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Radical Change in the Interpretation of the Validity of Transfers between Group Companies

The Czech Supreme Court issued a key decision concerning the transfer of assets (in this particular case real estate) owned by a company to another company within the same group. The transaction was subject to the well-known Section 196a (3) of the Czech Commercial Code under which a company in such situation may sell or acquire property with a value of at least 10% of the company's registered capital only if the value of the property (ie the purchase price) is determined by a court-sworn expert.

In the above case, the seller of the real estate duly requested the appointment of a court-sworn expert, but the purchase agreement had been concluded before the expert was appointed and the valuation report on the transferred property was prepared. However, the real estate was transferred for its market price as the expert informed the parties on the price orally before the agreement was concluded.

According to the previous case law of the Czech Supreme Court, the transaction would be absolutely invalid (ie it was not legally binding from the very beginning) because the expert report had not been prepared before the agreement on transfer of assets was concluded.

The Supreme Court has now ruled that it is not appropriate to declare the absolute invalidity of the concluded agreement in a situation where both parties formally failed to meet all of the requirements stipulated by the relevant section of the Czech Commercial Code but the purpose of the provision (ie to protect the company against damage caused by transferring its property to a third party for an inadequate price) was achieved as the real estate was transferred for a market price, which was later confirmed by an expert report.

It might appear that the new decision allows for ignoring the obligation to prepare a court-sworn expert valuation report as long as it is later confirmed that the property was transferred for a market price. However, we note that the validity of agreements on the transfer of assets subject to Section 196(3) of the Czech Commercial Code concluded without an expert report may still be challenged, eg in insolvency proceedings against the seller as in the case decided by the Supreme Court.

The only way of reducing the risk is to meet all of the conditions stipulated by the Czech Commercial Code, ie predominantly to arrange for a court-sworn expert report in time.

As the opinions of individual court-sworn experts on the value of property may differ significantly and a situation may occur when an expert report cannot be prepared at a later date (eg due to the lack of documentation), companies that have in the past conducted intra-group transactions without an expert report should arrange for the preparation thereof as soon as possible. If the report confirms that the price for which the property was transferred was the market price (common at the relevant place and time), the risk of the concluded agreement on transfer of assets being invalid will be substantially reduced.

Reflecting the above facts, we recommend preparing a court-sworn expert report for previous property transfers subject to the rules of Section 196a (3) of the Czech Commercial Code if such agreements were concluded without an expert report.

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