With effect from 20 July 2009, financial assistance is no longer on the list of prohibited transactions in the Czech Republic. Until then, transactions qualifying for financial assistance were prohibited without exception and with a sanction of the invalidation of the relevant transaction. Since 20 July 2009, however, when the amendment to Act No. 513/1991 Coll., Commercial Code, as amended (CCom) entered into effect, Czech law includes a so-called “whitewash procedure” subject to which financial assistance may be validly provided.

This is a significant change to the legal framework governing acquisition and financing matters in the Czech Republic. The problem is, the procedure is both strict and unclear. And it is uncertain how the Czech courts will interpret the unclear provisions. In addition, it seems that the parties involved prefer to exclude financial assistance altogether rather than be used as test subjects.

CCom imposes the obligation to examine the whole transaction consisting in financial assistance to the statutory bodies of the entity whose shares or ownership interests are acquired. It is therefore up to the statutory bodies whether or not to enter into such a transaction. A whitewash procedure differs depending on the form of the legal entity (limited liability company or joint-stock company). It does not apply to banks or financial institutions (provided that certain additional conditions are met).

Limited liability companies

Conditions under which financial assistance can be provided are less strict for limited liability companies. A limited liability company is allowed to provide financial assistance under the conditions usual in business relationships (i.e. arm’s-length basis) provided that (i) it does not cause the company’s insolvency and (ii) there are no unsettled losses recorded in the company’s accounting books. Finally, the provision of financial assistance cannot be prohibited by the company’s memorandum of association.

If the limited liability company meets these requirements, the statutory body (executive/s) is obliged to prepare a written report in which it: (i) explains the situation under which the financial assistance is provided and identifies the benefits and risks relating thereto, (ii) specifies the conditions under which financial assistance will be provided and (iii) explains why the contemplated financial assistance is in the interest of the company.

Financial assistance has to be approved by the general meeting of the limited liability company. Unlike with jointstock companies, the consent does not have to be prior.

Joint-stock companies

Unlike limited liability companies, joint-stock companies may provide financial assistance only if the articles of association allow it. All of the following conditions must be met:

• financial assistance is provided on an arm’s-length basis;
• the Board of Directors has examined the financial capacity of the person to which the financial assistance is provided;
• prior consent of the general meeting with the provision of financial assistance pursuant to a written report of the Board of Directors (see below) approved by at least a two-thirds majority of all shareholders;
• the Board of Directors has prepared the same report as that prepared by the executives of a limited liability company; it must further contain the findings of the examination of financial capacity mentioned above; ” if financial assistance is contemplated for acquisition of the shares of the company that will provide financial assistance, the price of its shares has been determined on an arm’s length basis;
• the provision of financial assistance cannot cause a decrease in equity below the amount of the registered capital increased by funds which cannot be distributed among the shareholders under the company statutes or the law and decreased by the amount of unpaid registered capital;
• the company creates a special reserve fund in the amount of the provided financial assistance; and
• the provision of financial assistance will not cause the company to become insolvent.

If the financial assistance is to be provided to (i) a member of the Board of Directors, (ii) a person controlling the company or (iii) a member of the statutory body of the controlling person or any person acting in concert with any person under (i) – (iii), the report of the Board of Directors must be reviewed by a generally accepted independent expert determined by the Supervisory Board.

The procedure is both strict and unclear, and it is uncertain how the Czech courts will interpret the unclear provisions.