Share Capital Share capital of a business company is the monetary expression of the aggregate of both monetary and non-monetary contributions of all members to the share capital of the company (cf. Section 58 of the Commercial Code (obchodní zákoník)). It must be expressed in units of Czech currency (this does not mean, however, that a contribution could not be paid in foreign currency, but in the memorandum of association or deed of foundation it must be expressed in Czech currency). In a limited liability company, share capital is created mandatorily, its minimum amount is stipulated by the Commercial Code and amounts to CZK 200,000; no maximum amount is given. Determination of the amount of capital is one of the essential requisites of the memorandum of association (cf. Section 110(1)(d) of the Commercial Code). The company must meet the minimum amount not only upon its formation but also throughout its existence (cf. Section 108(1) of the Commercial Code). Values formed by members’ contributions to the share capital may be used by the company for its activities; thus, the company may, for example, dispose of things acquired as a non-monetary contribution, and likewise may dispose of monetary contributions and need not keep them permanently deposited in its account.

Increase of Share Capital During the existence of a business company, an increase or decrease (not below the minimum statutory amount, however) of share capital may occur. The general meeting of a limited liability company decides on an increase of share capital. Adoption of the decision requires a qualified two-thirds majority of all members and the decision must be recorded in a notarial deed (cf. Section 125(1)(e) and Section 127(4) of the Commercial Code). If share capital is being increased by monetary contributions, all existing contributions (both monetary and non-monetary) must first be fully paid up (cf. Section 142 and Section 59(2) of the Commercial Code). An increase by non-monetary contributions is possible even before such payment. For limited liability companies which arose before the effective date of the amendment to the Commercial Code No. 370/2000 Coll. (i.e. before the date of 1 January 2001), the minimum share capital was set at CZK 100,000. These companies, after the entry into force of the said amendment, are not obliged to increase their share capital to the new amount (i.e. to CZK 200,000). However, should these companies increase their share capital, they must increase it at least so as to reach the newly required minimum amount of share capital. Thus, if the company Last Food, s.r.o. was formed on 1 August 1998 with share capital of CZK 100,000, it was not required after 1 January 2004 to increase its share capital. If it now decides to increase it, however, after such increase the share capital must reach the minimum amount of CZK 200,000. The increase may be effected in two ways, namely by increasing share capital through new contributions (cf. Section 143 of the Commercial Code) and by increasing share capital from the company’s own resources (cf. Section 144 of the Commercial Code).

Increase of Share Capital by New Contributions At the beginning of the process of increasing share capital is a decision of the general meeting. The resolution of the general meeting must specify the amount by which share capital is increased and the period within which obligations to increase contributions or to assume new contributions must be assumed. In the case of a non-monetary contribution, the object of the non-monetary contribution and the amount to be credited to the member’s contribution on the basis of an expert opinion must be specified. The notice convening the general meeting which is to decide on the increase must already contain a proposal of these particulars.

