It is generally known that from the date of the testator’s death until the date on which the inheritance decision becomes final pursuant to Section 203(1) of Act No. 161/2015 Coll. the Civil Non-Contentious Procedure Code (hereinafter “CMP”) may elapse a long period of time, often lasting several months or even years. During this period, the question arises as to which person or persons will inherit the business share in the limited liability company, as well as questions regarding the resulting consequences for the rights and obligations of a partner in a business entity, arising also from Act No. 315/2016 Coll. on the Register of Public Sector Partners and on Amendments to Certain Acts (hereinafter also referred to as “Act No. 315/2016 Coll.”) —specifically during the period from the testator’s death until such time as these matters are definitively resolved in a resolution on the estate.
Pursuant to Section 114 of Act No. 513/1991 Coll., the Commercial Code (hereinafter also referred to as the “Commercial Code”), a business share represents the rights and obligations of a partner and the corresponding interest in the company. Ownership of a business share entails not only the right to a property interest in the company, but also other rights of a partner, such as the right to participate in the exercise of the powers of the general meeting, the right to request information from the managing directors regarding company matters, the right to inspect company documents, etc. A business share thus entails both property rights and rights of a personal nature. Under Section 116 of the Commercial Code, a business share is inheritable. The articles of association may exclude the inheritance of a business share unless the company has a sole partner. An heir, unless he or she is the sole partner, may seek the termination of his or her partnership interest through the courts if it cannot be reasonably required of him or her to be a partner; the provisions of Section 113(5) and (6) of the Commercial Code apply mutatis mutandis. In the case of the inheritance of a business share, it passes to the heir in the same manner as the testator’s other assets, namely upon the testator’s death.
The heir to a business share in intestate succession may only be a natural person, and in testamentary succession, a natural person, a legal entity, or the state (in accordance with Section 21 of the Civil Code).
In the event of the death of a partner in a limited liability company, there is no grounds for dissolving the company, as the business share passes ex lege to his or her legal successor. A business share will not be inherited if the inheritance of the business share is expressly excluded by the articles of association. In the case of a single-member business entity, the exception excluding the inheritance of a business share does not apply. In accordance with the Constitution of the Slovak Republic, the inheritance of a business share is therefore also guaranteed. The heir to a business share inherits it as a whole and may either accept or reject it. If there is only one heir to the business share, they take the place of the deceased partner and assume all of their rights and obligations. If there are multiple heirs and they cannot agree on who will inherit the business share, the business share is inherited by all of them. A so-called joint business share is created, in which the co-owners act as a single owner in relation to the company and exercise the rights and obligations associated with the share through a joint representative. Pursuant to Section 114(3) of the Commercial Code, cit.: “A single business share may belong to multiple persons. These persons may exercise their rights arising from this business share only through a common representative and are jointly and severally liable for the payment of the capital contribution. If a single business share is owned by multiple persons, the Commercial Register shall record the amount of the capital contribution to which this business share relates, the extent of its payment, as well as information regarding the joint representative and the individual persons to whom the business share belongs, namely, in the case of legal entities, the business name or title and registered office, and in the case of natural persons, the first name, last name, and place of residence.”
Pursuant to Section 117 of the Commercial Code, a business share may be divided upon its transfer to an heir, but only with the consent of the general meeting. If the general meeting’s consent to the division of the business share is not obtained by the end of the probate proceedings, the rights and obligations of the partner regarding the inherited business share will be exercised by multiple heirs pursuant to the aforementioned Section 114(3) of the Commercial Code, where a single business share belongs to multiple persons.
If the articles of association exclude the inheritance of a business share, the business share of the deceased partner becomes vacant, and the heir is entitled to a settlement share pursuant to Section 150 of the Commercial Code. “The settlement share is calculated as the ratio of the paid-in capital of the partner whose participation in the company has ceased to the paid-in capital of all partners, unless the articles of association provide otherwise.” In addition to excluding the inheritance of a business share, the articles of association may also stipulate that certain business shares are ineligible for inheritance, while others are eligible. An agreement under which, in view of the subject matter of the inheritance, the inheritance of a business share by an heir who, for example, is not of legal age at the time of the testator’s death would be excluded, would certainly be possible.
