Czech Republic: Business Shares in the Community Property of Spouses - Are Both Spouses Members of a Company?

20 August 2015 | newsletters

Introduction

The discussion about the business shares of companies owned in the community property of spouses – regulated by the new Czech Civil Code and Business Corporations Act (both effective from 1 January 2014) – has recently come to a standstill over the question of the consequences of the absence of such a regulation, which was formerly included in the old Civil Code from 1964. This regulation distinguished between proprietary and management issues (corporate issues), which meant that if a married person acquired a business share it did not automatically result in membership in the company for their spouse.

Since 1 January 2014, it is uncertain whether the newly introduced laws have brought with them a new approach under which the spouse will now obtain all member's rights and obligations towards the company. Our assessment is that the current approach retains the previous stance that the spouse does not automatically become a member of the company. On the other hand, as several contradictory stances have also been published in specialised publications, subjects who have acquired business shares through finances belonging to the community property of spouses find themselves in a situation where they are unsure how to act.

Although the practice after 1 January 2014 continues as though the regulation has not been changed, the discord of opinion has brought doubt into this issue.

Enactment of community property in the new Civil Code

The new Civil Code explicitly regulates the proprietary causes of business shares owned in the form of community property. It states that "community property also includes a spouse's share in a company or cooperative if, during the marriage, a spouse becomes a shareholder in a company or a member of a cooperative."

Especially problematic is the question of the corporate part of the business share. Currently, if one of the spouses acquires a business share during the marriage, it is uncertain whether the other spouse also becomes a member of the company.

Possible interpretation no. 1: Both spouses are members of the company

In this interpretation, the legislature does not differentiate between the proprietary and the corporate issues of business shares, through which it unified the execution of members' rights, and acknowledges the membership of the other spouse. Both spouses become joint owners of the business share.

Both spouses have to arrange, at least implicitly, the administrator of their undivided property. That administrator can be either one of the spouses or a third person. In this interpretation, both of the spouses, as joint owners of the business share, should be recorded in the Commercial Register, the list of members and register of shareholders.

The argument in favour of this interpretation is that third parties would have greater legal certainty, as they would know, thanks to these registrations, whether the signature of the wife and/or the husband is needed in a transaction involving the business share.

Possible interpretation no. 2: Only one of the spouses is a member of the company

In this interpretation, the spouse obtains through their partner's acquisition of the business share only the asset value of the share, which is part of the community property. Their membership in the company is not established, not even the rights and duties of the member of the company connected to this membership.

The following arguments support this interpretation:

a)    Nothing indicates that the legislature wanted to change the former regulation

The central argument for this interpretation is that the legislature, in its explanatory report to the regulations in question, did not mention its intention to alter the existing approach in the new enactment. Even the ideological author of the family law passages stated in her commentary to the new Civil Code that the differentiation of the proprietary and corporate issues of the business share remains unchanged and that only one of the spouses becomes a member of the company.

b)    The language of the regulation

Another important argument in favour of this interpretation is the language of the regulation itself in the new Civil Code. The first sentence of the relevant provision states that "community property also includes a spouse's share in a company or cooperative if, during the marriage, a spouse becomes a shareholder in a company or a member of a cooperative". The use of the singular in the words "spouse" and "shareholder" is a clear sign that the legislature intended that only one spouse should become a shareholder.

c)    Protection of other company members

An interpretation where the other spouse does not become a member of the company is in accordance with the principle of legal certainty for other company members. In a situation in which only one spouse legally acts while establishing or obtaining a company, the other company members do not even have to know that the other spouse is going to be a company member.

d)    Disadvantage for spouses in running a business

The fact that both spouses should become members of a company would weaken their position while running the business. Entrepreneurs would be forced to acquire business shares from their personal financial assets held outside the community property in order to prevent their spouse from obtaining member rights towards the company. This would complicate how the acquisition of business shares is financed while weakening the position of the other spouse, as the share would not become part of the community property.

e)    Additional arguments

Another argument in favour of sticking with the current approach and interpretation is that some companies have limited participation for only specific persons. These typically include law firms established in the form of limited liability companies or auditing companies. In such cases, it would not be possible to determine the membership of a spouse who does not meet these requirements.

How to proceed practically

To avoid breaching the law, it will be necessary to improvise, at least prior to the novelisation of the Civil Code (which is expected to come into effect on 1 January 2016), which will add a sentence stating to this uncertain regulation that "the acquisition of the shares does not establish the membership of the other spouse in a company or cooperative, except for a housing cooperative." This improvisation will ensure that no unnecessary complications arise, even in the case of further judicial rulings based on the alternative interpretation.

The approval of the other spouse is already needed in order to obtain shares or stock financed from the community property. The law does not regulate whether the approval is to be given in advance or subsequently; it can only be recommended that such approval be given prior to closing the transaction. Third parties should always require such approval in writing before signing the contract. It is also possible to use a notarial deed on narrowing the scope of community property, a settlement between spouses by which they arrange the administrator of their community property or a court judgment by which the community property has been cancelled or reduced. Unmarried persons can be asked to provide written affirmation of their status.

It can also be suggested that those spouses not willing to become members of companies expressly state this when providing their approval. To eliminate all doubt, they would ideally also authorise their spouse or a third party to administer their share of the community property.

It is also good idea to file a note about the existence of community property in the list of members or register of shareholders in order to protect other members of the company.

Nevertheless, we recommend not recording the other spouse in the Commercial Register. Such protection would not be effective, as the Act on Public Registers does not require the inscription of the administrator.