Category: Czech Republic

Former Clifford Chance Of Counsel Tomas Richter has moved to JSK in Prague as the firm’s new Head of Restructuring and Insolvency.

Richter qualified as Czech attorney in 1998 and has over 20 years of experience in advising on resolution of corporate distress in and out of formal insolvency proceedings, as well as representing clients in disputes arising therefrom. He is one of the authors of the Czech Insolvency Act. He spent the first eight and a half years of his career with Allen & Overy in Prague. In January, 2006, he joined Clifford Chance, where he stayed until this most recent move.

At JSK, Richter will focus predominantly on client work, although he will retain several academic posts, including at INSOL Europe’s Academic Forum where he currently serves as the Chair, and at the Charles University’s Institute of Economic Studies where he is associate professor.

On his LinkedIn page, Richter commented that: “After just a little over 15 years at Clifford Chance (and what a wonderful time they have been – a big thank you to all my friends and colleagues there !), I am joining JSK, advokatni kancelar, s.r.o. in Prague today. Having spent 25 years at international law firms, I really look forward to returning to what will pretty much be full-time practice at a local independent firm.”

Van Campen Liem has advised ARX Equity Partners on its acquisition of Promens Zlin from Berry Global. The Prague office of Squire Patton Boggs reportedly advised ARX on Czech aspects of the acquisition, and DLA Piper reportedly advised Berry Global.

ARX is a private equity firm headquartered in Prague that has more than EUR 300 million raised in four funds. According to ARX, Promens Zlin (headquartered in Zlin, Czech Republic) is a system and development supplier focused predominantly on large vehicle exterior and interior parts, which are key components in the production of buses, earth moving vehicles, and agriculture equipment. The company generated approximately EUR 37 million in sales in 2020.

“ARX is delighted to partner with Promens Zlin, which represents an excellent case study of a successful Czech manufacturing company, producing sophisticated products that are well integrated into international supply channels,” Tomas Lansky, Partner at ARX Equity Partners, commented. We are especially pleased to be able to work alongside the outstanding Promens Zlin management team, in order to pursue our joint objective to grow and expand the business in the coming years.”

“Our enthusiasm and desire to seek new paths in technological progress enables our customers to be leaders in their field,” Robert Zatloukal, CEO at Promens Zlin added. “Together with ARX, we have a great opportunity to accelerate this vision, mainly due to the ARX infrastructure investment support and expertise. At the same time, the Promens Zlin company culture and modern strategy will enable us to meet all stakeholder expectations.”

The Van Campen Liem team consisted of Partner Aston Goad, Senior Associate Oya Derindere, and Junior Associate Nathan Hoeffnagel. 

DLA Piper and Squire Patton Boggs did not reply to inquiries about the deal.

Editor’s note: After this article was published, DLA Piper confirmed that it had advised Berry Global on the deal. The firm’s team was led by Bratislava-based Partner Michaela Stessl, Prague-based Partner Miroslav Dubovsky, and Amsterdam-based Partner Richard Fens, and included Prague-based Solicitor Petr Samec and Amsterdam-based Solicitor Sabine Botden. 

Allen & Overy has advised Czech Gas Networks Investments S.a r.l on its successful issuance and placement of EUR 500 million notes with investors on international capital markets.

The notes, rated BBB+ by both S&P and Fitch, were listed on the Global Exchange Market of the Irish Stock Exchange plc trading as Euronext Dublin. The transaction follows last year’s successful debut notes issuances by CGNI on the international debt capital markets (as reported by CEE Legal Matters on August 3, 2020).

CGNI, which is owned by a consortium of long-term infrastructure investors, holds 100% of the share capital of Czech Grid Holding, a.s., which in turn fully controls two core Czech businesses, operated by its subsidiaries: GasNet, s.r.o. (the main distributor of natural gas in the Czech Republic) and GasNet Sluzby, s.r.o.

Work on the transaction was managed by an A&O Prague team led by Partner Petr Vybiral and including Associate Jana Chwaszcz and Junior Lawyer Denisa Jonasova. London-based Partner Tim Conduit advised on English law aspects, and Luxembourg law aspects were handled by Partner Paul Peporte and Associate Ruslana Hrischeva.

The protection of whistle-blowers concerns persons who report the abuse of rights, illegal activity, corruption or other damage to public interests, which they found out about in the course of their work.

