A NEW PLAYER IN TOWN: SLOVAKIA INTRODUCES A MODERN COMPANY FORM

Amid a general EU-wide trend in championing initiatives intended to support startups and growth in small and medium enterprises, a new company form, the simple joint stock company (“SJSC”), was introduced into the Slovak company legal regime effective as of January 1, 2017. A welcomed introduction to Slovakia’s otherwise comparatively rigid company law, the new company form aims to provide a structure suitable for facilitating modern investment and operations. 

Until the start of 2017, aspiring business owners had little choice in realistically choosing a suitable Slovak business organization, typically choosing between a limited liability company or (traditional) joint stock company. However, each of these company forms can be characterized as having rather onerous capital requirements, inflexible share ownership, and arduous corporate governance requirements. To establish the operational framework international investors, joint venture partners, or sophisticated owners are accustomed to, companies have been compelled to utilize lawyer workarounds, including foreign holding structuring and other ad-hoc adjustments, which do not always offer a cure-all and can simply increase complexity. The SJSC is hoped to offer a solution to many of these problems.  

The SJSC contains key characteristics conducive for investment. Shareholder liability is limited to the shareholder’s investment and the SJSC’s liability is limited to the amount of its assets. The SJSC may be established by 1 or more natural or legal persons. SJSC corporate governance rules require two mandatory bodies: the shareholders meeting and board of directors (consisting of the appointment of at least 1 executive). A supervisory board may also be established but it is not mandatory. 

Stepping closer to jurisdictions favorably viewed for company flexibility and SPV establishment, the SJSC minimum capital requirement is a mere EUR 1. The SJSC’s registered capital is divided into shares which may have a nominal value in Euro(s), Eurocents, or any combination thereof. The SJSC may only issue book-entry shares which must be registered with the Slovak central securities depository. Shares may be ordinary or preferential. Preferential rights may include (i) the right to a different profit share, (ii) more, less, or no voting rights, and/or (iii) special information rights, and any such rights must be specified in the SJSC’s bylaws.

Also, for the first time under the Slovak legal regime, provisions typically contained in shareholders’ agreements are expressly incorporated into law. Tag-along, drag-along, and shoot-out deadlock provisions are expressly recognized with regard to the new SJSC form. Overall, the combination of substantial equity holding flexibility and express recognition of shareholders’ agreement provisions offer the greatest likelihood for startups to actually receive equity funding.  

The SJSC may only convert itself into a (traditional) joint stock company. The SJSC may merge with a joint stock company as long as the joint stock company is the successor. Notably however, the SJSC cannot publicly offer a subscription of its shares or go public without prior conversion into a joint stock company.

The new SJSC form contains basic characteristics required for facilitating startup investments. The SJSC has minimal capital requirements, offers flexibility in establishing the company’s bodies, enables diversified equity holdings, and expressly recognizes shareholder relationship rights. Consequently, the SJSC appears better positioned to avail itself of wider and more diversified funding possibilities compared to its peer company forms. Altogether, the SJSC may offer the greatest chance of Slovak company vehicles to qualify for receiving foreign private equity, venture capital, or growth equity funds based on fund investment strategy or placement requirements.

Nevertheless, the SJSC form is new and Slovak courts do not have a long-standing track record of adjudicating complex corporate or equity disputes. Also, many new and young prospective business owners are only beginning to understand the terms and potential benefits the SJSC may offer. While there is optimism about the SJSC, it is currently unclear whether the SJSC will be commonly utilized in bespoke structuring arrangements often effective in assisting new companies receive and retain capital, including lawyer equity and rate deferral arrangements where permissible. It remains to be seen whether the SJSC will prove a popular company vehicle and help enable companies procure funding as intended.  

©2017 by the American Bar Association.  Reprinted with permission.  All rights reserved.  This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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