Fundamental change in the distribution of profit for companies

According to the decision of the Czech Supreme Court file no. 27 Cdo 3885/2017 dated 27 March 2019 effective from 1 January 2014, ordinary financial statements prepared for the previous accounting period may serve as the basis for distributing profit until the end of the following financial year.

Due to changes in the law governing the distribution of profit of joint-stock companies (as well as other types of companies) effective from 1 January 2014, the Czech Supreme Court abandoned the case law conclusions accepted in the interpretation of the Czech Commercial Code.

The original case law has long inferred that after the expiry of the period for holding the annual general meeting to discuss the regular financial statements (6 months after the end of the accounting period), the regular financial statements prepared for the previous accounting period cannot serve as a basis for the distribution of profit. In other words, the general meeting could not decide on the distribution of profit to shareholders after the six-month period from the end of the previous financial year based on these ordinary financial statements. The so-called insolvency test should suffice to avoid payment of shares in profit “at the expense” of creditors.

In addition according to the Czech Supreme Court, the Business Corporations Act will not continue to prohibit the share of profits of members of the board of directors and supervisory board to be set without simultaneous approval of the profit (dividends) for distribution to shareholders.

On the contrary, even after 1 January 2014, if a joint-stock company generates profit, the general meeting may only decide not to distribute the profit among the shareholders if there are important reasons, while respecting the prohibition of abuse of the majority votes.

Unsure what to take into account when distributing profit? We will be happy to advise you in your specific situation.

For more information, please contact Jiří Absolon or your contact person in our office.

This article is for informational purposes only and does not constitute legal advice on any of the topics covered.

 

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