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Simple Joint-Stock Company: Breakthrough for venture capital in Slovakia
On 12 November 2015, the Slovak parliament adopted the amendment of the Slovak
Commercial Code, introducing a wholly new type of legal vehicle – a simple joint-stock
company (j.s.a.). As Taylor Wessing Slovakia was among the principal drafters and driving
forces behind the adoption of this piece of legislation, and spent many months intensively
involved in its drafting, brainstorming with the Ministry of Finance and holding expert
discussions with the Ministry of Justice, we are proud that we took the long journey and look
forward to its application.
For the first time since the adoption of the Commercial Code in 1991 (in what was then
Czechoslovakia), the Slovak legislator found enough courage to stir the stale waters of
Slovak company law and introduced a new type of corporate entity into the Slovak corporate
landscape (disregarding the mandatory and rather sloppy transposition of EU legal vehicles SE and European Cooperative Society). It is also a breakthrough on another level: at last,
the Slovak legislator abandons the perpetually failing idea of protection of creditors by
tightening the rules for registered capital (the minimum capital of j.s.a. being set at EUR 1) to
which it stuck for so long.
It should be very encouraging for the start-up community that the aim of the new vehicle is to
serve start-ups and VC investors, though it will certainly have a much more versatile use - all
forms of joint venture projects come to mind first as natural recipients.
What makes the difference?
In a nutshell, the simple joint-stock company (j.s.a.) will be:
It is basically a lean version of the joint-stock company with a minimum registered capital of
EUR 1, a minimum nominal share value of 1 Eurocent, and a lean structure (thus suitable
also for initial stages): a one-man board of directors is possible, a supervisory board is only
optional; circular resolutions of shareholders are possible.
Flexible and contractual
This is the "heart" of the new vehicle: it gives shareholders substantial and in the Slovak
company law unparalleled freedom to flexibly shape their relationships both on the level of
(i) Articles of Association: The j.s.a. can issue various classes of shares to which different
rights may be attached (there is no explicit limit on these rights) thus allowing the creation of
various classes of shareholders reflecting their position and time of "arrival" (e.g. employees,
founders, investors); the implementation of ESOP schemes will be substantially easier; and
(ii) Shareholders' agreements (SHA): SHAs may contain, besides any arrangement between
shareholders not prohibited by law, explicitly regulated agreements on drag-along/tag-along
right and shoot-out (deadlock); the voluntary registration of drag along and tag along in public
registers leads to enhanced enforceability.
Electronic registration of all shares and their transfers; list of shareholders available online in
a public register kept by central securities depositaries.
The simple joint-stock company cannot go public or offer subscription of shares publicly
without prior transformation to a regular joint-stock company; the reason behind this is to
avoid an application of several restrictive obligations concerning the maintenance of capital
stipulated in the Second Company Law Directive.
Insofar as it provides protection to VC through the self-enforcing nature of a registered dragalong right that will allow to execute the drag along without being forced to initiate
court/arbitration proceedings. We also expect that the explicit regulation of arrangements in
SHA in combination with an application of the new Slovak Arbitration Act (2015) and
arbitration courts in Slovakia on shareholders' disputes can change the situation and lead to
effective and timely enforcement of shareholders rights (founders or investors).
User-friendly - bringing together entrepreneurs and investors
Low incorporation requirements and a simple corporate structure (with or without supervisory
board) serving initial stages and a variety of share classes together with statutory drag-along
and tag-along regulations serving investment scenarios are designed to accommodate both
requirements of entrepreneurs as well as the goals and strategies of investors.
Take-off in January 2017
At first sight it may be disappointing that the act will not enter into force until January
2017; however, this (at least in Slovakia) unusually long transitional period is necessary to
establish and implement new public registries that will be kept with the central securities
depositaries. In the meantime, it will be a crucial safeguard that the registration fees will be
set at a reasonably low level.
Background: Slovak corporate landscape
companies - why are they required?
One may ask a legitimate question: Why is this so significant? Doesn’t Slovakia have limited
liability companies and joint-stock companies? Can't they be put to good use? Is a special
legal vehicle really needed?