Recently, this has been a highly topical issue, particularly because of the rising number of instances of whistleblowing all over the world and because of the general change in perception of whistle-blowers from negative (“telling on others”) to neutral, or even positive (protecting society and behaving ethically). Companies have also started noticing that the proper management of whistleblowing can help them significantly, particularly by enabling the management or owners of a company to learn about problems as soon as possible, so they can then resolve them effectively. Giving employees confidence in internal reporting can prevent them from discussing their claims of illegal activity with the public authorities or the media. Thus, a number of companies have already set up whistleblowing hotlines or similar mechanisms, for instance as part of their general compliance controls (i.e. ensuring compliance with the legal regulations applicable to the company).

Still, the main wave of regulations on the protection of whistle-blowers is yet to come, especially following the EU’s Directive on the protection of persons who report breaches of Union law (hereinafter the “Directive”), and the act that transposes the Directive into Czech law. The bill proposed by the Ministry of Justice was released by the government on June 30, 2020. This is the third version of the bill, the first two did not completely reflect the final text of the Directive and ended in the comments stage. The legislative process should start by the end of the year. The plan is for the act to come into force on December 17, 2021, which is when the transposition period for the Directive expires.

The aim of this article is to introduce the basic elements of protection of whistle-blowers and the main risks and opportunities arising from the new regulation.

Basic elements of the regulation of whistle-blower protection

The basic principle of whistle-blower protection is to provide whistle-blowers who report their suspicions of illegal activity with a guarantee that as long as they do so in compliance with the prescribed procedure, they will not  be subject to any sanctions. We will go through the key concepts of whistle-blower, illegal activity, the prescribed procedure for reporting and sanctions against whistle-blowers below.  

• Whistle-blower

Whistle-blowers are not only limited to employees, but can also include persons in a service relationship, self-employed persons, members of a legal entity, members of elected bodies of a legal entity, persons that manage trust funds, volunteers, interns, temporarily assigned employees and contractors. Whistle-blowers can also come from among the ranks of persons whose employment or similar relationship is or was yet to start.

Recognition of the status of whistle-blower, is conditioned upon the existence of a connection between the gaining of information about illegal activity and the whistle-blower performing work for the company. Therefore, the protection of whistle-blowers does not apply to e.g. journalists, or to witnesses of illegal activity. Furthermore, whistle-blower protection does not apply to persons who knowingly make false reports.

• Illegal activity

The legislation does not apply to all reports made by employees or other designated persons. The report must concern illegal activity which has the features of a criminal offence or a misdemeanor (a “relevant report”), or is included in one of the defined spheres such as financial services, taxes, preventing the legalization of the proceeds of crime, consumer protection, protection of the environment or public procurement. The defined spheres stem from the Directive, which applies only to activities that breach Union law in these defined spheres, though the Directive explicitly allows member states to expand the scope of protection. Still, the Act is missing a couple of spheres mentioned in the Directive – for instance, the safety of products and their compliance with the regulations, competition, state aid, network and information system security, and nuclear security.

Thus, whistle-blower protection is not intended for resolving employees’ complaints or ordinary disputes between employees. Employers should explain comprehensively to employees and, if necessary, to other persons, what purpose whistle-blower protection serves and to what cases it applies, preferably by providing practical examples that employees might come across while performing work for the company.

Not only illegal activities already committed can be reported, but also facts indicating that an illegal activity is about to take place. The latter case in particular is crucial for preventing illegal activity.

• The prescribed procedure for reporting

There are three ways of filing a report: through an internal reporting system; externally, through a newly established Whistle-blowers’ Protection Agency; or by publication (only in narrowly defined cases).

It is best for companies to receive reports through an internal reporting system. This can prevent significant reputational damage and outside interference.

Internal reporting systems must be set up by companies that employ more than 50 people, contracting authorities (except municipalities with less than 10,000 inhabitants and authorities with less than 50 employees), and also companies working in AML-sensitive fields, in the field of transport safety, transportation and operation on highways, environmental protection, animal health protection and consumer protection.

