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A Travelling Business Share

SLOVAKIA: Are you sure you are still a shareholder?

Success and failure often stand close to one another. Companies that are still drawing up expansion plans today may be in economic turmoil tomorrow. For insolvent foreign companies with a Slovak subsidiary, Slovak company law may offer an unpleasant surprise. According to the principle in sec. 148 (2) of the Slovak Commercial Code (SCC), a Slovak subsidiary, by law, acquires its own shares upon the insolvency of the shareholder. In this way, an insolvent company ‘loses’ all shareholder rights and retains a claim for financial compensation. This rule was introduced to speed up insolvency proceedings, so that the insolvency administrator does not have to worry about exercising any shareholder rights, but simply can seek to recover fail value from the subsidiary. This rule does not apply to companies with only one shareholder, in order to prevent a de facto non-shareholder company.

However, there are problems with the regulation – it can be assumed that this consequence has not been taken into account in the legislative process – specifically if all the shareholders belong to a group, and the insolvency of these shareholders is opened at the same time. In this case, it is questionable whether the non-shareholder-exception is effective, since the company is "losing" all shareholders at the same time. The other way round would not be problematic if first one and then the other shareholder become insolvent, since the second shareholder in this case would already be the sole shareholder and consequently the exception would apply.

The real brisance of sec. 148 (2) SCC is revealed in an international context. There was a case when the German insolvency administrator of two group-affiliated shareholders wanted to sell their non-insolvent Slovak subsidiary to an investor via a share deal as part of a larger transaction. Our analysis concluded that the share purchase agreements are most likely null and void, since both shareholders lost their primary shareholder rights at the time of their simultaneous insolvencies. It could be argued legally that this provision is actually a bankruptcy provision and was only included in the SCC as a drafting error. In which case it would not apply as it is pre-empted by the EU Insolvency Regulation. However, this argument seems questionable, since sec. 148 SCC has already been amended and revised several times, so that a drafting error is more likely not to be the case. Moreover, the competent registry court would have to be persuaded of this when the shareholder changes are registered, although registry courts are traditionally very cautious in argumentation contrary to the wording of the law.

This problem could best be solved by arranging a consultation with a Slovak lawyer in the run-up to an insolvency filing. With regard to this problem, it seems advantageous under Slovak law if the German insolvency court does not open the insolvencies at the same time, but consecutively, since in this case the aforementioned exemption regulation applies. Of course, foreign law may require opening the insolvency at the same time. There is, in our view, no elegant solution to this problem after the conclusion of such an agreement, so that the share purchase agreement has to be re-concluded, and this time on the seller side the company itself, represented by the management, has to act.

Incidentally, if the insolvency is lifted again because payment difficulties have been overcome, the share of the business will revert to the shareholder.