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Acquisition of Property by Company from Shareholdder/Mandatory Appraisement of Subject Matter of Contract by Expert´s Opinion

“If the company acquires property on the basis of contract concluded with its founder or shareholder for an equivalent amounting to 10% of the value of the registered capital of the company, the value of the subject matter of such contract has to be determined by an expert´s opinion. Such a contract cannot come into force before its deposition, together with the expert´s opinion, with the collection of deeds. If the effectiveness of the contract is subject to registration in special records under applicable law, then the contract, together with the expert´s opinion, has to be deposited with the collection of deeds before registration in the special records.”
The purpose of the above provision is to prevent substantial unbalance between value of the subject matter of the contract which is transferred by the shareholder to the company and the equivalent provided by the company to the shareholder on the basis of such contract, with the final goal of preventing evading of provisions on mandatory appraisement of non-financial contributions to the registered capital. Deposition of the contract and Expert´s opinion with the Collection of Deeds serves an informative function vis-à-vis other shareholders of the company and the company´s creditors with respect to potential claims against the statutory bodies of the company.

Section 59a of the Commercial Code on mandatory appraisement of subject matter of the contract shall apply upon fulfillment of the following conditions:

  1. the company has legal form of a limited liability company or a joint-stock company,
  2. the company acquired property on the basis of repayment contract;
  3. the equivalent of the acquired property equals to at least 10% of the value of the registered capital;
  4. the other contractual party is the company´s shareholder, founder or other persons enumerated in the Commercial Code,
  5. the contract is not concluded in ordinary course of business, the property is not acquired under decision of court or other public authority, nor is the property acquired at
  6. stock exchange for a price equaling to the exchange rate which at the relevant time corresponds to demand and supply.

2) The company acquires property on the basis of repayment contract

In most cases the company acquires property on the basis of a purchase contract. However, the company may acquire property also on the basis of other types of transfer agreements, such as contract on purchase of a leased thing, barter contract or contract on assignment of receivable, etc. The term “property” shall be, for the purposes of application of Section 59a of the Commercial Code, interpreted extensively, whereas especially Section 6(1) of the Commercial Code, which defines the term business property, shall be taken into consideration: “The business property means an aggregate of proprietary values (things, receivables and other values that can be financially evaluated) which belong to the entrepreneur and serve or are designated to use in undertaking.”

An interesting situation arises in connection with an agreement on financial loan on the basis of which the shareholder lends money to the company for an agreed interest, i.e. for repayment. In line with theory of civil law the ownership to subject matter of the loan shall be transferred to the debtor, i.e. loan can be, legally speaking, deemed as transfer of property pursuant to Section 59a of the Commercial Code for repayment. A loan agreement itself, however, does not under theory of civil law fall within the group of transfer agreements, as it is traditionally considered related to lease agreement and bailment agreement. Despite the aforementioned, on the basis of a loan agreement ownership to subject matter thereof is transferred to the company. Given the above, Section 59a of the Commercial Code shall apply to loan agreement accordingly, provided that the subject matter of the loan agreement is a non-financial performance, as such interpretation corresponds to the purpose of this section, which is preventing evading of provisions on mandatory appraisement of non-financial contributions to the registered capital. [1] Quite to the contrary, we are of the view that in case of a financial loans any appraisement of the subject matter of such loans would be redundant and illogical, as it would only be appraisement of financial loan in terms of finance.

3) The equivalent for the acquired property corresponds to 10% of the value of registered capital at minimum.

The equivalent means performance provided by the company to the shareholder for the acquired property. In most cases it is the purchase price agreed in purchase agreement, or other thing in case of barter agreement. Given that such equivalent amounts to at least 10% of the registered capital, than Section 59a of the Commercial Code shall apply. As regards purchase price, which is the financial equivalent of value of the property acquired, it is fairly easy to determine whether the above condition is fulfilled. However, a different situation occurs in relation to a barter contract where the equivalent for the acquired property is a non-financial performance. Given the above, we are of the view that for the sake of legal certainty it is advisable to have an Expert´s opinion elaborated also in relation to the equivalent of the property acquired by the company, and thusly avoid any doubts regarding application of Section 59a of the Commercial Code.

4) The other contractual party is the company´s shareholder, founder or other entities enumerated in the Commercial Code.

The entity from whom the company acquires property is (1) its shareholder, (2) founder, (3) persons close to founders or shareholders of the company, (4) controlled or controlling persons of the founders or shareholders of the company.

  1. The shareholder means current shareholder of a limited liability company or joint-stock company on the day of conclusion of transfer agreement.
  2. The founder of the company is a person who established the company in the manner governed by law, whereas such founder does not even have to be shareholder of the company on the day of conclusion of the acquisition contract.
  3. The term “close person” of a natural person is defined by the Act No. 40/1964 Coll. Civil Code, as a direct ancestor or descendant, sibling or spouse, whereas other persons in family or other such relation are considered as close to each other provided that harm sustained by one would the other reasonably perceive as its own. The term close person of company is not defined by Slovak legislation, however, the applicable case law filled in this gap. Under applicable case law, e.g. Resolution of the Supreme Court File No. Cdo 2192/2001, pursuant to which it is desirable to apply analogically the above cited provision of the Civil Code, based on which the court concluded that a company is a close person of natural person provided that such natural person is the company´s statutory body (member of statutory body), shareholder, member or employee, or is in other such relationship to the company and at the same time such natural person would reasonable perceive the harm sustained by the company as its own.
  4. The controlled person is in the Commercial Code defined as a company in which certain person has the majority votes because it has share (limited liability company) or shares (joint-stock company) in the company with which majority of votes is associated or because on the basis of agreement with other entitled persons such person may perform majority of votes, regardless of validity of such agreement. The controlling person is a person who has in the controlled person status defined in the previous sentence.

