How to pledge an interest in a business corporation

Act No. 90/2012 Coll., on Commercial Companies and Co-operatives (Act on Commercial Corporations) (hereinafter referred to as the "CCC") has undergone extensive changes as a result of the amendment as of 1 January 2021. One of them is the regulation of lien rights (and other rights in rem) to shares in a business corporation.

Author of the article: ARROWS (Mgr. Marek Hučík, office@arws.cz, +420 245 007 740)

Conditions for pledging shares in a business corporation

The original legislation allowed for the pledge of a share in a business corporation only under conditions under which it could be transferred. In practice, this meant that, unless the articles of association provided otherwise, the share could be pledged to another shareholder without restriction; in the case of third parties, this was subject to the consent of the general meeting. At the same time, the pledge agreement was required to be in writing with officially certified signatures.

If you wanted to adjust the conditions for pledging a share more strictly than they were set for the transfer of a share (or to exclude pledging a share altogether), this would not be feasible, the only exception being housing cooperatives.

The amendment abolished this regulation in the ZOK and now the relevant provisions of the Civil Code apply. The latter provides that the articles of association may limit or prohibit the pledge of a share in a business corporation.

When do rights in rem in a share in a business corporation arise?

As far as the right of pledge is concerned, the answer to this question is easy. It follows from the Civil Code that a lien on a share is created by registration in the Commercial Register. But what about rights in rem (other than a pledge) over a share in a business corporation that is not represented by a security or book-entry security (hereinafter abbreviated as "other rights in rem over a share")?

The amendment has inserted a new paragraph 5 into the provisions of Section 32 of the CCC, which provides that the provisions of the Civil Code on the creation and creation of a lien on a share in a corporation shall apply to the creation and creation of other rights in rem over a share (e.g., prohibition of alienation, pre-emption right, etc.). This means that other rights in rem over the share are now subject to the same regime as a pledge.

Conclusion

As can be seen from the foregoing, the amendment has introduced a number of innovations, although these changes have largely resulted from existing case law and thus should not be entirely unfamiliar to corporations. However, a number of them need to be appropriately reflected in existing contractual documentation and company agreements. If you have any questions about the new legislation or are unsure how to update your existing documentation, please do

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