Cancellation of the general meeting resolution on increasing the share capital in the event of non-assumption of the contribution obligation in light of the current decision of the Supreme Court

Case Context

A limited liability company decided to increase its share capital from the original CZK 100,000 to CZK 1.6 million. In doing so, the original shareholders were to exercise their pre-emptive right to assume an additional contribution obligation in proportion to their shares – one of them was to assume CZK 1,050,000, the other CZK 450,000. However, the shareholder with the smaller share did not assume the contribution obligation within the specified period. The other shareholder then, with the consent of the general meeting, assumed his contribution obligation (the minority shareholder voted against this at the general meeting). However, this step triggered disputes regarding the validity of such a resolution (consent) of the general meeting.

Courts of First and Second Instance: Dispute over Unanimity and Deadlines

The Municipal Court in Prague, as the court of first instance, expressed the view that all shareholders must give their consent to the assumption of the contribution obligation – i.e., unanimity is required. Therefore, it found the resolution of the general meeting on the assumption of the obligation by another shareholder to be invalid.

However, the High Court in Prague, as the appellate court, pointed out that the assumption of a contribution obligation is not a material amendment to the Memorandum of Association that would require the consent of all shareholders. A two-thirds majority of votes is sufficient, and therefore it considered the resolution of the general meeting on the assumption of the contribution obligation by the majority shareholder to be valid.

Supreme Court: Clear Limits on Deadlines and Legal Certainty of Shareholders

The Supreme Court brought crucial clarification to the legal situation – the resolution of the general meeting on the assumption of the contribution obligation by the majority shareholder is contrary to the law. It emphasized that if a shareholder does not assume the contribution obligation within the specified period, the respective resolution of the general meeting on the increase of the share capital is automatically cancelled pursuant to Section 225 of the Business Corporations Act. Once this resolution ceases to exist, the general meeting cannot subsequently authorize the assumption of the contribution obligation by another person – because no obligation to assume the contribution obligation exists anymore.

In other words, the Supreme Court concluded that unless the Memorandum of Association provides otherwise and the general meeting, before the expiry of the deadline for the assumption of the contribution obligation by a shareholder, does not grant consent under Section 222 of the Business Corporations Act (i.e., does not permit the assumption of this obligation by another person) and at the same time does not determine an additional period for its assumption, then if the shareholder does not assume the contribution obligation within this period, the resolution of the general meeting on the increase of the share capital is cancelled by operation of law. The general meeting can no longer subsequently grant consent to the assumption of the contribution obligation by another person, as this obligation has formally ceased to exist.

At the same time, the Supreme Court confirmed that the consent of the general meeting under Section 222 of the Business Corporations Act is not a decision amending the Memorandum of Association within the meaning of Section 171 of the Business Corporations Act, and therefore, in principle, does not require the unanimous consent of all shareholders.

Furthermore, for the sake of completeness, the Supreme Court elaborated in more detail that: "However, if the general meeting decides on consent under Section 222 of the BCA retrospectively (after it has already decided on the increase of the share capital) and if the determination of the deadline for the assumption of the contribution obligation is also part of its resolution (typically when the deadline for the case of proceeding under Section 222 of the BCA is not already determined by the resolution on the increase of the share capital itself), it is (to the extent of determining this deadline) a resolution amending the content of the resolution on the increase of the share capital (if it concerns the determination of the deadline for the assumption of the contribution obligation). To this extent, it is subject to the same regime as the resolution on the increase of the share capital itself, including the necessary majorities (Section 171 of the BCA) and the required notarial deed (Section 172 of the BCA)."

Practical Implications for Business Corporations

The decision of the Supreme Court emphasizes strict compliance with statutory deadlines when increasing share capital. Shareholders and company management must pay maximum attention to ensuring that the deadlines set by the resolution of the general meeting comply with statutory requirements and that contribution obligations are assumed in a timely manner. Failure to comply with these rules can lead to the cancellation of the resolution and thus to serious legal and business complications, such as the cancellation of the planned dilution of shares or other changes in the ownership structure.

In addition, the Supreme Court explained that, in principle, unanimous consent of all shareholders is not required for consent to the assumption of a contribution obligation by another shareholder. This gives companies greater flexibility, but at the same time, increased attention must still be paid to compliance with statutory deadlines and formal requirements.

Conclusion

The decision of the Supreme Court in this case represents an important precedent that significantly guides the practice of increasing share capital in Czech companies. It highlights the need for careful management of processes associated with the assumption of contribution obligations, correct setting of deadlines, and respect for the rights of minority shareholders.

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