The internal reporting system includes several components – in particular, a channel for receiving reports (electronically, by telephone, in writing or in person). Thus, reports can take various forms. As opposed to the previous proposals, the bill will no longer include an obligation to accept anonymous reports. Anonymous reporting was seen by many businesses as posing a threat of abuse of the entire system, and therefore a barrier to accepting whistle-blowing as such. However, the possibility is not excluded that companies might accept anonymous reports voluntarily, even if the Act does not impose such obligation. The guarantee of anonymity can help reduce whistle-blowers’ concerns about retaliatory measures.

Besides the channel for receiving reports, in order for the internal system to function properly it is necessary to implement measures for the protection of whistle-blowers and for keeping their identities secret, to organize the submission of reports, to set out rules for resolving reports and the procedure for informing the whistle-blower about the progress and results of investigation. Those measures should take the form of directives and should be reflected in the wider context of the processes of the company (for instance, in the context of retention policy or the rules for personal data processing).

In addition, companies that establish an internal reporting system are obliged to appoint a person responsible for receiving and investigating reports.

The administration of the internal reporting system may be delegated to another entity. However, even such delegated system remains an internal system.

For the purposes of external reporting, the law has established a Whistle-blowers’ Protection Agency as an organisational unit of the Ministry of Justice. Apart from performing informational and advisory functions, the Agency must investigate the legitimacy of reports on illegal activity made to the Agency.  Thus, the Agency’s task will be to act as an intermediary between whistle-blowers and the bodies responsible for the objective review of reports of illegal activity.

External reports should be taken into consideration only if there is no internal reporting system or if such internal system is dysfunctional or unreliable. It is therefore in the interests of businesses to establish and maintain an internal reporting system.

The last alternative to reporting is the publication of a report. This last resort in considered only after internal and external reports are made in vain (or only an external report, if the conditions for external reporting were met), or if one of the strictly defined conditions has been met regarding the seriousness of the reported offence or deficiencies in the reporting system.

• Sanctions against whistle-blowers

The core of whistle-blower protection is the prohibition of direct and indirect retaliatory measures. Direct retaliatory measures are implemented against the whistle-blower, indirect ones against other persons involved in the report or to which the whistle-blower is somehow connected.

Specifically, retaliation means an act (the Directive also explicitly mentions omission), directly triggered by a report, which the whistle-blower (or the other persons in case of indirect measures) may consider to be a violation of their rights or legitimate interests. Furthermore, the Directive defines retaliatory measures as taking place in the context of work; this limitation is not present in the bill. Omitting this connection to the work context thus extends the prohibition of retaliatory measures e.g. to complaints regarding a breach of confidentiality, defamation lawsuits and other legal tools sometimes used by employers.

Furthermore, the Directive explicitly prohibits even a mere threat or attempt at retaliation.

Risks and opportunities under the new legislation

The protection of whistle-blowers is unique in that the other consequences of insufficient protection of whistle-blowers are far more significant than the sanctions laid down by law. The law provides for sanctions: businesses face fines of up to CZK 1 mil. for taking retaliatory measures; for a breach of the responsible person’s obligation to evaluate reports and other obligations he/she faces a fine of up to CZK 50 000 (that is, for an offence committed by the person in charge, not the employer that appointed him/her).

There are however some further risks. If an internal reporting system is not established, or if the established system is not reliable or functional, there is a risk that employees might use external systems (reporting through the Agency), or might even make the information public while taking advantage of the protected status of whistle-blower. The company is thereby at risk of losing control over the incident, or might even face significant reputational damage. Alternatively, employees might decide not to file a report at all, in which case problems may go unnoticed for many years before they grow so large that they can no longer be ignored and could even cause the liquidation of the company. The same applies to the case when a company does not react adequately to a report.

Even while trying to implement a system for the protection of whistle-blowers as best possible, a company might face difficulties arising from the need to comply not only with the conditions of the legislation on protection of whistle-blowers, but also with the labour code, GDPR, and other regulations. These difficulties can be avoided if the company delegates the reporting system to a properly selected provider.

A properly set up reporting system can bring many benefits. In the first place, it allows companies to take action quickly and effectively against problems and thus to avoid later losses brought about by illegal activity, whether directly (e.g. by embezzlement) or because of liability for damage (e.g. in the field of environmental protection). Furthermore, it allows the company to maintain control over the decision-making process and to prevent external interference and related reputational damage. Lastly, it strengthens the corporate culture and can bring employees greater job satisfaction.

