Please enable JavaScript to view this website.

Corporate Law in Post-Communist Countries: Changes in the Czech Republic

Within every legal system, corporate law serves the immensely important function of regulating influential economic actors and economic affairs. It is therefore crucial that corporate law attracts the necessary academic and legislative attention to pursue perpetual development of an appealing framework that will not itself be an obstacle for economic activities and operations. For post-communist countries still transitioning from totalitarian regimes, establishing such a framework has been particularly difficult.

Legal systems in virtually all post-communist countries have faced great challenges since the fall of the totalitarian regime.1 Decades of communist law and overwhelming regulation of individuals and private entities designed to satisfy the governing ideology took a great toll on the legal environment of such countries.2 Many post-communist countries have been slow to replace the laws drafted and enacted by communist legal scholars and communist governments.3 In fact, several post-communist countries took more than a decade to adopt a new system of private law, including Ukraine (2004), Romania (2011), and Hungary (2012).4

In the Czech Republic, rapid political and social changes followed the 1989 Velvet Revolution. However, during this time legislators made only absolutely necessary changes in private law, which were intended to serve as a temporary solution until a more complex legislative overhaul could be prepared.5 Only the areas of commercial relationships and business organizations were included in the framework of the new Commercial Code.6 Nevertheless, the main set of rules governing private parties, their relationships, and interactions was a civil code that had originally been enacted by the communist parliament in 1964.7 It was not until January 2014—after a long process generally referred to as “the recodification of the private law”—that a set of new complex legislation finally cam into effect.8 The Business Corporations Act (the “BCA”) was a focal point of the recodification process, drafted with the goal of shaping the Czech corporate legal system into a modern and attractive regulatory framework.9

The BCA aims to correct the deficiencies of the previous laws governing business organizations by removing burdens of rigidity and overregulation by increasing flexibility and opportunity in corporate governance.10 In doing so, the BCA seeks to provide a consensus legal framework that western investors and businesses are accustomed to as part of a national effort to attract new investors and entrepreneurs into the jurisdiction.11

Many post-communist countries have based their new legal frameworks on rules recognized in important corporate legal jurisdictions such as the United States. The Czech Republic’s transition out of communism illustrates such a shift towards western corporate law.

Prior to the BCA, regulation of common stock in the Czech Republic was unnecessarily rigid and burdensome. Czech corporations were legally restricted in designing their special classes of shares—customization or modification was prohibited under the previous corporate legal regime.12 Under the new regime, corporations have substantial flexibility to design their own classes of stocks with special rights attached to them including, for example, assigning different weights for voting.13

The BCA also authorizes Czech corporations to use a single tier corporate governance structure.14 Before 2014, Czech corporations could only use a two-tier structure in which a separate body called the supervisory board had oversight responsibilities over the executive management board.15 This traditional corporate law trait of European continental jurisdictions is now supplemented with the option for a governance structure containing a single body of the board of directors.16 Opting for a single tier structure may reduce transaction costs in corporate governance, especially where the governing board may consist of only one.17 More importantly, investors from the United States and other common law countries where single tier corporate structures exist may appreciate having this statutory option, which could add further weight to considering the Czech legal system when setting up a corporation in Europe.

The BCA has a number of other significant features that bring the Czech corporate legal framework closer to the widely recognized standard.18 For example, the BCA eliminated prohibitions on cumulative voting and repealed the prior statutory requirement that employee representatives serve on the supervisory board.19 Most of these rules are similar to what has been the custom for decades in jurisdictions like the United States, where corporate law relies heavily on the concept of fiduciary duties that provide directors with tangible guidelines for their behavior and actions related to the corporation.20 The BCA set forth new rules governing directors’ duties and responsibilities towards the corporation and its shareholders,21 and incorporated the core elements of fiduciary obligations into its provisions.22 The BCA, together with the new civil code, has incorporated the core elements of fiduciary obligations into its provisions. Directors are now bound by statutory duties of care and loyalty and must follow certain procedures for disclosing conflicts of interest.23 The BCA also introduces the business judgment rule into Czech corporate law,24 which protects directors from an ex post judicial assessment of non-conflicted and informed business decisions made in good faith.25

The statutory rules applicable to the corporations and their directors discussed above exemplify the significant shift in Czech corporate law. This movement towards globally recognized standards of corporate governance is appealing to European investors and entrepreneurs alike.

  1. E.g., Catherine Dopre, Importing the Law in Post-Communist Transitions: The Hungarian Constitutional Court and the Right to Human Dignity 37 (2003); Loannis Gilnavos, Neoliberalism and the Law in Post Communist Transition (2010). 

  2. H.R. Doc No. 362, Explanatory Memorandum to the Civil Code 555-556 (2011) (Czech); Stephen Cohen & Andrew Schwartz, Privatization in Eastern Europe: The Tunnel at the End of the Light, 4 Am. Prospect No. 13, Spring 1993. 

  3. Milana Hrušáková et al,, Zkušenosti s Implementací Nového Soukromého Práva v Zahraničí [Experience with implementing the new private rights abroad] 73 (2013),

  4. Id

  5. H.R. Doc No. 362, Explanatory Memorandum to the Civil Code 559 (2011) (Czech). 

  6. See generally, Zákon č. 513/1991 Sb. (Czech). 

  7. Zákon č. 40/1964 Sb. (Czech) repealed by Zákon č. 89/2012 Sb. (Czech). 

  8. Obkansky Zakonik [Civil Code], pt. I, § 1-654, cmt. 5 (1st ed., Petr Lavicky ed., 2014). 

  9. See generally Zákon č. 90/2012 Sb. (Czech). 

  10. H.R. Doc No.363, Explanatory Memorandum to the Business Corporations Act 189-193, 208 (2011) (Czech). 

  11. See generally, Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001). 

  12. See Zákon č. 513/1991 Sb. §155(7) (Czech). 

  13. Zákon č. 90/2012 Sb. §276(3) (Czech). 

  14. Id. at §397(1). 

  15. Zákon č. 513/1991 Sb. §197 (Czech). 

  16. Zákon č. 90/2012 Sb. §397(1) (Czech). 

  17. Id

  18. See generally Hansmann & Kraakman, supra note 11. 

  19. Zákon č. 90/2012 Sb. §354 (Czech); H.R. Doc No.363, supra note 10, at 189-193. 

  20. William T. Allen et. al, Cases and Commentaries on the Law of Business Organizations 26-27, 227, 277 (Wolters Kluwer, 4th ed. 2013). 

  21. Zákon č. 90/2012 Sb. §§54-58 (Czech). 

  22. Zákon č. 90/2012 Sb. §159, §54 (Czech). 

  23. Zákon č. 90/2012 Sb. §§159, 54 (Czech). 

  24. Zákon č. 90/2012 Sb. §51 (Czech). 

  25. Allen et. al, supra note 20, at 218-19; Ivana Štenglová & Bohumil Havel, Zákon O Obchodnich Korporacich Komentar §51 at 136 (Štenglová, I., Havel, B., Cileček, F., Kuhn, P., Šuk, P. eds. 2013).