UK: Major Legislative Changes In The Czech Republic – Why Investors Must Act

Last Updated: 21 June 2013
Article by Thomas Rechberger

Changes to the corporations / companies regulations: Part 2

In the course of our newsletter series about the most important changes within the recodification of Czech private law, this newsletter will focus on changes in connection with members of statutory bodies (managing directors / board of directors).

Direct acts or representation
The current regulation distinguishes direct acts of a legal entity (acts committed by its statutory body) and acts of a legal entity by power of attorney (acts committed by a representative). Contrary to the existing regulation, the new Civil Code only recognises acts on behalf of a legal entity (by representation). Because of this new regulation, the Supreme Court's opposition to joint representation of managing directors together with proxies (mixed joint representation) could cease to apply. However, we will see which approach the Supreme Court will take.

Acts in relation to employees
As of 1 January 2014, one member of a collective statutory body must be appointed as representative for acts in relation to employees. In the case that no representative is appointed, the chairman of the statutory body (i.e. of the board of directors or managing directors) will have this representation power.

As of today, managing directors or members of the board of directors can resign by notification to the general meeting / supervisory board, and this body shall subsequently negotiate the resignation. According to the new law, the function (office) of a managing director / member of the board of directors shall be terminated two months after the delivery of the resignation letter to the company. In the case that the sole managing director / sole member of the board of directors resigns, the general meeting is obliged to nominate a new managing director / member of the board within one month (for a limited liability company) or two months ( for a joint stock company).

Acts of managing directors / members of the board of directors
As the most superior body in a joint stock company or a limited liability company, the general meeting will be entitled to issue instructions concerning the management of the company to managing directors or members of the board of directors (on their request). However, the duty to act with due care and diligence is not affected.

Liability of managing directors / members of the board of directors
Besides managing directors and members of the board of directors having general liability for damages (objective liability with a reversed burden of proof in favor of the company), the following stringent liability rules will apply as of 1 January 2014:

  • in case insolvency proceedings are initiated within the company, the insolvency court can decide on the liability of managing directors and members of the board of directors for obligations of the company - i.e. if the managing director knew or must have known that the company was in danger of insolvency and if he did not take – against the due diligence of an entrepreneur – measures to prevent the insolvency (e.g. by filing for insolvency or by taking restructuring measures);
  • if insolvency proceedings are initiated on request of a creditor, the insolvency trustee can request that the salary received by the managing directors or members of the board of directors over the past two years before the insolvency proceedings began should be paid into the bankrupt estate.

Managing director / board of directors agreement
Contrary to the current regulation, the function (office) of a managing director / member of the board of directors will be executed for no consideration, unless stated otherwise in the managing director agreement.

The Commercial Code has only allowed a managing director to be employed on the basis of an employment contract since 2012. The new law on business corporations does not provide an explicit answer to the question of whether a managing director can still be employed as employee or not. Besides payments to members of a statutory body, the general meeting must also approve payments to people related to members of a statutory body (e.g. salary of the wife of a managing director).

Competition clause
According to the applicable law, members of a statutory body must not operate their own business in the same or a similar area to the company´s subject of business.

According to the new regulation, managing directors and members of the board of directors are allowed to operate a business in these areas, if no shareholder of the company raises an objection against such business activities within one month from the notification of such business activity.

Intercompany relationships
The managing director / member of the board of directors has to announce his intention to conclude a contract between himself (or associated persons) and the company to the managing directors or the board of directors and the supervisory board (to the general meeting, if no supervisory board is established). The supervisory board or the general meeting can prohibit the conclusion of such contracts. If the managing director / member of the board of directors executes an agreement against such proscription, the agreement would be valid in our opinion, however, the company can hold the managing director / member of the board of directors liable for such an act.

Legal entity as managing director
According to the new law a legal entity can be appointed managing director or member of the board of directors. The stringent standard of liability applies to the natural persons acting on behalf of those legal entities (managing directors).

We recommend reviewing all documents regarding the company (articles of association, managing director contracts, managing director bylaws, and employment contracts with managing directors, etc.) to ensure that they will still comply with the new law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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