In addition to those undeniable advantages, there is another fundamental reason not to underestimate the reporting of illegal activity. Timely detection of illegal activity is one of the conditions for the exemption of a legal entity from criminal liability, pursuant to Sec. 8 par. 5 of Act N. 418/2011 Coll., on the Criminal Liability of Legal Entities and Proceedings against Them. For this purpose, a number of companies have already adopted a functional system of interrelated measures referred to as a Compliance Management System (CMS). Companies that have not yet adopted a CMS can do so, for example, in the context of introducing whistle-blower protection.

By Michal Nulicek, Partner, Bohuslav Lichnovsky, Senior Associate, and Anna Cervanova, Associate, Rowan Legal

JSK, working in cooperation with solo practitioner Daniel Marousek, has advised TGA Holding on the sale of Znacky Morava and its Grames and Silverton affiliates to CIDEM Invest. Hladky Legal advised CIDEM invest on the deal.

TGA Holding primarily focuses on construction, development, gastronomy, and agriculture, and Znacky Morava operates in the field of transport construction, with primary activity involving the implementation of horizontal traffic signs, the installation of steel road barriers, and the production and installation of vertical traffic signs and other systems ensuring the safe construction of the highway and road network in the Czech Republic and Slovakia.

“We are pleased that the transaction was successfully completed,” said Georgios Tavandzis, owner of TGA Holding. “I would like to thank the teams from JSK, TGA Holding, Znacky Morava, Silverton and Grames for their excellent work. I wish the new owner, CIDEM Invest, the best of luck in building on the company’s growth to date and much success in the years to come.”

The JSK team consisted of Partner Tomas Dolezil, Lawyers Daniel Pospisil and Martin Vlk, and Associate Jan Koprnicky.

The Hladky Legal team was led by Partner Lucie Hladka and included Partner Jan Hladky and Associates Nikola Chalupska and Pavla Stojaspalova.

Havel & Partners has advised Sebre, Havel & Partners’ Managing Partner Jaroslav Havel, and Sebre Managing Director Jan Kubicek, on the joint acquisition of a 50% shareholding in SousedeCZ, a company operating an online platform for digital communication of homeowner associations in residential buildings, from entrepreneurs Tomas Holomoucky and Tomas Sikora.

Established in 2013, the Sebre investment group maintains its operations mainly in the Czech Republic and the countries of the former Yugoslavia in the fields of development and construction, gastronomy, interior design, and golf. By investing in the Sousede.cz project, the group has expanded its activities in technological and digital start-ups.

According to Havel & Partners, “the investment will help the platform focus on the further development of its project, especially smart apps and features for residential property management, integration of customer portals, and marketing of digitalized services in a branch undergoing transformation.”

Havel & Partners’ team included Partner Jan Koval, Managing Associate Silvie Kiraly, and Associate Josef Bouchal.

The most substantial changes to the BCA (effective as of 1.01.2021) will be:

• Introduction of a special type of share/stock with a so-called “dismissal” right (i.e. the right to appoint a certain member of the statutory body).
• Cancellation of the position of statutory director in a joint stock company with a monistic structure.
• Different concept of non-competition by members of the bodies of the company.
• Changes in the consequences if an executive service agreement is not approved.
• Stricter liability of members of the statutory body for causing the bankruptcy of the corporation.
• Changes in convening general meetings (for instance in the area of per rollam decision-making, participation of the members, limitations in exercising one’s voting rights, rules for filing a protest against the decisions of the general meeting, etc.).
• Some changes regarding the payment of dividends.

As regards the BCA amendment, we recommend:

• Revising the Articles of Incorporation, or if needed the corporate bylaws, in order to check for essential changes and to identify possible opportunities for improving the current version.
• Revising the shareholders’ and partnership agreements in order to identify possible opportunities for improving the current versions.
• Acquainting oneself with the impact of the BCA amendment on the liability of the members of the statutory body and with respect to this revise the corporation’s compliance program if needed.

A substantial amendment to Act No. 90/2012 Coll., on Commercial Companies and Cooperatives (Business Corporations Act), as amended (hereinafter referred to as the BCA), should come into force on the 1st of January 2021. The amendment will bring about significant changes, particularly for joint stock companies with a monistic structure [1]. However, all business companies should take careful note of the amendment.