In probate proceedings concerning a business share representing more than half of the total share in the company, the institution of an estate administrator under Section 179 of the CMP shall be utilized. Pursuant to Section 179 of the CMP: “If necessary, the court shall, even without a motion, take urgent measures, in particular secure the estate, conduct an on-site inventory, entrust personal belongings to the testator’s spouse or another household member, arrange for the sale of items that cannot be stored without risk of damage or disproportionate costs, or appoint an estate administrator or administrator of a portion of the estate.” The administrator shall be one of the heirs or a close relative of the decedent. Only a person who consents to the appointment may be appointed as administrator. According to Section 184(1) of the CMP: “The estate administrator shall perform the acts necessary to preserve the assets belonging to the estate, within the scope defined by the court.”
Beneficial owner based on partner status
In the case of the inheritance of a business share where the beneficial owner has been identified, complying with the obligation to register a change in the identity of the beneficial owner of a public-sector partner can be quite challenging.
It is indisputable and evident that the testator, as a deceased partner, is no longer the beneficial owner pursuant to Section 6a(2) of Act No. 297/2008 Coll. on the Prevention of Money Laundering and the Financing of Terrorism and on Amendments to Certain Acts (hereinafter also referred to as the “AML Act”) from the moment of his death. The authorized person is therefore required to reflect this fact and remove the deceased partner, who is identified as the beneficial owner of the public sector partner, from the register of public sector partners.
However, in light of the above, it is unclear which person should be registered as the beneficial owner in place of the deceased partner.
In this case, it is necessary to assess what impact the death of the testator—who was also identified as the beneficial owner of a limited liability company and whose status as the beneficial owner of a public sector partner also arose from ownership of a business share (as a partner) with the associated rights and obligations of a partner, and the impact of the transfer of the business share to the heir on the identification of the ultimate beneficial owner.
Before the actual assessment, we would like to outline the basic legal obligations of the public sector partner and the authorized person. Pursuant to Section 9(1) and (2) of Act No. 315/2016 Coll., as follows: “(1) If there is a change in the data recorded in the register concerning the beneficial owner, the public sector partner is required to immediately inform the authorized person entered in the register of this fact, and this authorized person is required to notify the registering authority within 60 days from the date the change occurred, and to attach a verification document to the application for registration. (2) If the authorized person entered in the register becomes aware of a change in the data entered in the register pursuant to paragraph 1, they are required to immediately inform the public sector partner thereof.”
Pursuant to Section 11(10) of Act No. 315/2016 Coll., as follows: “(10) The ultimate beneficial owner is required, within 15 days of learning that he has become the ultimate beneficial owner of a public sector partner, notify the public sector partner that he has become its ultimate beneficiary, and also deliver the notification to the authorized person listed in the register. The notification under the preceding sentence shall not affect the obligations of the public sector partner and the authorized person under paragraphs 1 through 9 and § 9.”
Following the death of the public sector partner’s ultimate beneficial owner, the public sector partner is primarily obligated to immediately inform the authorized person of the death of the ultimate beneficial owner, as, pursuant to Section 9(1) of Act No. 315/2016 Coll., there has been a change in the data recorded in the register of public sector partners concerning the ultimate beneficial owner. The authorized person is subsequently required to report this information to the registering authority within 60 days of the date on which the change occurred and to attach a verification document to the application for registration. At the same time, the new beneficial owner is required to notify the public sector partner within 15 days of learning that they have become the public sector partner’s beneficial owner. A potential heir to a business share would thus be considered, provided that they are aware of this fact, but only if they met the defining characteristics of a beneficial owner of a public sector partner prior to acquiring the business share through inheritance. This is often a problem in practice, as compliance with these deadlines and obtaining knowledge of the status of the ultimate beneficial owner—taking into account the conclusion of the probate proceedings and the definitive determination of the ultimate beneficial owner—cannot be expected in such a short period of time.
The cited provisions and obligations under Act No. 315/2016 Coll. should be illustrated with a specific example and the question considered as to which person may be identified as the ultimate beneficial owner if the probate proceedings have not yet been concluded and the business share is not yet owned by the potential heir to the business share.
The documents and records submitted by the public sector partner to the authorized person indicate that the public sector partner, as a limited liability company, has a sole shareholder who, as the sole shareholder, owns a 100% business share, he alone decides on the dismissal and appointment of managing directors, and he is entitled to the entire profit of the public sector partner. This shareholder has died, and the probate proceedings have not yet been concluded.