Members have a preferential right to participate in an increase of share capital if it is being increased by monetary contributions, by assuming an obligation to increase contributions. Members are entitled to assume the obligation to increase contributions in proportion to the amount of their business shares, unless the memorandum of association provides otherwise. The memorandum of association may also entirely exclude this preferential right of members to participate in an increase of share capital. In the event that the memorandum of association does not exclude the preferential right of members, assumption of new contributions shall be offered to existing members, as stated, in proportion to the size of their business shares (unless otherwise specified in the memorandum of association). In second order, assumption of new contributions shall be offered to anyone. A condition of this offer is the fact that members did not exercise their preferential right within the period stipulated by the memorandum of association or articles of association, otherwise within one month from the day they learned of the resolution of the general meeting on the increase of share capital, or if they waived the preferential right (waiver of the preferential right must be in written form with officially verified signature or must be made at the general meeting). The statutory period of one month for exercising the preferential right is subjective, thus it begins to run only from the moment when the member actually learned of the resolution. This may in practice cause difficulties and considerable prolongation of the capital increase process. Therefore, it is desirable in the memorandum of association to regulate the period for exercising the preferential right differently from the law, preferably as an objective period, thus commencing to run from the moment of the general meeting’s decision (or at least from the moment when the member could have learned of the increase). If members do not have a preferential right according to the memorandum of association or do not exercise it (or waive it), anyone may, with the consent of the general meeting, assume an obligation for a new contribution. With the consent of the general meeting, any member may also assume an obligation to increase a contribution up to the amount of the proposed increase of share capital. The law does not address whether the general meeting may give consent in advance (i.e. whether this consent may be expressed by the same general meeting that decided on the increase of share capital). If we admit this possibility, it can be recommended that the persons who may assume the contribution be expressly designated in the decision. For completeness, I note that assumption of a contribution by a person other than a member is not possible if this would cause the number of members to exceed the statutory maximum limit of the number of members in a limited liability company, i.e. the number of 50 members. An obligation to increase a contribution or for a new contribution is assumed by written declaration, which must contain the amount by which share capital is increased, in the case of a non-monetary contribution the object of the non-monetary contribution and the amount to be credited to the member’s contribution and the period for payment of the contribution. An interested person who is not a member must additionally declare that he accedes to the memorandum of association. Furthermore, it is clear from the requirement for certainty of legal acts that the declaration must also contain identification of the business company and the interested person, the amount of the contribution being assumed and, of course, also an express declaration of assumption of the contribution and an undertaking to pay the contribution. The signature of the interested person on this declaration must be officially verified. The declaration becomes effective upon delivery to the company. If obligations to increase a contribution or for a new contribution were not assumed within the period specified by the decision of the general meeting, or if the registry court rejects the application for registration of the increase of share capital in the commercial register, the increase of share capital is ineffective. Thus, the rights and obligations of persons who undertook contributions cease and the company is obliged to return to them without undue delay the amount already paid together with interest at the rate of interest usually provided by banks under a current account agreement as at the date when the obligation to return the paid amount arose, in the place where the company has its registered office.

Non-monetary Contribution

Assuming an obligation to increase share capital by non-monetary contributions is possible only if it is in the important interest of the company. If share capital is being increased by non-monetary contributions, the statutory body (i.e. one or more managing directors) must submit to the general meeting a written report stating the reasons for increasing share capital and the amount by which these contributions are credited to the increase. Share capital may be increased only by those non-monetary contributions which the general meeting has approved. Non-monetary contributions must be paid up before submitting the application for registration of the increase of share capital in the commercial register (see below).

A non-monetary contribution may only be property whose economic value is ascertainable and which the company can use economically in relation to its business activities. Contributions consisting of obligations concerning performance of work or provision of services are prohibited. The value of a non-monetary contribution is determined according to an opinion prepared by an expert independent of the company, appointed for that purpose by the court. The competent court in the first instance is the regional court in whose district the applicant has its registered office. The application for appointment of an expert is submitted by the company. Parties to the proceedings are the applicant and the expert. The court is not bound by the proposal of the person of the expert. If the non-monetary contribution is immovable property, the contributor must hand over to the company a written declaration with officially verified signature, on the basis of which the company shall acquire ownership right to this immovable property by entry of the ownership right in the cadastre of immovable property (cf. Section 60(1) of the Commercial Code).

Capitalisation of a Claim

A claim against the company cannot be a non-monetary contribution. This claim may, however, be set off against the company’s claim for payment of a contribution when share capital is being increased, if the general meeting consents thereto. The consent of the general meeting forms part of the decision on the increase of share capital. However, this decision does not give rise to an obligation of the member to set off the claim; he may pay the contribution in money.

The business company Perfidia, s.r.o. owes one of its members, Jan Písek, an amount of CZK 80,000 (for example, for the reason that on the basis of a purchase contract concluded between Jan Písek and Perfidia, s.r.o., delivery of goods took place on the part of the member, but the company has not yet paid the purchase price). The general meeting decides to increase share capital by an amount of CZK 200,000 by new contributions; Jan Písek assumes a contribution of CZK 100,000. With the consent of the general meeting in the decision on the increase of capital, mutual set-off of claims may occur (i.e. the member’s claim against the company under the purchase contract in the amount of CZK 80,000 and the company’s claim against the member from the obligation for a contribution in the amount of CZK 100,000). After set-off, Jan Písek will owe Perfidia, s.r.o. an amount of CZK 20,000.