The BCA amendment firstly enshrines the principle derived from case law (27 Cdo 3885/2017), that profit or other resources can be distributed on the basis of financial statements until the end of the accounting period that follows the accounting period for which the financial statements were compiled. [2] The amendment also introduces a restriction according to which the profit of stock companies [3] or cooperatives cannot be paid if after that the equity of this corporation would fall below the aggregate of the registered capital and the amount of the corporation’s stock, which cannot be distributed according to the law.

After the BCA amendment comes into force, there would also be other consequences if an agreement to execute the function of member of an elected body in the corporation were not approved. Currently, relative invalidity is the only consequence, but after the BCA amendment comes into effect, the legal consequences will be that such contract will never become effective, which is much more serious in terms of legal consequences.

Further changes concern the liability of members of the statutory body, and among other things they will include:

• The decision to dismiss a member of the statutory body from executing a function in a business corporation can be made in cases of significant infringement of due managerial care or recurring infringement of obligations; the novelty here is that the conditions no longer need to be fulfilled cumulatively.
• If the members of the statutory body contributed to the bankruptcy of a business corporation by not fulfilling their obligations, they can be among other things obliged to contribute to the company’s bankruptcy estate up to an amount equal to the difference between the total of the debt and assets of the company.

The liability and extent of obligations of members of the statutory body are also affected by some further obligations introduced or amended in the BCA amendment. Among these are changes regarding the organization of general meetings, payments of profit and other resources, the content of the report on related parties, the prohibition on competitive conduct, the regulation of conflicts of interest, regulations concerning the moment of resignation from office etc.

The amendment also introduces the member’s, or the shareholder’s right to invite other persons to a general meeting. That person must, like members, pledge confidentiality, but nothing prevents the shareholder of a company from participating in the general meeting for instance with his legal advisor. Still, this right can be abolished by the Articles of Incorporation, or the corporate bylaws. As for the general meetings of stock companies, there will also be a change in provisions regulating the organization of their general meetings. More precisely, there will be a change in the competence of the general meeting in limited liability companies and joint stock companies. Furthermore, a change should occur in the conditions for decision-making per rollam in joint stock companies and limited liability companies, or in the rules for filing protests against decisions of the general meeting (e.g. a member or shareholder will no longer have to explicitly request the registration of their protest), or there should also be a change in the prohibition on executing one’s voting rights (the last one mainly concerns limited liability companies).

Furthermore, one of the most fundamental changes will be the introduction of a so-called “dismissal” right. The Articles of Incorporation, or the corporate bylaws can determine that a certain share, or certain stock is connected to a dismissal right, on the basis of which a partner, or a shareholder, will be authorized to appoint/dismiss one or more members of the statutory body of the company. This should be a highly fundamental change thanks to which it will be possible to give a certain majority partner of the limited liability company the authority to appoint an executive director without agreement with the other partners. The dismissal right will be introduced for both limited liability companies and joint stock companies with a dualistic and monistic structure.

Another change will consist in the possibility of removing the legal prohibition on competition by members of an elected body from the Articles of Incorporation of a limited liability company or from the corporate bylaws of a joint stock company. The exact content of the prohibition on competition and its notification to the members or shareholders after the BCA amendment could therefore be regulated differently by each company (as opposed to the current situation in which a single version of the prohibition on competition is stipulated by the BCA for both limited liability companies and joint stock companies.)

As was mentioned above, the BCA amendment implies a great change for joint stock companies with a monistic structure. After the amendment comes into force, the position of statutory director will be completely dissolved and the competence of the statutory and controlling authority will be executed by the administrative board of the company. Of course, connected to this considerable change in conception is the important question of how the competence of the administrative board should be regulated in the corporate bylaws of the company.

These and many other changes will be brought about by the BCA amendment that will come into force in just a few months. Therefore, close attention should be paid to the amendment, and companies should prepare before the amendment comes into effect and thoroughly consider amending some parts of their Articles of Incorporation, corporate bylaws or other related documents. Many of the abovementioned changes can be at least partly regulated in the Articles or corporate bylaws.

By Ondrej Krizek, Managing Associate, Irena Kolarova, Senior Associate, and Pavel Visek, Junior Lawyer, Rowan Legal

Havel & Partners has successfully represented Apple in a dispute with the President of the Czech Republic’s Industrial Property Office involving the trademark for the company’s “Think Different” slogan in the Czech Republic.