According to Section 6a of the AML Act, “the beneficial owner is any natural person who actually controls or exercises control over a legal entity and any natural person for whose benefit the legal entity conducts its business or trade; beneficial owners include, in particular, a natural person who:
a) in the case of a legal entity that is neither an asset pool nor an issuer of securities admitted to trading on a regulated market subject to disclosure requirements under a special regulation, equivalent legislation of a Member State of the European Union or another state that is a party to the Agreement on the European Economic Area (hereinafter referred to as a “Member State”) or equivalent international standards, a natural person who
1. holds a direct or indirect share, or a combination thereof, of at least 25% of the voting rights in the PVS or of the share capital,
2. has the right to appoint, otherwise designate, or dismiss the statutory body, management body, supervisory body, or audit body of PVS or any of their members,
3. controls PVS in a manner other than that specified in the first and second points,
4. has the right to at least 25% of the economic benefits from the business operations of the public sector entity or from any other activity thereof.”
In this case, following the death of the ultimate beneficial owner of a public sector partner, the authorized person proceeds by verifying whether there are individuals who meet the definitional criteria for identifying another person as the ultimate beneficial owner of the public sector partner. Several categories of natural persons may thus be considered. In the event that a natural person — the administrator of the estate and thus also of the business share of the sole deceased partner—actually controls and manages the public sector partner and thereby meets the definitional criteria for such designation, they are therefore identified as the beneficial owner of the public sector partner. It is a matter of debate, and depends precisely on the individual assessment of each public sector partner, whether the acts performed by the estate administrator within the scope of his or her statutory authority—and whose scope is thus limited by law (and the court)— can be subsumed and understood as actual control and supervision of the legal entity. In the event that another person, such as a potential heir or multiple heirs, actually controls and exercises control over the public sector partner, it is they who may be identified as the beneficial owners of the public sector partner, even if they have not yet legally inherited the business share and are only potential owners of a joint business share (each of the co-owners of the joint business share participates in the exercise of the rights and obligations to which they are entitled based on the size of their share in the company, and this exercise of rights and obligations is carried out through a joint representative whom they themselves choose). In this case, the actions of these persons can be understood as acting in concert, and each of these persons may be identified as the ultimate beneficial owner of the public sector partner, since these persons act through an elected joint representative or through an estate administrator. The conclusion of the individual assessment of the public sector partner may be the identification of the ultimate beneficial owner, consisting of the fact that the ultimate beneficial owner is both the estate administrator and the aforementioned potential heirs of the deceased partner. In practice, however, it may also happen that, until the conclusion of the probate proceedings, no person meets the definitional criteria for determining the ultimate beneficial owner; in which case the procedure under Section 6a(2) of the AML Act applies, and thus the members of the public sector partner’s senior management will be considered the beneficial owners; A member of senior management is considered to be a statutory body or a member of a statutory body. In that case, the authorized person shall register the members of the statutory body of the public sector partner as beneficial owners.
But what if the shareholder and the managing director of a limited liability company were the same person, and following that person’s death, there is neither a shareholder nor a managing director in the company for a certain period of time?
In this case, it is necessary to consider the aforementioned institution of the estate administrator, which undoubtedly plays an indisputable role precisely in fulfilling the legal obligations of a business entity, including those arising from Act No. 315/2016 Coll. An estate administrator may be appointed, for example, from among the heirs, from among persons close to the testator, or a notary, provided that the notary is not acting as a court commissioner in these proceedings. The estate administrator must have experience in business management and must consent to the appointment as administrator. If a notary has already been appointed by the court to administer the decedent’s estate, it is advisable to submit a request for the appointment of an estate administrator to the notary. However, if a notary has not yet been appointed, it is possible to request that the court issue a ruling appointing an administrator for part of the estate and defining the scope of their duties, including the obligation to notify the public sector partner of a change in the identity of the ultimate beneficiary.
This is also confirmed by established case law, as per R 80/2002 (Czech Republic) (Collection of Decisions of the Supreme Court of the Czech Republic) “If the testator is the sole shareholder and sole managing director of a limited liability company, the public interest and the interest of the testator’s heirs require that an administrator of the portion of the estate—the testator’s business share in the limited liability company—be appointed. The administrator of the testator’s business share in the limited liability company performs, for the duration of the probate proceedings, the necessary acts related to the testator’s business share in this company; in particular, he or she exercises the rights and fulfills the obligations arising from the testator’s participation in this business entity.”
