1. Power to decide on the provision of an advance on the share in profit of a joint-stock company
The Supreme Court has made it clear that the body which has the power to decide on the provision of an advance on the share in profit of a joint-stock company is the governing body. The law does not expressly entrust this competence to any of the bodies of a joint-stock company.
The Supreme Court stated that this was a residual power of the governing body, which in the case of a joint-stock company is either the Board of Directors or the Management Board. At the same time, however, the Court stated that this was not a matter falling within the rules of business management and could therefore be transferred to another body of the joint-stock company, typically the supreme body – the General Meeting. The foregoing shall apply mutatis mutandis in the case of a limited liability company.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 3330/2020 of 9 March 2022)
2. Whether or not a company has suffered damage is not decisive for the assessment of the breach of due professional care and diligence
The Supreme Court has ruled that if a certain decision of a member of the governing body was taken correctly, i.e., in the interest of the business corporation, with due care and with the necessary knowledge, it is not relevant for the assessment of a breach of due professional care and diligence whether the decision in question was advantageous or disadvantageous for the business corporation or whether it caused it harm. The duty of due professional care and diligence is not based on responsibility for the outcome of the decision, but on the specific decision-making processes of the body concerned.
The Court further held that a breach of due professional care and diligence may occur not only in relation to the actions of a member of the governing body on behalf of the business corporation externally, but also in deciding on the internal administration of the business corporation, such as the rules for convening the General Meeting.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 1831/2021 of 30 March 2022)
3. Conflict of interest when concluding an agreement between a company and its executive director
The Supreme Court ruled on a conflict of interest in the conclusion of an arbitration agreement between a company and its executive director, who had not notified the company of his intention to conclude the agreement. The Supreme Court stated that the obligation of the executive director to inform the General Meeting of the conclusion of the agreement applied to all agreements concluded between a member of an elected body of a company and that company, and that the arbitration agreement was no exception.
The Supreme Court further ruled that the executive director had not been entitled to represent the company in concluding the agreement as he had been acting in an unlawful conflict of interest. The Court also concluded that if the representative acted in conflict with the interests of the represented party, the represented party was not bound by that action unless the third party with whom the representative had been negotiating believed in good faith that the representative had authority to act. Conversely, in the case of the actions of a representative whose interests conflict with the interests of the represented party, the represented party is always bound by those actions if the third party was acting in representation in good faith.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 31 Cdo 1640/2022 of 5 October 2022)
4. Right of a shareholder to a “fair exit”
The Supreme Court has dealt with the question of the right of a shareholder to redeem his/her/its share(s). According to the Supreme Court, a shareholder may exercise this right only if it is appropriate to the specific circumstances and if it is an extreme solution (ultima ratio), i.e., in cases where it is not possible to achieve remedy using other institutes.
According to the Supreme Court, the right of the shareholder to terminate involvement in the company by way of redemption of shares by the controlling entity arises only if the following conditions are cumulatively met:
1) the company is the controlled entity;
2) the controlling entity uses its influence (exercises it);
3) the shareholder’s position is materially impaired or the shareholder’s legitimate interests are otherwise materially prejudiced;
4) there is a causal link between the controlling entity’s conduct (the use of influence) and the consequences referred to in the preceding paragraph; and
5) the shareholder concerned cannot fairly be required to remain in the controlled entity.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 1395/2020 of 31 January 2022)
5. For the revocation of the General Meeting of a limited liability company already convened, the rules for the revocation of the General Meeting of a joint-stock company apply by analogy.
Unlike the legal regulation for a joint-stock company, there is no explicit regulation of the rules for the revocation of the General Meeting of a limited liability company that has already been convened but has not yet been held. In its ruling, the Supreme Court admitted an analogous application of the regulation for the revocation of the General Meeting of a joint-stock company in the circumstances of a limited liability company.
The Supreme Court stated that the person entitled to revoke the General Meeting was its convener, but it cannot be excluded that a person other than the convener could also revoke the General Meeting. However, such a person must have the right to convene the General Meeting and, according to the Supreme Court, it will be necessary to assess in specific cases whether or not that person has a conflict of interest vis-à-vis the convener or the company itself. On the contrary, if the General Meeting is revoked by a person who is not entitled to do so, such revocation has no legal effect and the General Meeting can therefore be held. A shareholder who fails to attend the General Meeting as a result of his/her mistaken belief that the General Meeting has been revoked may then seek to have the resolutions passed at that meeting declared null and void.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 2453/2021 of 22 March 2022)
6. How serious does a breach of due professional care and diligence have to be for a member of the governing body to be expelled from the company?
