Managing Director without remuneration

What the law says about executive remuneration

The rights and duties between a business corporation and a member of its elected body are governed mutatis mutandis by the provisions of the Civil Code on mandate, unless otherwise provided by the agreement on the performance of office or by law (Section 59 of the Business Corporations Act). A managing director is therefore not an employee, but a person whose relationship with the company is based on election and the agreement on the performance of office. Any performance provided to them by the company must therefore have a demonstrable legal basis.

The most important rule is in paragraph 3 of the same provision. If remuneration in a capital company is not agreed upon in the agreement on the performance of office, the performance of office is deemed to be free of charge (Section 59(3)). The opposite is a situation that buyers see in practice: the managing director receives a monthly payment, but either no agreement exists, or it is silent on remuneration, or no one has approved it. For such a payment, another legal basis must be sought, and if the company cannot document it, the risk remains with the company.

In a capital company, the agreement on the performance of office is concluded in writing and approved, including its amendments, by the supreme body of the company; without this approval, it does not take effect (Section 59(2)). In an s.r.o. (limited liability company), this body is the general meeting. Unless it decides otherwise, the approved agreement is effective from the date of conclusion or from the date the office commenced, whichever is later. The mere signing of the agreement by the managing director and the other shareholder is therefore not sufficient if the general meeting has not approved it.

However, the presumption of no remuneration under the agreement does not mean that the managing director cannot receive anything. The law explicitly adds to the rule of gratuitousness that this does not affect the possibility of other performance. Performance to which there is no right under a legal regulation, the approved agreement on the performance of office, or an approved internal regulation may be provided with the consent of the body that approves the agreement on the performance of office, and with the opinion of the supervisory body, if established (Section 61 of the Business Corporations Act).

This leads to a practical conclusion for every company. A managing director who has been performing their office for several years, receiving remuneration without an approved agreement or a general meeting resolution granting the performance, is in a vulnerable position, and the company is exposed to the question of the basis on which it made the payments. The longer this state persists, the higher the amount that a buyer or supervisory authority will question, and the more laborious the subsequent remedy will be.

The reference to mandate has practical significance. The managing director undertakes to act towards the company with the care that the company reasonably expects from them, and they are entitled to remuneration only to the extent that it has been validly agreed upon or granted by the general meeting. The law thus assumes that the relationship should have a written basis and that the company must be able to document at any time what it agreed upon with its managing director.

What the agreement on the performance of office must contain

In the case of a capital company, the law requires that the agreement on the performance of office also contain details on remuneration. This includes the definition of all components of remuneration that belong or may belong to a member of the elected body, including any benefits in kind and contributions to a supplementary pension scheme, determination of the amount of remuneration or the method of its calculation, rules for the payment of special remuneration and profit shares, and details on benefits consisting of the transfer of investment securities (Section 60 of the Business Corporations Act).

A general phrase like "remuneration by agreement" is not enough. The agreement must describe what the remuneration consists of, how it is calculated, and when it is paid. A managing director who is to be paid a flat rate, a performance bonus, and provided with a car must have all three components in the agreement. Any component missing from the agreement can only be provided with the separate consent of the general meeting, and if even that is not documented, the buyer will flag it as a risk during due diligence.

It is also important who approves the agreement. Under Section 190 of the Business Corporations Act, the election and removal of a managing director fall within the competence of the general meeting, and the same body approves the agreement on the performance of office. A managing director who is also a shareholder is in a conflict of interest when voting on their agreement. However, the law does not automatically prohibit them from voting: the cases where a shareholder of an s.r.o. does not exercise their voting rights are listed in Section 173, and the approval of the agreement on the performance of office is not among them; another reason may be specified in the memorandum of association. The minutes of the general meeting should therefore clearly document who voted and what majority approved the agreement.

In addition to approval, the general rule on conflict of interest applies. If a member of a body intends to conclude an agreement with the corporation, they must inform without undue delay the body of which they are a member and the supervisory body, if established, otherwise the supreme body, and state the conditions under which the agreement is to be concluded (Section 55 of the Business Corporations Act). This is an information obligation, not an approval: the effectiveness of the agreement on the performance of office depends on approval by the supreme body under Section 59(2).

When remuneration is determined as customary

The law also provides for an exception to the presumption of gratuitousness. If the agreement on the performance of office or the remuneration arrangement is invalid due to reasons on the part of the capital company, if the agreement was not concluded due to obstacles on the part of the company, force majeure, or another obstacle independent of the will of the member of the body, or if the supreme body does not approve it for these reasons without undue delay, the presumption of gratuitousness does not apply (Section 59(4)). The remuneration is then determined as customary at the time the agreement was concluded, or, if it was not concluded, at the time the office commenced.

