Converting an s.r.o. into a joint-stock company: the project, approval and registration under the Transformations Act

Companies usually convert an s.r.o. into a joint-stock company at a particular stage of growth: an investor arrives who wants shares, the company is preparing an issue or an employee share scheme, or the circle of owners is widening and with it the need for a board of directors and a supervisory board. Since March 2024, this step has been governed by Act No. 309/2023 Coll. on transformations of companies and cooperatives. It defines a change of legal form as follows:

A change of legal form is a procedure by which a company changes its legal form without being dissolved or liquidated.

— Section 2(14) of Act No. 309/2023 Coll. (unofficial English translation)

On the effective date of the change the company does not cease to exist; it exists in the new form (Section 5(5)). Unlike the formation of a new joint-stock company, there is therefore no need to transfer assets or contracts.

When a change is permissible

An s.r.o. may change its legal form to a joint-stock company, a simple joint-stock company or a cooperative (Section 105(3)). A change is not permissible if the company is in liquidation, if the effects of bankruptcy apply to it and the trustee does not consent to the change, if restructuring is under way and the confirmed restructuring plan does not envisage the change, or if the court is conducting proceedings for the company’s dissolution (Section 3(6)). The managing directors must refrain from the change if it is impermissible, and they are jointly and severally liable for damage caused to the company and its members by breaching their duties in preparing it (Sections 6(1) and (2)).

The change-of-legal-form project and the articles of association

The basis is the draft project, which is prepared by the managing directors (Sections 106(1) and (2)). It contains the existing and the new business name, the shares of the individual members after the change together with their type, class, form, nominal value and number, and the members of the board of directors and of the supervisory board (Section 106(3)). The project need not name the members of the board of directors if they are elected by the supervisory board under the articles of association. How interests become shares is examined in our answer on from an ownership interest to shares.

The draft articles of association of the company after the change form an annex to the project (Section 106(4)). This is where the change of form meets formation: the articles must satisfy everything the Commercial Code requires of any joint-stock company. They must contain the mandatory particulars (Section 173(1)), the share capital must be at least EUR 25,000 (Section 162(3)) and the bodies must comply with the Act. Only a natural person may be a member of the board of directors (Section 194(2)), and the supervisory board must have at least three members, likewise only natural persons (Sections 200(1) and (4)). If the s.r.o. has lower capital, see our answer on share capital when converting an s.r.o. into an a.s.. What belongs in the articles and what is better placed in a shareholders’ agreement is explained in our answer on the founding agreement, the articles and a shareholders’ agreement.

The managing directors’ report and the supervisory board’s opinion

The members do not decide on the wording of the project alone. The Act requires an explanation from the management:

Where a simple joint-stock company, a joint-stock company or a limited liability company changes its legal form, the company’s statutory body is obliged to draw up a written report explaining and justifying the change of legal form from a legal and an economic point of view.

— Section 107(1) of Act No. 309/2023 Coll. (unofficial English translation)

The report must be available for inspection by the members at the registered office at least 30 days before approval, unless the memorandum of association provides otherwise (Section 107(2)). If the s.r.o. has a supervisory board, it reviews the report and submits its opinion to the members (Section 108). Where the vote is contentious, the report may be one of the materials used in assessing whether the managing directors acted with due care.

Approval

The project is approved by the general meeting by a two-thirds majority of the votes of all members, unless the memorandum of association requires a stricter criterion (Section 109(1)). The minutes must bear the officially certified signature of the chair of the general meeting (Section 127a(3) in conjunction with Section 125(1)(i) of the Commercial Code). A member who was outvoted may, if the statutory conditions are met, request the purchase of their shares after registration. With the consent of the members concerned, the project may also provide that their participation ends as at the effective date in return for a settlement share (Section 110). The details are examined in our answer on converting an s.r.o. into an a.s. where a member objects. An approved project may still be cancelled up until the application for registration is filed, the rules on cancelling a transformation project applying mutatis mutandis (Sections 106(5) and 14).

Registration and what follows

A change of legal form takes effect on entry in the Commercial Register (Section 4(1)). The special protection of creditors, with a notice and a call in the Commercial Bulletin, applies only where the company after the change creates no share capital or creates less than before (Section 111(1)). If the joint-stock company’s capital is not lower than that of the original s.r.o., no such duty arises. After registration the board of directors takes over management and issues the shares or arranges registration of the issue and delivery of the shareholder list to the central securities depository.

A change of form or a new joint-stock company

The alternative is to form a new joint-stock company and transfer the business to it. A new company starts with a clean history, but its founding agreement goes to a notary: the general rule offering two forms (Section 57(1) of the Commercial Code) yields to other provisions, and those remain in place for an a.s. — both Section 172(2) and Section 171(3) presuppose a notarial deed. The analysis is set out in our answer on the founding agreement of an a.s. under the new rules. Moving the business out of the original s.r.o. is, however, a separate transaction involving contracts, counterparties’ consents and tax consequences. A change of form preserves the continuity that matters to banks, public contracting authorities and long-standing partners, at the price of a more formal process with a project, a report and a vote.

We will compare both routes at the initial consultation. We prepare the transformation of an existing company under our conversion of an s.r.o. into an a.s. service, and a new company under forming an a.s. in Slovakia.