5) The contract is not concluded (1) in ordinary course of business, (2) the property is not acquired under decision of court or other public authority, (3) nor is the property acquired at stock exchange for the price equaling to the exchange rate which at the relevant time corresponds to demand and supply.

  1. The term “ordinary course of business” is not defined by Slovak law. Generally, it will concern activities which relate to entrepreneurial activities of the particular entrepreneur and these activities are performed on regular basis in order to promote operation of the business. Pursuant to opinion of the Supreme Court of the Czech Republic (file No. 23Cdo/3867/2007): “The conclusion whether acquisition of property or its transfer falls within ordinary course of business will depend on evaluation of specific circumstance of each individual case, generally, what matters is comparison of subject matter of the transfer (its nature) with the scope of business activities of an individual entrepreneur”. The above opinion of the Supreme Court emphasizes the scope of business activities which have to be registered in the Commercial Register. We are, however, of the opinion that the ordinary course of business cannot be strictly identified only with the scope of business activities of an entrepreneur. When assessing whether transfer of property may be considered ordinary course of business it is, in our view, essential to consider also other criteria, such as the amount of payment (equivalent) or manner of payment in comparison to other transfers in the same field, perhaps also necessity of such transfer, etc. Closest to definition of ordinary course of business is Section 10(1) of the Act No. 7/2005 Coll. on Bankruptcy and Restructuring, as amended, as it defines a related term “ordinary legal acts”: “Ordinary legal acts of an entrepreneur (…) are legal acts which are necessary for promoting due performance of those activities which are the entrepreneur´s scope of business activities or other activities.” Accordingly, for determination of entrepreneur´s activities as ordinary legal acts there must exist a relation between the activities which are being evaluated with promotion of due performance of those activities which belong to scope of entrepreneur´s business activities, whereas the evaluated activities do not necessarily need to form part of the entrepreneur´s scope of business activities. Evaluating whether particular transfer of property belongs to ordinary course of business will always depend on the circumstances of each individual case.
  2. Acquisition of property on the basis of court or other public authority is not subject to Section 59a of the Commercial Code. We are of the view that in this case formulation of the law is somewhat inaccurate. When interpreting this exception the purpose of the whole Section 59a should be taken into account, which purpose is prevention of so-called “concealed contributions”, and thusly evading of provisions on mandatory appraisement of shareholders´ contributions into registered capital of the company. The Section 59a of the Commercial Code tightens up the conditions for acquisition of property by the company on the basis of contract from enumerated persons. Given the above, the above exception should be formulated as acquisition of property by the company on the basis of contract which was concluded on the basis of decision of court or other public authority. In practice this exception would apply mostly to cases when the freedom of contract of certain person is substituted by court´s decision (e.g. in case of a contract on future contract).
  3. The Section 59a shall apply also to stock exchange contracts provided that the price of the acquired property should not at the time correspond to the exchange rate corresponding to demand and supply.

In case all the above conditions (1-5) are fulfilled the following legal consequences shall apply:

  1. Value of the subject matter of the contract shall be determined by an Expert´s opinion;
  2. The contract on the basis of which the company acquired property shall not come into force before it is, together with the Expert´s opinion, deposited with the Collection of Deeds,
  3. In the event that the company concluded such a contract within 2 years as of its establishment, approval of the contract by the General Meeting is required.

1) Value of the subject matter of the contract shall be determined by an Expert´s opinion

The subject matter of the contract means property which shall be acquired on the basis of the contract for an equivalent of 10% of the registered capital of the company.

2) The contract on the basis of which the company acquired property shall not come into force before it is, together with the Expert´s opinion, deposited with the Collection of Deeds

By Section 59a the Commercial Code modifies general provisions of the Act No. 40/1964 Coll. Civil Code, as amended, in relation to (1) form of the contract between the company and persons enumerated under Section 59a of the Commercial Code and (2) effectiveness of the contract.

  1. Written form of the contract is only logical, as the contract has to be deposited with the Collection of Deeds.
  2. The legislator sanctions failure to evaluate the subject matter of the contract by an Expert´s opinion and to deposit it with the Collection of Deeds. The statutory sanction is that such a contract, despite fulfilling all statutory prerequisites and being legally valid, shall never become effective, i.e. on its basis no rights and obligations shall arise. In the event that registration of contract with special register is required for a contract to become effective, than such contract has to be deposited with the Collection of Deeds before its registration. The obligation to deposit the contract and the Expert´s opinion with the Collection of Deeds serves only to inform other shareholders or creditors of the company. Even if there is a gross disproportion between the value of the subject matter of the contract and the equivalent provided by the company, and provided such contract was, together with the Expert´s opinion, deposited with the Collection of Deeds, than such disproportion does not cause invalidity of the contract.

3) In the event that the company concludes a contract subject to Section 59a of the Commercial Code within 2 years as of its establishment, approval of the contract by the General Meeting is required.

Obligation to approve proposal of the contract by the General Meeting functions as certain internal control mechanism within the company. In the event that the company should conclude a contract subject to Section 59a of the Commercial Code within 2 years as of its establishment, an approval of the General Meeting of the contract is required, i.e. even before conclusion of the contract the contractual parties need to obtain the General Meeting´s approval. The Commercial Code, however, lacks to mention what are the legal consequences of breach of this obligation. We are of the opinion, as already mentioned above, that approval of the General Meeting is only an internal control mechanism, the breach of which, therefore, shall not cause invalidity of the contract.

[1] Patakyová, M. and collective, Commercial Code, Commentary 2 updated edition, C.H.Beck, Bratislava 2008, page 168.

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