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Types of shares in limited liability companies

Czech Republic: On the various types of shares in limited liability companies and the limitations of right and obligations vested therein.

Until the end of 2013, shareholders were not allowed to hold more than one share in one and the same limited liability company. Moreover, it was not possible under the relevant law (i.e., at the time, the Commercial Code) to endow the share with rights and obligations in deviation from the statutory standard and thus to create special classes of shares. Some experts nonetheless believed that a shareholder in a limited liability company should be allowed to hold a special type of share in spite of the law's silence in this regard. However, the case law of the Czech Supreme Court offered no guidance in this respect.

Since 1 January 2014, it is beyond contention that the shareholders of limited liability companies may hold special types of shares and newly also several shares at once, provided that the memorandum of association contains an arrangement to such effect. According to the Supreme Court's position (expressed in Cpjn 204/2015), the concepts of multiple shares and of various types (or classes) of shares should be available not only to those limited liability companies which have submitted to the Corporations Act in its entirety (as per Sec. 777 (5) of that law), but also to limited liability companies which did not submit to the Corporations Act.

If no special rights and obligations are vested in a given share, we are looking at what is known as 'common share'. If special rights and obligations are associated with the share, then all shares with the same rights and obligations together form one special type of share. Examples include a higher profit share, a preferential profit share, a fixed profit share, a different number of voting rights, an obligation to become involved in the company's business operations, a right to nominate the members of elected bodies of the company, a veto right, a more extensive right to information, etc.

Having said that, the freedom of shareholders to determine what rights and obligations should be vested in company shares is not entirely without limits. A relatively straightforward case are shareholders' rights whose modifications is expressly anticipated by the law – such as the right to a profit share. It stands to reason that special types of share could also be connected to privileged (broader) rights e.g. to demand information. Presumably the biggest bone of contention at this point is whether statutory rights may be ruled out in their entirety, whereas the discussion centers around the admissibility of shares which carry no voting rights or no right to a share in the company's profit. Our view is that, with the exception of borderline cases, such a step should be perfectly acceptable; however, legal commentaries have taken conflicting positions on the issue, and there exists as of yet no relevant case law.

The Corporations Act strengthens the freedom of contract, and leaves it to the shareholders to individualize their contributions to the company in the form of various types of shares. This could be interesting in particular for both domestic and foreign investors who thus may attain e.g. a share associated with a fixed (or higher) profit share, or whose voting rights may be curbed such that the founders of the company retain control. Given that one's position in the company is tied to the share (and not to the identity of any specific person), the buyer of a share will have the same position as the original investor.

Source: Corporations Act (Act No. 90/2012 Coll., as amended) Civil Code (Act No. 89/2012 Coll., as amended)