High Court in Prague sheds some light over the definition of a significant part of an enterprise
Like any other major change of legislation, the recodification of Czech private law in 2014 has raised a long list of interpretation issues. At the end of August 2018, the High Court in Prague outlined (since the decision has not yet been confirmed by the Supreme Court) an interpretation with respect to one of the items on the list. It clarified the meaning of the term “a part of an enterprise that would imply a significant change of the existing structure of the enterprise or a significant change in the scope of business of the company”.
Under the Czech Business Corporations Act, an approval of a general meeting is required for a transfer or pledge of an enterprise or such part thereof that would imply a significant change of the existing structure of the enterprise or a significant change in the scope of business of the company (the significant part of an enterprise). The question arose what does ‘the significant part of an enterprise’ actually mean.
Separate organizational unit
Under the first approach, which leans towards case law relating to the Commercial Code valid until the end of 2013, general meeting approval is necessary for those transactions when a branch or a separate organizational unit (as defined by the Civil Code and interpreted by courts under the previous Civil Code) are subject to an ownership transfer or pledge. However, a new condition must be taken into account. Such a transfer or pledge must cause a significant change of the existing structure of the enterprise or in the scope of business of the company.
The second (material) approach takes a different view. The proponents say that basically anything (real estate, machines, rights, etc.) can be characterized as the significant part of an enterprise, as long as it is essential for maintaining the existing structure of the enterprise or for maintaining the scope of business of the company. In other words, without such a component the company would not be able to conduct activities within the scope of its business. That is regardless of whether or not such an asset is organized as a branch or separate organizational unit. The problem with the material approach is that it is too abstract. In some situations, it may not be clear whether the transaction will or will not disrupt existing enterprise significantly (its structure or activities).
The decision of the High Court
The High Court supported the first approach stating that the approval of the general meeting is necessary for transfers or pledges of a branch or a separate organizational unit which would entail a substantial change in the structure of the enterprise or entail a substantial change in company’s scope of business.
Amendment to the Business Corporations Act
Unfortunately, it is still questionable as to how long the above mentioned decision, even if approved by the Supreme Court, will apply to corporate transactions. The Chamber of Deputies is currently discussing an amendment to the Business Corporations Act, under which the significant assets approach is supported and the new wording of the provision is proposed. We may still expect some amending proposals during the process. Therefore, we have to wait for the final wording of the amendment to draw the final conclusion.