Management Agreements

Why a "manager's contract" as such does not exist and why this myth is dangerous for your company

This relationship is governed mainly by the Act on Business Corporations (ZOK) and the Civil Code. The difference is vast. An employment contract under the Labor Code provides the employee with a high level of protection – for example, entitlement to a notice period, protection period during illness, or severance pay in the event of organizational changes.

Conversely, an agreement on the performance of office does not provide this protection. A managing director can be recalled by the general meeting at any time, immediately, and without giving a reason. Likewise, they have no statutory right to severance pay. Confusion between these two regimes is the direct reason why owners lose control over management.

At ARROWS, our Prague-based legal team daily optimizes contractual relationships with management. We help companies set clear and legally sound rules that protect the company while fairly motivating management. Do you need a review of your management contracts? Write to us at consultation@arws.cz.

Concurrency of offices: A ticking time bomb in your company

What happens when a managing director has an agreement on the performance of office and at the same time an employment contract, for example, for the position of "sales director"? This state is called concurrency of offices and was a legal nightmare for many years.

Although the Supreme Court and the Constitutional Court have abandoned the previous strict ban on concurrency, they have set very strict conditions. Case law now distinguishes whether the activities overlap or not. If a managing director is also an IT expert and has an employment contract for programming, the activities apparently do not overlap and concurrency is possible.

The problem arises if the scope of the employment contract (e.g., for the position of director) is an activity that fully overlaps with the duty of business management of the company, which is the essence of the managing director's office. Such an employment contract is then considered ineffective unless it has been approved by the general meeting.

Agreement on the performance of office: Two steps whose failure will cost you millions

The only correct tool for managing the relationship with a managing director is an agreement on the performance of office. However, its validity and effectiveness depend on two key steps in which companies make fatal mistakes.

The first step is the written form and content. The agreement must clearly define rights, obligations, and above all, remuneration (fixed remuneration, bonuses, benefits). If there is no agreement on remuneration in the contract, the law states that the performance of office is free of charge. The days when it was possible to claim "usual remuneration" are long gone.

The second, and even more common, failure is approval. Even a perfectly drafted agreement on the performance of office that is not approved by the supreme body (general meeting) is ineffective under the law. The consequences of an ineffective agreement are catastrophic. Not only does the managing director work for free, but if the company nevertheless paid them remuneration, it constitutes unjust enrichment. In the event of the company's insolvency, the insolvency trustee is obliged to recover this performance, up to 2 years retrospectively.

Most common mistakes in contracts with management

Liability of the managing director: When do you guarantee with all your assets?

The myth that "I have an s.r.o. (LLC), so I am only liable up to the amount of my contribution" is the most dangerous misconception for a managing director. As a managing director, you bear full personal and unlimited liability with your assets for your decisions.

The Act on Business Corporations defines your basic obligation: to act with due managerial care. This means acting loyally to the company, with the necessary knowledge, and diligently. You guarantee with your assets especially when:

1. You breach due managerial care (e.g., you sign an obviously disadvantageous contract).

2. You fail to file an insolvency petition in time when the company is bankrupt.

3. You act in a conflict of interest or contrary to the interests of the company.

Furthermore, case law specifies that part of due managerial care is also the obligation to recognize when professional help is needed and to actively secure this help. A managing director who tries to save on legal advice for a key contract, paradoxically, breaches their statutory duty and increases their personal risk.

This liability is personal and non-transferable. Even an instruction from the general meeting will not relieve you of liability if such an instruction is obviously contrary to the interests of the company or unlawful. This puts management in an extremely vulnerable position.

How can management defend itself? The Business Judgment Rule

Fortunately, the legislator understands that business is inherently risky. Therefore, they introduced an instrument that protects management from liability for decisions that retrospectively turned out to be loss-making. This is the business judgment rule.

This is your "safe harbor" anchored in Section 51 of the ZOK. In any dispute, the court does not assess the outcome of your decision, but the quality of your decision-making process.

