The “new” Civil Code, which entered into force more than two years ago, has made it possible for businesses to shape, in their own image, the regulations governing their organisation and operation. This opportunity has certainly captured the imagination of legal practitioners. All sorts of extreme ideas were mooted. For example it was suggested that a limited liability company (Kft.) could issue shares or other securities embodying members’ rights. The company courts soon put a dampener on things, however, creating the category of “status rules”: no matter how flexible the law, it still isn’t possible to depart from the rules that constitute the defining features of a particular form of business entity.
Since then, the question of what does or doesn’t constitute a status rule, that is, which rules can or can’t be changed in the company’s by-laws, depends on how the law is applied in practice. In this roundup we give a brief taste of the current situation in this regard, highlighting some cases in which the company court tolerates a departure from the rules, and others in which it does not permit any change. When selecting the cases, we have concentrated on issues that could have relevance in the course of a company acquisition or a capital injection.
1 Investment committees and management boards get the green light
Although the Civil Code clearly permits companies to create “other corporate bodies” in addition to those regulated by the law, for a long time it wasn’t clear whether, once the members had created such a body, it could actually make decisions on matters that would otherwise come under the authority of a regulated body (such as the general meeting or board of executive officers). In practice, the company courts have shown a positive and flexible attitude to this question. At a company affected by a capital investment, for example, an investment or owners’ committee can be created which, wedged in between the company’s supreme governing body and management board, can improve the flexibility of decision-making within the company.
An even greater dilemma was whether a board of managers, modelled on that of a joint-stock company, can be set up within the corporate structure of a Kft., a type of company that is traditionally run by executive directors acting independently. In such cases, decisions on behalf of the Kft. would no longer be made by individual directors, but by the committee. Such a setup could be particularly useful, for example, as a means of providing reassurance for investors from the English-speaking countries. The company courts seem to be flexible regarding this matter too, and Kfts have now been registered at several company courts, in several counties, that are governed not by independent managing directors but by some kind of executive body.
2 Shareholdings: small is beautiful?
In the past, investors’ nerves were tested by two restrictions, relating to their shareholdings, that were hard to swallow from a business perspective. Under the previous law, all business quotas of a kft. had to be divisible by HUF 10,000, and the nominal value of an individual business quota could not be less than HUF 100,000. These inflexible rules often made it necessary to put up with convoluted legal solutions, or simply compelled companies to set up a closely held joint-stock company (Zrt.) instead of a Kft., contrary to their business intentions.
The new Civil Code has simply abolished the requirement that a business quota be divisible by HUF 10,000. The HUF 100,000 minimum amount, however, has remained. And the company courts seem to be divided on whether it’s possible to depart from this limit. There are some company registrars who insist that the HUF 100,000 minimum value of business quotas is a defining characteristic of a Kft., and therefore members may not depart from this in their articles of association. Others take the view that a substantial departure from the HUF 100,000 minimum amount (e.g. a business quota with a nominal value of HUF 500) is unacceptable, but there is no legal obstacle to, for example, a HUF 90,000 stake. In the case of this latter position, of course, the question arises of where to draw the line, and why precisely there.
The practice relating to the rules on the dividing up of business quotas is more encouraging, however. If a member wants to sell only a part of its quota, it is required to divide up its stake prior to the sale, and it is the members’ meeting that has the authority to make the decision in this regard. Company court practice appears to accept it when the parties overwrite this impractical rule and stipulate, in their articles of association, that the decision of the member concerned is sufficient for the subdivision of its business quota, and the approval of the members’ meeting is not required.
3 Capital requirements: not what they seem
Although the new Civil Code has not altered the minimum amount of registered capita requirements and equity capital, it nevertheless makes numerous concessions with regard to how long, and in what extent, the owners need to place the capital at the company’s disposal. The general rule has now become that the company is allowed to operate even if the members have not yet placed all of the minimum subscribed capital at the company’s disposal – with the proviso that this will limit the extent of dividend that can be paid out by the company.
The law does, however, retain the restrictions relating to capital payments. For example, the shareholders of a Zrt. are required to pay in at least 25% of the cash contribution undertaken when founding the company. While the 25% minimum amount itself is a creditor protection rule, and as such, is set in stone, the question has arisen of whether a procedure under which the shareholders fulfil the 25% requirement not necessarily individually, but overall as a group, could be seen as a correct interpretation of the law. The company court proceeding in the case in question responded positively to this request too. Contrary to the conservative view that generally prevails among lawyers, the court permitted this procedure for fulfilment of the equity capital requirement, and registered the company without any problems.
The moral of the story: it’s worth a try
The examples given above also demonstrate that the concept of the new Civil Code of giving free rein to the imagination of the company’s members and lawyers clearly works. Although there continue to be limits on this flexibility, it appears to be worth trying to incorporate unorthodox legal stipulations and institutions into the legal frameworks governing the operation of companies.