The Supreme Court has held that neither a single breach nor repeated less serious breaches are sufficient to expel a member of the governing body from the company for breach of due professional care and diligence. Conversely, at least two serious breaches of due professional care and diligence are required within a three-year period. Here, too, the above applies, i.e., it is not decisive whether or not the breach causes damage to the company.
The Supreme Court further emphasised the importance of proportionality between the penalty for the breach and the breach of the obligation itself, which must represent an adequate (fair) consequence of the breach of the obligation. According to the Supreme Court, it is always necessary to carefully assess whether a member of the governing body has breached due professional care and diligence at all and, if so, whether that breach can be considered serious enough to justify his or her removal from office.
Acts committed with gross negligence and breaches of the duty of necessary loyalty, i.e., acts not in the interest of the business corporation but in the interest of oneself, persons close to oneself or other persons, should be considered as serious breaches. A breach of loyalty is normally such a gross and serious breach of duty by a member of an elected body as to justify the sanction of disqualification from office.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 1370/2021 of 31 August 2022)
7. Inactivity or absence of income of the company does not entitle the company not to comply with the obligation to file financial statements in the collection of documents
The Supreme Court was ruling on an extraordinary appeal by a limited liability company which had been dissolved with liquidation following a decision of the general courts on the grounds that it had not been filing its annual reports and financial statements in the collection of documents after repeated requests by the registry court. The company was fined and always paid the fines, but had never complied with the obligation to file its financial statements. It argued that it had not been in business for a long time and had no income, and that there were therefore no grounds for its dissolution for failure to file its financial statements in the collection of documents.
The Supreme Court, however, disagreed with that argumentation and noted that the obligation to file financial statements in the collection of documents and the related sanction of dissolution of the company with liquidation was not conditioned by the size of the company, the existence of its income or the conduct of business activities.
The Supreme Court in that ruling also admitted that it was possible to file financial statements (or annual report) in the collection of documents without certain information the disclosure of which could cause harm to the company.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 2536/2021 of 24 February 2022)
8. Exception from the obligation to lodge a protest at the General Meeting due to unexpected developments
According to the Supreme Court, if a shareholder fails to protest against a resolution at the General Meeting on the ground that he/she is surprised by its developments, the exception from the obligation to protest may be fulfilled.
According to the Supreme Court, a protest need not be filed not only if it was not objectively possible, but also if a subjective circumstance prevented the protest from being lodged. According to the Supreme Court, such a subjective circumstance may be, for example, a completely unexpected development of the General Meeting (which may last for a short period of time), which surprises the shareholder so much that he/she is unable to even lodge a protest.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 3364/2020 of 23 March 2022)
9. Enforceability of a claim for compensation for damage caused by an executive director as a precondition for the occurrence of liability
The Supreme Court has held that the liability of a member of an elected body is not conditional on the maturity (payment) of a claim for compensation for damage caused by the member, but is conditional on its enforceability.
It is not necessary for the fulfilment of the obligation of a member of an elected body to compensate the company that the claim is due and payable, but it is sufficient if the corresponding debt is enforceable. Already before the claim for compensation for damage is due, the legal regulation on statutory liability can (objectively) influence the member of the elected body in question to compensate the legal entity for the damage.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 59/2022 of 30 June 2022)
10. Suspension of voting rights of a shareholder due to violation of his/her duties as a member of an elected body
The Supreme Court has confirmed that the exercise of voting rights by a shareholder who is also a member of an elected body of the given company may be suspended for breach of his/her duties in the exercise of his/her office only if the invitation to the General Meeting at which the removal is to be decided states that the removal of the member of the elected body is to be for breach of his/her duty. The invitation must also specify the obligation that the member of the elected body has breached, and the absence of such information in the invitation shall preclude the adoption of a decision to remove the member of the elected body.
If a member were to be removed despite the failure to include the above information in the invitation to the General Meeting, this would likely be grounds for invalidating such a resolution. At the same time, however, the Supreme Court adds that the General Meeting may also decide on matters not included in the invitation, provided, however, that all the shareholders agree that the General Meeting may or should decide on the matter(s) in question.
(According to Ruling of the Supreme Court of the Czech Republic Case No. 27 Cdo 1175/2021 of 29 March 2022)
