor companies under the design of the conversion project,
• determination of the date from which the members of the companies which will cease to exist acquire the right to share in profits as members of the successor company,
• designation of members of the statutory body and members of the supervisory board of the company formed by the merger, if the successor company is a limited liability company, a joint-stock company or a simple share company,
• the designation of the members of the company being dissolved by conversion who, on its dissolution, become members of the successor company.

A mandatory annex to the conversion project is a draft memorandum of association (memorandum of association) and articles of association of the successor company. In addition to the general particulars, the conversion project shall contain the specific elements of the conversion project for each type of company. The special requirements of the project for the conversion of a limited liability company are regulated by Section 22 of the Act, a joint-stock company is regulated by Section 34 of the Act and a simple company into shares by Section 51 of the Act.

As regards the form of the conversion project, the Act retained the mandatory form of notarial deed only in the case of a merger of a limited liability company, a joint-stock company and a simple company into shares.

The change occurred in the so-called simplified merger (i.e. the merger of a company with a company whose share reaches at least 90% and less than 100% of the share capital and the merger of the company with a company that is the sole member), here the legislator requires that in the form of a notarial deed, a proposal for a conversion project be drawn up.

Notification to the tax administrator about the preparation of a proposal for a conversion project.

After drawing up a proposal for a conversion project, the dissolving company is obliged no later than 60 days before the date of the General Meeting to approve the draft conversion project to deliver to the tax administrator a notification of the preparation of the conversion project.

Notification to creditors and lien creditors of the preparation of a proposal for a conversion project.

After sending a notification to the tax administrator, the dissolving company has another obligation. The company being dissolved is obliged to inform all its creditors as well as lien creditors who have established a lien on the business interest in the preparation of the proposal for the conversion project. This obligation must be fulfilled by the members of the dissolving company at least 30 days before the date of the general meeting which is to approve the draft conversion project.

Publication of the proposal for a conversion project in the Commercial Gazette or deposit in the Collection of Deeds in the Commercial Register.

As in the old legislation, under the Act of the Dissolving and Successor Company, the obligation to publish the draft conversion project remained. Pursuant to Section 10 of the Act, companies shall publish the draft conversion project either in the Commercial Gazette or deposit it in the Collection of Deeds. The draft conversion project must be published at least one month before the general meeting deciding on the approval of the conversion project.

Information obligation of the statutory body.

The statutory body has an obligation under the Act the obligation to inform its partners about the conversion. The law explicitly regulates this obligation only for capital companies.

Directors in a limited liability company are obliged, together with the invitation to the general meeting, to send the shareholders a draft of the conversion project, financial statements of participating companies for the last three years, interim financial statements as well as a report of the statutory body and an auditor's report, if any.

In the case of a joint-stock company, the obligation to send the above documents together with the invitation is waived, but all documents must be available for inspection at the registered office of the company at least 30 days before the day of the general meeting.

A new alternative way of making documents available is the possibility of publishing documents on the company's website at least 30 days before the general meeting approving the conversion project.

Auditor's report

The new legislation of the Act introduced two types of auditor's reports, which, unlike the old legislation, can only be prepared by an auditor. The law left the method of appointing an auditor by the court at the proposal of the statutory body only for joint-stock companies and simple companies for shares. In the case of a limited liability company, it is sufficient that the auditor is selected by the statutory body, without the need for further approval by the court.

The first type of auditor's report is a simpler report, which is referred to as the auditor's report. The second type, referred to as the auditor's review report on the design of the conversion project, is considerably more complex.

According to the Act, companies are obliged to always have at least one type of auditor's report prepared. That is, if the company does not draw up an auditor's report on the review of the design of the conversion project, it is obliged to prepare a simpler type of auditor's report. The purpose and objective of an auditor's report (whether simpler or more complex) is to contribute to the protection of creditors, lien creditors and members and thus prevent unfair business practices.

Other conversion obligations.

In addition to the abovementioned obligations, capital companies shall be obliged to draw up:

• the report of the statutory body;
• the opinion of the supervisory board; and
• keep members/shareholders informed.

Cooperatives and personal companies do not have this obligation.

Report of the statutory body

The statutory body of capital companies is obliged to draw up a report and explain from a legal and economic point of view the conversion and the particulars of the design of the conversion project. This obligation does not arise for the statutory bodies if the members or shareholders waive the right and agree not to produce the report.

Statement of the Supervisory Board

Where capital companies have established a supervisory board, the supervisory board is obliged to examine the intended conversion, the draft conversion project and the report of the statutory body. After the examination, it shall submit its opinion on the intended conversion to the general meeting of the company.

As in the case of the report of the statutory body, if all shareholders of the participating companies agree, the supervisory board will not have to comment on the conversion.

Keep members and shareholders informed

During the entire conversion – merger, the directors and the board of directors are obliged to keep the general meeting of the company of which they are the statutory body and also the statutory body of all companies involved in the conversion informed of any substantial change in the company's business assets and liabilities that occurred between the preparation of the draft conversion project and its approval. The statutory body cannot relieve itself of this obligation or exclude it even by agreement of the shareholders.

Filing of an application for registration of the conversion of the company in the Commercial Register.

The last necessary step to complete the transformation of the company is registration in the Commercial Register. A merger only takes effect upon registration in the Commercial Register, therefore it is necessary to file an application for registration of the merger in the Commercial Register.

An application for registration of a conversion in the Commercial Register must be filed simultaneously by all companies no later than 30 days from the date of approval of the conversion project.

Since the transformation of a company involves a division in addition to a merger, in the next article we will take a closer look at the process of division.