If a company needs fast operational or project financing, there are several ways to go about it. External resources are often difficult to access. A company, especially at the beginning of its business life, may not have sufficient assets to provide banks with adequate collateral. Modern corporate law thus assists us in this case with the institute of additional contribution outside the share capital.

The concept of additional contribution

A matter of rather theoretical interest is that the legislative abbreviation for the additional contribution, introduced in Section 139(2) of Act No. 90/2012 Coll., on Business Corporations and Cooperatives (hereinafter also “TCA”), is inaccurate. It only covers the obligation of additional contribution, which does not correspond to the definition of surcharge in article 162 et seq. of the TCA. Bohumil Havel, one of the authors of the commentary to the TCA, points out that the content of the additional contribution is not only an obligation, but also a right defined by the concept of voluntary additional contribution.

Voluntary and compulsory additional contribution

Sections 162 and 163 TCA introduce both a voluntary and a mandatory additional contribution outside the share capital. This means, in principle, that the additional contribution is either provided for in the articles of association, which bind the shareholder to it, or there is no such provision in the articles of association and any “contribution” to the operation of the company is based purely on the shareholder’s initiative. An additional contribution outside the share capital is beneficial to the company for several reasons. The primary objective is, of course, to strengthen equity without taking on additional debt from external financing. At the same time, there is no legal obligation to return the additional contribution and the shareholder’s position in corporate governance does not change. The process is also cheaper, simpler and faster compared to a capital increase.

A simple majority of the votes of the shareholders present at the general meeting will be sufficient to impose the specific obligation of additional contribution provided for in the articles of association. At the same time, it should be added that in the case of a partner paying a voluntary additional contribution, it cannot be counted on to fulfil the obligation of additional contribution provided for in the articles of association. As is evident from the wording of the Act, these are separate concepts of corporate law. In practice, however, the use of the obligation of additional contribution is rather rare and voluntary contributions prevail.

To what or to whom is the additional contribution linked?

The essential question of the nature of the additional contribution is, of course, its attachment. Doctrinal disputes in the past have addressed whether the additional contribution is linked to the share or to the person of the shareholder, who provided the additional contribution to the company.

In fact, attachment to a person would imply that the eventual sale of the share would leave the additional contribution “alone” at the disposal of the company. In the absence of a claim for repayment, conflicts would certainly arise between the shareholders and the company. Practical interpretation thus agrees that the additional contribution is linked exclusively to the share. In the event of its sale, the value of the additional contribution is therefore included in the purchase price of the share. Thus, once the transfer of ownership of the share has taken effect, the company must, if such a situation arises, pay the amount corresponding to the share of the additional contribution granted to the new acquirer of the share, not to the seller as the person who granted the premium to the company.

An interesting situation arises when the transferor of a share has assumed the obligation to provide a voluntary additional contribution under article 163 of the TCA but has not yet provided it. In such a case, the obligation to transfer the additional contribution remains with the transferor, but the subsequent return of the additional contribution will go to the transferee.

Transfer of part of the share

In the event of a division of the share, to which the additional contribution is linked, and the transfer of part of it to a new shareholder, the question arises as to what happens with the surcharge. Although the legislator does not provide us with an unambiguous answer in the statutory wording, it can be inferred from the above that in the case of a transfer of part of the share after the division, the additional contribution is divided proportionally between the individual shareholders concerned (it is linked to the share and divided with it).

In this context, a non-monetary voluntary additional contribution (e.g. real estate or a plant) could be problematic. In the case of a division of a share, to which such an additional contribution is attached, a rather complicated situation arises, where one indivisible thing as an additional contribution is included in different shares. It is at just such a moment that the pragmatism, perhaps unintended, of the legislators, who explicitly ruled out the right to a refund of the additional contribution, becomes apparent. Thus, the Company will only decide on the repayment through the general meeting and it can be assumed that in the case of non-cash additional contributions, it will not repay them in indivisible parts. At the same time, the practice has settled through interpretation on the valuation of the additional contribution by an expert before it is granted, in a manner similar to the valuation of a deposit under section 143 of the TCA. In the event that the General Meeting decides to return the non-cash additional contribution, other items may also be returned, primarily money corresponding to the value stated in the expert’s report. However, it cannot be ruled out that this issue is open to further, different, interpretation and amendment of the law in the future. Finally, in the context of the above, we consider it important to draw attention to the commentary literature on the TCA, which states that if the contract, by which an additional contribution was granted, whether mandatory or voluntary, stipulated an obligation for the company to repay the surcharge, it would not be a surcharge contract, but the bond would generally have to be assessed as a loan or credit. This is relevant, for example, in insolvency proceedings.

Conclusion

If you want to improve cash flow quickly and finance your company’s operations without increasing debt, a contribution outside the share capital is the ideal instrument. Especially in the case of a voluntary additional contribution, this is a really simple process.

This does not mean, of course, that the issue of additional contribution does not offer room for controversy and is merely a reflection of the genius of domestic legislators. For example, the return of an additional contribution linked to a previously divided share is not clearly addressed in the law and perhaps only future case law will provide us with clear answers.

This article was originally published at www.epravo.cz.

Author: David Fabián, Adam Simota