To be protected by this rule, you must prove in court that in making the decision you acted:

1. On an informed basis (you had sufficient reasonably available information).

2. In good faith (without ulterior motives and in the interest of the company).

3. In the defensible interest of the company (the decision had a rational business basis).

The key to your protection thus becomes careful documentation. Without minutes of meetings, risk analyses, documents from advisors, and legal opinions, you have no way to prove in a potential dispute that you acted on an informed basis. Here, legal service turns from an expense into an insurance policy for your personal assets.

Our Prague-based lawyers at ARROWS will not only help you with the contract. We will help you set up internal processes and prepare the documents required under Czech legislation. When we prepare a legal opinion for a transaction, we do not just deliver a piece of paper, but we build your defense in the event of a future dispute. Do you need a legal assessment of your strategic decision? Write to consultation@arws.cz.

How to regain control: Termination of the manager's office

Control over the company also means the ability to quickly and effectively replace management if they do not meet your expectations. As already mentioned, the general meeting can recall a managing director at any time, even without giving a reason. This is the basic control tool of the owners. However, you must pay attention to the formal correctness of the entire process so that the recall cannot be challenged in court for invalidity.

If the managing director wants to leave on their own (resignation from office), the process is not immediate. The office terminates only on the day the resignation is discussed by the general meeting. If it is not discussed, the office generally terminates upon the expiry of two months from the notification. Furthermore, the managing director must not resign at a "time inappropriate for the company", otherwise they are liable for the damage caused thereby.

And what about severance pay? We emphasize the key fact again: There is no statutory right to severance pay (as in the Labor Code) for a managing director. If the manager is to be paid any severance pay ("golden parachute") upon departure, it must be explicitly and very precisely agreed in the agreement on the performance of office.

ARROWS has extensive experience representing clients in courts in disputes with former management. We will help you prepare contracts that protect you from unreasonable severance claims and guide you through the recall or resignation process in a legally clean manner. Are you facing a dispute with a manager? Contact us immediately at consultation@arws.cz.

Protection of know-how after the manager's departure

The greatest loss of control often occurs when a manager leaves and takes clients, key employees, and strategic know-how with them. The tool of defense is a non-compete clause.

A fatal mistake applies here as well: You cannot use the regulation of a non-compete clause from the Labor Code. Such a clause would be invalid in an agreement on the performance of office. The relationship of a managing director is governed by the Civil Code, which has its own, different rules.

A non-compete clause under the Civil Code must clearly define the prohibited activity, territory or circle of persons, and duration (maximum 5 years). Unlike the Labor Code, financial consideration is not a statutory condition of validity.

Nevertheless, it is a fundamental mistake not to agree on consideration. Case law and legal theory agree that without reasonable financial compensation for the restriction, the clause is unbalanced. Its enforceability (especially the agreed contractual penalties) is highly disputable in court. Companies that think they are protected are actually not.

Control over the company after the manager's departure

International element: When the managing director or company has an international reach

Problems multiply if the managing director is a foreigner in a Czech company or a Czech managing director manages a subsidiary abroad. You immediately address questions such as: Which law applies to the contract? Where will the managing director pay taxes? What residence or work permits do they need?

These situations are our daily practice. Thanks to the ARROWS International network built over ten years, we provide legal and tax services in more than 70 countries worldwide.

As a "One-Stop-Shop", we provide comprehensive legal and tax advice under one roof. We help with the restructuring of international holdings for maximum operational and tax efficiency and coordinate defense in disputes with an international element. Our experience also covers specific political and cultural risks.

For international legal assistance, contact our specialized team at consultation@arws.cz.

Conclusion: A precise contract is the basis of control over the company

Underestimating contracts with management is not a saving, but a risk that successful companies cannot afford. A precisely set agreement on the performance of office, approved by the general meeting and supplemented by a valid non-compete clause, is a fundamental tool for managing and controlling your company.

Our clients, who include more than 150 joint-stock companies and 250 limited liability companies, value our long-term experience, speed, and high quality. We also pride ourselves on connecting our clients with each other if we see interesting business or investment opportunities. We would be happy to hear your business plan as well.

Do not wait for a problem to arise. Set the rules right from the start. Our Czech legal team is ready to conduct a comprehensive audit of your management contracts and protect your company. Get in touch with us at consultation@arws.cz.

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