Increase of Share Capital from the Company’s Own Resources The general meeting may decide to increase share capital from own resources. Unlike the previous case, where it concerns a so-called effective increase of share capital, in this case it concerns a so-called declaratory or nominal increase. It consists in the fact that in the company’s balance sheet a certain item of own liabilities will be transferred to the item of share capital. Thus, it is only an accounting operation. Part of the reserve fund may be transferred if it is created to a greater extent than prescribed by law or the memorandum of association, or part of profit may be transferred. The resolution of the general meeting on the increase of share capital from the company’s own resources must contain, besides the new amount of each member’s contribution, the amount by which share capital is increased, and further designation of the own resource or resources of the company from which share capital is increased. The notice convening the general meeting which is to decide on the increase of share capital must contain a proposal for the resolution on the increase of share capital. Upon increase of share capital from own resources, the amount of each member’s contribution shall increase in proportion to their existing contributions. After approval of ordinary, extraordinary or interim financial statements, the general meeting may decide to use net profit after allocation to the reserve fund (net profit cannot be used when increasing share capital on the basis of interim financial statements) or another own resource shown in the financial statements in equity to increase share capital. The financial statements must be audited without reservations and must be prepared from data ascertained at the latest as at a date from which, on the day of the general meeting’s decision on the increase of share capital, no more than six months have elapsed (if, however, the company has from any interim financial statements ascertained a reduction of own resources, it cannot use data from ordinary or extraordinary financial statements but must proceed from these interim financial statements). The company cannot increase share capital from own resources if the equity ascertained from ordinary or extraordinary financial statements is (or would be as a result of profit distribution) lower than the company’s share capital increased by (I.) assumed contributions, if contributions for increase of share capital were assumed and the increased share capital was not registered in the commercial register as at the date of preparation of the ordinary or extraordinary financial statements, and by (II.) that part of the reserve fund or those reserve funds which, according to law and the memorandum of association, the company may not use for performance to members. Reserve funds which are created for other purposes, nor own resources which are tied to a purpose and whose purpose the company is not entitled to change, cannot be used for increase of share capital.

Registration of the Increase in the Commercial Register The company through its statutory bodies is obliged to submit an application for registration of the increase of share capital in the commercial register. The application need not (unlike the application for registration of the company) be signed by all managing directors; it suffices to submit the application in the manner in which managing directors act on behalf of the company according to the memorandum of association (if the memorandum states that each managing director acts independently, one signature suffices). Signatures must be officially verified and the application submitted without undue delay after assumption of contributions or after the resolution of the general meeting on the increase (if capital is being increased from own resources). Before submission of the application, at least 30% must be paid on each monetary contribution (or an agreement on set-off concluded); non-monetary contributions must be paid up in full. If the company has a sole member, monetary contributions must also be paid up in full. The increase of share capital is effective as at the date of registration of its new amount in the commercial register; registration of both effective and declaratory increase thus has so-called constitutive nature.

Example The business company MagicNite s.r.o. has two members, Jan Frans and Marcela Kujalová. Each of them has a business share of 50%; each of their contributions to the company’s share capital of CZK 200,000 amounts to CZK 100,000 and is fully paid up. The memorandum of association does not contain (as is common in practice for most limited liability companies) any special provisions on increasing share capital which would exclude or alter the statutory regulation. The managing directors are both members; each acts on behalf of the company independently. The company wishes to increase its share capital to double, i.e. to the amount of CZK 400,000, by new contributions of members.

The general meeting, by 100% of the votes of all members, decides to increase capital by the amount of CZK 200,000 by monetary contribution and determines a two-month period within which obligations to increase contributions must be assumed. A notarial deed is made of the decision.

Members have a preferential right to participate in the increase of share capital. Members are entitled to assume the obligation to increase contributions in the ratio 1:1. Member Jan Frans, 7 days after the general meeting deciding on the increase of share capital, assumed the obligation to increase the contribution by written declaration containing the necessary requisites and signed the declaration, the signature was officially verified. Member Marcela Kujalová waived the right to participate in the increase of capital at the general meeting.

A third person, the member’s brother, Jan Kujal, expressed interest in an obligation for a new contribution. The general meeting, held 14 days after the general meeting deciding on the increase of share capital, consented to Jan Kujal assuming an obligation for a new contribution. Jan Kujal, 2 days after the holding of the general meeting which granted consent to the assumption, assumed the obligation for a new contribution by written declaration containing the necessary requisites. Furthermore, in the declaration he acceded to the memorandum of association of the company MagicNite s.r.o. and signed the declaration, the signature was officially verified. Within 20 days of the general meeting deciding on the increase of share capital, both Jan Frans and Jan Kujal paid their obligations. The following day, the company submitted an application for registration of the increase of share capital in the commercial register. After registration of the increase, this became effective.

This text was translated from Czech to English using an AI translator.