The new Civil Code serves as the basis of law applicable to commercial companies. It stipulates the status of a legal entity and partially stipulates the status of associations and entrepreneurs. The Commercial Companies Act (the “Act”) sets forth new rules for setting up commercial companies, as well as the degrees of “influence” which may exist over such companies. New regulations governing reports on relationships between related parties stipulate that the information contained in such reports must include more detail and the scope of such information must be more extensive, which on one hand means a greater burden is placed on the statutory body that is responsible for drafting the report. On the other hand, however, it allows third parties to obtain more information.

Influence versus control

The new regulation stipulates that anyone who, through his/her influence in a commercial company, substantially affects the conduct of such company to its detriment will be held liable for any resulting damage, unless such person proves that it could be reasonably assumed that his/her conduct was based on relevant information and was performed in defence of the interest of the affected party.

The Act defines control through influence – a controlling party is a party that can directly or indirectly influence a commercial company (i.e. who has controlling interest). The controlled party is by law a commercial company controlled by a controlling party.

Concerning influence and control, compensation for any damage suffered must be provided by the end of the relevant accounting period or within another agreed period. Failing this, liability for reflex damage, i.e. liability vis-a-vis third parties (such as the company’s members and creditors) may also arise. It should also be mentioned that the influencing person may be held liable for the affected party’s debts resulting from the influence which the former exercises over the latter.

New definition of a corporate group

“Submission to single management” is a crucial term. An exception from the above-mentioned liability arising out of influence applies to corporate groups where the given company has fulfiled its obligation to publish the existence of the group on its website (i.e. so-called “acknowledged corporate group”). A purchase duty set forth by the Act applies to all three degrees of “influence” over the company in cases where the position of the shareholders or their legitimate interests is significantly worsened and therefore they cannot be reasonably required to remain the owners of the company. In such a situation, each shareholder that is not a controlling party or a party controlled by a controlling party is entitled to request that the controlling party purchases its interest for a reasonable price.

The Act no longer regulates control agreements and profit transfer agreements. On the basis of temporary provisions, validly concluded agreements will terminate at the end of 2014. After this date, the current exception that allows companies that have concluded a control agreement to forgo preparing a report on relationships will cease to apply.

Reports on relationships after the recodification

The Act has not changed the current requirement for a report on relationships between related parties for the previous accounting period to be prepared within three months following the end of the relevant accounting period. Newly, however, the Act lists the details and extent of what the report should contain. The introductory sections should include the structure of the relationships between the related parties, the role of the controlled party and the methods and means of control. In the report itself, the company’s statutory body should summarize any acts performed in the last accounting period which gave rise to detriment and which were performed at the instigation or in the interest of one of the related parties. The report should also contain important facts decisive for assessing the detriment and related compensation. What is also new and important is that a statutory body which does not have the information necessary for preparing the report on relationships must state as much in the report and provide an explanation.

The report on relationships should also assess the advantages and disadvantages arising from the relationships between related parties and newly state what risks may arise from this for the controlled party and whether certain advantages or disadvantages prevail in the given relationship.

Concerning compensation for damage to a corporate group, the Act provides that compensation should be provided during a reasonable period of time and within the corporate group by reasonable counter-performance or other demonstrable advantages arising from membership in the corporate group. The report on relationships must also include information on whether, how and when compensation was or will be provided for the potential damage.