According to Havel & Partners, the slogan “THINK DIFFERENT” has been associated with Apple since 1997, when founder Steve Jobs returned to the company.

According to Havel & Partners, the current dispute arose from the Industrial Property Office’s assessment of the similarity of the Apple trademark to the “Tick different” trademark of the Swiss watch manufacturer Swatch, and the IPO’s conclusion that there was no likelihood of confusion. That conclusion was then upheld on review by the President of the Office.

The decision of the President of the Office was subsequently challenged by Apple, which claimed that “the Office [had] erred in its assessment of the similarity of the slogans and that the application for registration of Swatch’s “Tick different” trademark was not filed in good faith, was interchangeable with Apple’s trademarks, and thus unlawfully benefited from the reputation of Apple as a company having the world’s most valuable trademark.”

According to the firm, the Municipal Court in Prague annulled the decision of the President of the Office, with “the court taking the view that the [Industrial Property] Office had insufficiently dealt with the assessment of the similarity of the conflicting trademarks,” and “should therefore re-examine the whole matter and make an overall assessment of the likelihood of confusion.”

The Havel & Partners team representing Apple consisted of Partners Frantisek Korbel and Ivan Rames, Counsel Katerina Stankova, and Senior Associate Tereza Hrabakova.

Glatzova & Co has advised the shareholders of composite wood producer WPC-Woodplastic on the sale of a majority stake in the company to the investment group M.L. Moran. Samak reportedly advised M.L. Moran on the deal.

WPC-Woodplastic was founded by Zdenek Hosticka and Miroslav Vodenka, with support from investment company Reflex Capital.

Glatzova & Co’s team was led by Partner Jan Vesely.

Samak’s team included Partner Marek Svehlik and Attorneys Jiri Cerny, Andrea Nacalova, Olga Vavrova, and Jan Vozar.

New Act No. 37/2021 Sb. on the Register of Beneficial Owners (“ARBO”) will enter into force on 1 June 2021 in the Czech Republic. In contrast to the current legislation, the ARBO introduces significant sanctions for a breach of the obligations it imposes, including fines up to CZK 500,000 or invalidation of voting rights and the right to dividends.

As the effective date of the ARBO is inexorably drawing near, we highlight below some of the most important changes it will introduce so that you can prepare sufficiently in advance.

Current status

In 2017, an amendment to the Public Registers Act entered into force, transposing AML Directive IV, and introducing the duty of each of the persons listed in the public register under that Act to disclose its beneficial owner (based on the current definition, in simple words, a natural person who is actually or legally able to exert controlling influence over the legal entity) in the new register of beneficial owners of legal entities (“RBO”).

Legal entities were obliged to register their beneficial owners by the end of 2018. Failing to do so, they have been acting in violation of law since 1 January 2019.

Neither the Public Registers Act, nor the Anti-Money Laundering Act, nor the Companies Act, nor any other laws currently impose any direct sanctions for a breach of this duty. An indirect sanction may be represented by the more complicated procedure in the course of the customer due diligence, where the company has to identify its beneficial owner ad hoc, which is more complicated than simply referring to previous registration in the RBO.

Outlook

Shortly after the transposition of the AML Directive IV into the Czech legislation, the European Parliament adopted AML Directive V in 2018, introducing numerous changes, in particular with regard to the perception of the national registers / lists / records of beneficial owners.

The most significant changes introduced by the directive include:

• the obligation of each Member State to ensure public access to the data recorded in the national registers of beneficial owners; and
• the obligation of the Member States to introduce significant sanctions for violations of the registration duty.

An obligation was imposed on the EU Member States to transpose AML Directive V into their respective national legislations by 10 January 2020.

Act on the Register of Beneficial Owners

The legislature has now pulled the rules for keeping records of beneficial owners out from the Public Registers Act into the separate ARBO. At the same time, the definition of beneficial owner has been transferred to the ARBO. Below please find a summary of the most significant related changes:

Identification of the Beneficial Owner

The ARBO slightly modifies the definition of the beneficial owner – the beneficial owner is any natural person who is the ultimate beneficiary or who has ultimate control (preserving the 25% threshold of the distributed benefits and of the voting rights – both directly and indirectly).

