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Securities and their types

A security embodies certain rights that are associated with it (incorporated into it) in such a way that they cannot be exercised or transferred without it. The types of securities are regulated by several legal regulations (e.g. the Civil Code, the Bill of Exchange and Cheque Act, the Bonds Act), but since there is no longer a closed list of securities (numerus clausus), an innominate (unnamed) security, for example a certificate, can also be issued. However, it must meet the conditions of Section 515 of Act No. 89/2012 Sb., Civil Code. Individual kinds (sometimes also referred to as types) include, for example:

  • Shares (Section 256 of Act No. 90/2012 Sb., on business corporations)
  • Bonds (Act No. 190/2004 Sb., on bonds)
  • Subscription warrants (Section 295 of the Business Corporations Act)
  • Bills and cheques (Act No. 191/1950 Sb., on bills of exchange and cheques)
  • Bills of lading and warehouse receipts (Section 2417 and Section 2572 et seq. of the Civil Code)

Types of securities

The law distinguishes several forms of securities, namely a security to bearer, a security to order and registered security (Section 518 of the Civil Code). The form determines who is the owner of the security and how the security can be transferred. Securities to:

  • Bearer do not contain the name of the beneficiary and are freely transferable upon their delivery, so they can be easily traded. The owner of the security is deemed to be the owner of the instrument.
  • Order and registered securities, in contrast, contain the name of the beneficiary and are transferable by oral agreement, endorsement or delivery unless specified otherwise.

Form of securities

A security is represented either by a deed or a record in the register, also referred to as a book-entry security. Certificated securities thus actually exist in paper form and include, for example, bills, cheques, share certificates or bonds. Whereas book-entry securities are kept only in electronic form with the Central Securities Depository (except for collective investment securities if they are kept in a separate register and book-entry securities kept in the register of the Czech National Bank). They can only be transferred by changing the record in the register (Section 525 et seq. of the Civil Code). Unlike a certificated security, a book-entry security is an intangible thing.

Conversion from certificated to book-entry securities

The procedure for converting certificated securities to book-entry securities is as follows (Sections 529 to 535 of the Civil Code):

  1. The company’s general meeting (“GM”) decides on the conversion of certificated securities to book-entry securities; such a decision is usually a decision to amend the company’s articles of association and therefore must be approved by a 2/3 majority of the shareholders present and must be certified by a notarial deed.
  2. The decision of the GM is then published in the Commercial Journal and on the company’s website without undue delay, including the time limit for shareholders to deliver their shares to the issuer (joint-stock company).
  3. The time limit for the delivery may not be shorter than two months nor longer than six months from the publication of the GM’s decision in the Commercial Journal.
  4. When delivering a security in certificated form, the shareholder specifies to the company the number of the property account in the register for the registration of the book-entry security (if the shareholder fails to do so, the company will invite him to provide the information and provide him with an additional time limit of least two months).
  5. The company then submits an application for the registration of the securities to the Central Securities Depository.
  6. At the same time, the change in the form of the shares is registered in the Commercial Register.

The entire conversion process may ideally take only a few weeks.

Issuance and issue of securities

In order for a security to be created, it must first be issued. The person issuing the security, i.e. the issuer, is a person authorised by law, depending on the kind of security (i.e. whether it is shares, bonds, etc.). In accordance with the law, the date of issuance is the date on which the security “meets the requirements provided by a statute or another legal regulation and on which it becomes the property of the initial acquirer in the manner prescribed” (Section 520 of the Civil Code). The requirements for specific kinds of securities are contained in specific legal regulations relating to the given kind of security. Therefore, if the security meets all the requirements, it is duly issued, even if the procedure for its issuance has not been followed or the security has not become the property of the first acquirer, provided only that the acquirers of the security are in good faith that it has been duly issued. A book-entry security is issued by registration in the Central Securities Depository.

The date of issue means the date “on which securities may be issued to the initial acquirer” (Section 519 of the Civil Code). In the case of innominate securities, the date of issue is generally not required. Terms of issue are general terms and conditions regulating “the rights and obligations of the issuer and owners of the securities” together with other details of the issue, such as the parameters of the issue (Section 519(2) of the Civil Code). In practice, however, this concept is almost meaningless, but it can be used to infer, for example, the point in time from which a security can be issued.

What situations do we typically handle for our clients regarding securities?

  • Determination of the suitability of the “type” of securities for my purposes (shares, bonds, bills, cheques)
  • Types and forms of securities
  • Conversion from certificated to book-entry securities
  • How to issue a bill to make it “safe”
  • Dealing with securities with regard to tax efficiency
  • Issuance/issue of securities – shares, bonds, bills and cheques
  • Suitability of issuing registered securities
  • Authentication of cheques
  • Securities transfer agreements and procurement contracts
  • Securities custody and administration contracts
  • Pledging securities
  • Taxation of gains on securities