The Business Corporations Act (zákon o obchodních korporacích) uses the term business corporation to cover all forms of business companies and cooperatives. A limited liability company (společnost s ručením omezeným, s.r.o.) is one of these forms of business company. The share certificate (kmenový list) was introduced by the new Business Corporations Act, which has been in force since 1 January 2014.
What are the main features of an s.r.o.?
The s.r.o. is one of the most common forms of doing business in the Czech Republic. The law defines it as a capital company, but it also has features of a partnership.
So what is the difference between them? A capital company may also carry out activities other than business. It is characterised by all members having a financial stake in its activities, and they are either not liable for the company’s debts at all or only to a limited extent.
A partnership can only be set up for business purposes or to manage its own assets. Partnerships are also characterised by the members taking part personally in running the company.
As an s.r.o. shows features of both a capital company and a partnership, it can be regarded as a mixed company. A member’s share in this type of company is determined by the ratio of their contribution to the company’s registered capital. The articles of association may allow different classes of shares. If you are interested in the wider topic of the s.r.o. or in how to set one up, take a look at this article, which covers setting up an s.r.o. in more detail.
Share certificate
A member’s share in an s.r.o. may also be represented by a share certificate (kmenový list) if the articles of association say so. If the articles of association allow one member to hold several shares, the company may issue a share certificate for each share. A share certificate is therefore a type of security that represents a member’s share in an s.r.o. and the rights and obligations that come with it.
The Civil Code (občanský zákoník) defines a security as “a document to which a right is attached in such a way that, once the security has been issued, the right cannot be exercised or transferred without that document.” So once a share certificate has been issued, a member can exercise the rights arising from their stake in the company, or encumber or transfer that share, only by means of the share certificate. A share certificate cannot be issued as a book-entry security, but the law does not prohibit the immobilisation of a paper share certificate.
A share certificate is an order security. This means it is a security which, in paper form, is transferred by endorsement (writing the new owner’s name on the back of the security) and physical handover. The owner of the security is named on it in full, and until it is transferred, only the person in whose name the document was issued can exercise the rights attached to the order security.
A share certificate cannot be offered to the public or admitted to trading on a European regulated market or any other public market.
What a share certificate contains
- A statement that it is a share certificate
- Clear identification of the company that issued the share certificate
- The amount of the contribution attributable to the share the certificate represents
- Clear identification of the member
- Identification of the share for which the certificate is issued, the certificate’s designation and number, and the signature of the executive director or directors
- A collective share certificate also states how many share certificates it replaces and identifies the shares it replaces.
Issuing a share certificate is not difficult in itself. It is simply a document that must contain all the details required by law. No approval from a state authority is needed to issue a share certificate.
An issued share certificate is not registered anywhere, and share certificates are not filed in the company’s collection of documents in the Commercial Register. The fact that a share in the company is represented by a share certificate can therefore only be known from the articles of association and from the entry in the Commercial Register, which states for the share in question that the company has issued a share certificate for it.
The biggest advantage of a share certificate is that it is very easy to transfer to another person, without any formalities. The signature on the share certificate does not need to be certified when it is transferred, a simple signature is enough. A share certificate can therefore be transferred at any time and anywhere, sometimes without the company itself or the other members finding out. The transfer can really be made to anyone.
This is also one of the biggest disadvantages for the s.r.o. itself if it wants to keep track of who its shares are transferred to, because with share certificates the company loses the ability to approve share transfers at the general meeting or to introduce a pre-emption right for existing members.
If you found this article interesting and want to set up an s.r.o. that can issue share certificates, have a look at this article on how long registration in the Commercial Register takes.