A significant change to the previous regulation involves the identification of a surrogate beneficial owner in cases where the beneficial owner cannot be determined in one of the envisaged methods (i.e., applying the threshold of distributed benefit or of voting rights). In this case, the legislation currently in force stipulates the obligation to register the director(s) of the Czech legal entity (i.e., directly the legal entity that identifies and registers its beneficial owner).

The ARBO, however, introduces the obligation in this case to identify the director(s) of the ultimate parent company rather than the director(s) of the legal entity identifying and registering its beneficial owner. Companies that currently have their directors registered as their beneficial owners and are a part of a more complex corporate structure thus should double check whether they are not subject to the above-mentioned conditions and, as the case may be, re-register their current beneficial owners.

In addition, the ARBO contains an exhaustive list of the types of legal entities which do not have a beneficial owner. Those mostly public entities are not recorded in the register of beneficial owners at all. Legal entities directly owned by entities with no beneficial owner will identify their director(s) as their beneficial owner(s).

The Nature and Properties of the Register

Some of the information entered in the register of beneficial owners will be publicly accessible (the full name, country of residence, the year and month of birth, citizenship, and the reason of the status of beneficial owner).

Nevertheless, the ARBO takes into account that, in some cases, beneficial owners may be minors; in such cases, the ARBO allows an exemption from the publication duty in respect of such individuals – i.e., disabling public access to their data, which is not granted automatically but instead needs to be applied for. Entry in the register of beneficial owners will be subject to administrative proceedings, provided that the application concerning business companies and similar legal arrangements must be sent electronically.

In cases where the identity of the company’s beneficial owner(s) clearly follows from the information entered in the Commercial Register (e.g., members of a limited liability company who are natural persons and hold an interest in excess of 25%; or a joint-stock company with a single shareholder identified in the commercial register), the court will automatically carry the information over to the RBO.

The currently prevailing practice is that the court will, as a rule, register beneficial owners merely on the basis of an affidavit issued by the company, in which it thoroughly describes its ownership structure and the ensuing information regarding the beneficial owner.

The ARBO introduces a non-exhaustive list of corporate documents a company may produce to evidence the status of its beneficial owner. This list also contains the above-mentioned affidavit, which will henceforth only be admissible in cases where the status of beneficial owner cannot be evidenced otherwise.

Discrepancies and Sanctions

If a public authority or the obligated person under the Anti-Money Laundering Act ascertain a discrepancy in the due course of their activities, they are required to notify the competent registration court. The registration court will then publish a discrepancy note in the RBO and will ask the person concerned to make good the discrepancy within a reasonable period set by the registration court.

If the discrepancy is not rectified, the court will initiate a discrepancy proceeding. In the course of such proceeding, the discrepancy may either be confirmed, whereas this fact will be recorded in the RBO and the court will subsequently rectify the incorrect information, or the recorded information will be completely erased if the identity of the beneficial owners fails to be ascertained in the course of the proceeding; or, if the outcome of the proceeding is that the beneficial owner was correctly registered, the court will remove the discrepancy note.

AML Directive V imposes on the Member States the duty to introduce significant sanctions in the event of failure to make an entry in the RBO, or for making an incorrect entry. In addition to public-law sanctions (for failure to make an entry as well as for failure to enter correct data after deletion of the incorrect data in connection with the discrepancy proceeding, a fine up to CZK 500,000 to the registering person and up to CZK 500,000 to the beneficial owner, ultimate beneficiary and the person exercising ultimate control for failure to provide assistance in making an entry in the RBO), the ARBO also introduces private-law sanctions. The latter include invalidation of voting rights and of the right to receive distributions and apply to beneficial owners not registered in the RBO and/or to shareholders of a legal entity with no properly registered beneficial owner.

At present, this topic strongly resonates with the professional public due in particular to the fact that the ARBO applies to virtually all legal entities. Consequently, we are preparing a series of more detailed articles specifically dedicated to:

• identification of the beneficial owner under the ARBO;
• nature of the register of beneficial owners, and registration procedure;
• consequences of incorrect identification and registration of beneficial owner.

Having in mind that the effective date of the new statute regulating the register of beneficial owners is literally around the corner, we strongly suggest that you verify whether your company complies with all the statutory requirements.

By Ondrej Florian, Partner, and Alexandra Parnaiova, Associate, Havel & Partners