The answer is yes, it is. Every lawyer who cares for results and who has ever implemented a
VC term sheet (or, as a matter of fact, any structured SHA) - including such essentials as
vesting/share option plan, employee pool, drag-along, tag-along, liquidation preference - and
who tried to adapt it to (or rather force its adaption onto) Slovak corporate vehicles, knows
that it is more than necessary and it is long overdue. The Slovak company law became a
victim of its own rigidity and simply fell too far behind to effectively accommodate these
Origin in the nineties, current economic life not reflected
Why is this the case? The Slovak company law was formed in the early 1990s as a
"greenfield" regulation and was heavily inspired by German and Austrian post-war notions of
capital companies (without taking into account judicial development in these countries). It is
based on rigid concepts and approaches that are more than 50 years old, which in no way
reflect current economic investment models and in some ways do less than little to
accommodate the realities of Slovak business environment.
The starting point for the legal framework of our joint-stock companies (a.s.) is that these are
large companies which regularly have dispersed ownership and commonly publicly subscribe
shares - nothing could be more remote from real practice in Slovakia. Slovak joint-stock
companies may issue only two types of shares: common stock (without exception, no special
rights may be attached) and preferred stock (priority shares); however, preferred stock only
enjoys priority rights concerning the distribution of profit (off-set by elimination of voting
rights). It is obvious that this framework does not allow shareholders to shape the company
according to their needs and their position by issuing various classes of shares. Strict antidilution rules, relatively high minimum registered capital, formal rules on decision-making of
general meeting and mandatory supervisory board, with the participation of employees (if
more than 50 (!) employees) are just some examples of further constraints for start-ups.
On the other hand, limited liability companies (s.r.o.) have always been intended for small
and medium businesses. Regulation presupposes a close relationship and strong loyalty
between each shareholder and company (each shareholder has the right of full access to all
information/documents!) and caps the maximum number of shareholders at 50. Besides a
leaner structure, the only upside is that limited liability companies provide some more leeway
as regards the rights of shareholders (profit, voting rights, liquidation share). The downside is
that there are no shares, but each shareholder owns just one "participation interest" so the
concept of price per share can only be emulated (minimum contribution of shareholder
into registered capital is EUR 750, relativising the advantage of relatively low registered
capital of EUR 5T). It is clear that under these conditions the implementation of a real ESOP
is next to impossible and, at any rate, may end up suicidal.
The rigidity of the legal regulation is compounded by the general and structural problem that
Slovak courts (in contrast to, e.g. German or Austrian courts) are not able to even attempt to
bridge the gap to the needs of the business: not only do they not contribute to a
modernisation of company law but are, in most cases, more conservative and formalistic
than the legal regulation itself. Moreover, court disputes in Slovakia (including all types of
shareholders' disputes) are lengthy and difficult to predict.
A good illustration of this, both on the legislator's and judiciary's part, is the case of SHAs:
in joint-stock companies all agreements between shareholders concerning the exercise of
their voting rights were explicitly deemed as null and void by the Commercial Code until
2002(!). Although the ban was lifted (as part of a slight facelift of the Slovak company law
prior to accession of Slovakia to EU in 2004), many judges still treat SHAs as something
implicitly suspicious and detrimental. Enforcing rights from SHAs before Slovak courts can
therefore become a nightmare.
For years, the only official line of "modernisation" discussion concerning the Slovak company
law revolved mainly around the concept of registered capital and, later on, around capital
maintenance. Needless to say, being entangled in futile (and from a practitioner's point of
view sometimes absurd) attempts to strengthen the protective function of (registered) capital,
there was little room and incentive to truly modernise the Slovak company law.
As a consequence, all entrepreneurs and VC investors considering an investment into a
Slovak start-up face the dilemma of which "coat to wear" (which legal vehicle) and no option
fits. This has been very frustrating for all solution-oriented attorneys active in VC deals. Of
course, it is possible to design creative "workarounds" and structures to circumnavigate the
constraints. However, there are no clean cut and cost-effective solutions, which feels quite
wrong vis-a-vis clients and dampens the emerging Slovak start-up market.
In an ideal world, the solution to the issues outlined above would be to rethink and revamp
the Slovak corporate law - for many reasons this is, at least at the moment, not possible.
With all this in mind, almost two years ago, Taylor Wessing Slovakia eagerly welcomed the
joint initiative of SAPIE (led by Ivan Stefunko) and the Ministry of Finance. Together with
Majerník & Miháliková, Allen & Overy, White & Case and Kinstellar, Taylor Wessing Slovakia
formed a working group with the aim to propose a legal vehicle that would reflect the needs
of both entrepreneurs and VCs. It was the start of a rather long and winding journey. The
Slovakian simple joint-stock company is the result.
JUDr. Radovan Pala, LL.M., Partner at Taylor Wessing Bratislava
T.: +421 2 5263 2804, E: [email protected]