The exception only protects the managing director if the obstacle did not arise on their part. The managing director must take steps that can reasonably be required of them, such as delivering a draft agreement with a remuneration provision to the company or ensuring that the general meeting has the opportunity to approve the agreement. A managing director who has been receiving money for years and has never asked the general meeting to approve the agreement will find it difficult to rely on the exception, as the obstacle did not arise on the part of the company, but from their own inactivity.

The Supreme Court stated in its judgment case file no. 27 Cdo 5340/2017 that if a member of a body remains completely inactive, the prerequisites for customary remuneration will generally not be met. At the same time, it emphasized that gratuitousness does not prevent the general meeting from granting such a member remuneration under Section 61(1). These are two different paths: customary remuneration is a claim asserted by the managing director themselves, whereas the granting of remuneration is a decision of the general meeting to which they have no legal entitlement.

In practice, therefore, parties do not rely on the court calculating the remuneration as customary. Customary remuneration requires proving what is customary for a similar activity, which is evidentially demanding and the outcome is uncertain. An approved agreement with a precisely described remuneration, which can be referred to without proof, is more reliable.

It is also necessary to distinguish between money paid and the entitlement to it. The presumption of gratuitousness relates to the entitlement to remuneration. What the company paid to the managing director without an approved agreement and without a general meeting resolution may be considered by the buyer as performance without a legal basis, and they may demand its reflection in the price or in the warranty. Whether and to what extent such performance is refundable must be assessed individually for each company.

Why due diligence will reveal this

During due diligence, the buyer compares three sources: the commercial register and the collection of deeds, the minutes of general meetings, and the accounting records. If the accounting records show regular payments to the managing director and the minutes lack both the approval of the agreement on the performance of office and the decision to grant the performance, the discrepancy is obvious. Remuneration of members of bodies is typically a standard area of review, which is why this check is usually carried out.

The discrepancy is reflected in the price in three ways. The buyer may demand a reduction in the price by the amount they consider to have been paid without authorization, they may insist on a specific warranty or indemnity in the purchase agreement, or they may require a remedy before closing as a condition of completion. All three options cost the seller time and money, which is why it is better to fix the problem before the buyer begins due diligence.

Another impact concerns negotiations with the manager running the company. If the managing director receives remuneration without an agreement and the buyer questions it, there is a risk of a dispute between the seller and the managing director, often even before signing. The managing director may claim that the remuneration was due to them, while the company may claim it had no legal basis. Such a dispute delays the transaction and creates uncertainty among other employees.

The process and timing of due diligence during a sale are discussed in the text on how a company is sold step by step. It shows that checking managing directors' remuneration belongs to the first phase of preparation, not to the phase of negotiating the purchase agreement.

How to remedy this before the sale

The simplest remedy for the future is to convene a general meeting to approve the agreement on the performance of office with a precise description of the remuneration. The agreement should contain all mandatory details required by law, be in writing, and be approved by the necessary majority. This is a step that can be taken within weeks and will show the buyer that the company has resolved the issue.

Even the past period is not without a solution, but the general meeting must decide. The absence of an approved agreement does not mean that remuneration for past years cannot be adjusted retroactively. The general meeting may grant the managing director remuneration even for a period prior to its decision, even if the agreement on the performance of office was never concluded. The purpose is to ensure that control over remuneration remains with the shareholders; the managing director cannot grant themselves remuneration for the past or infer it from long-term practice.

The Supreme Court explicitly confirmed this in its resolution case file no. 27 Cdo 3463/2024 dated 29 April 2026. In it, it overturned the decision of the appellate court, according to which the absence of an agreement on the performance of office excludes retroactive granting of remuneration, and built on older case law according to which the general meeting is allowed to grant remuneration even for a period preceding its meeting. This concerned the remuneration of a member of the board of directors for the performance of office between 2012 and 2021.

Retroactive granting has its limits and must be properly documented. Performance will not be provided if the performance of office apparently contributed to the unfavorable economic result of the company, unless the general meeting decides otherwise (Section 61(2)). A minority shareholder may challenge the resolution of the general meeting by filing a petition for a declaration of invalidity, as happened in the case mentioned. The minutes should therefore record who voted, for what period, and in what amount the remuneration is granted, and what the amount is based on. Tax implications must also be assessed.

It must also be taken into account that a conflict of interest may arise during approval, especially if the managing director is also a shareholder. The conflict itself does not automatically prohibit them from voting on their own remuneration, but a minority shareholder can delay the entire process with objections. Therefore, it is worth securing the written consent of all shareholders and detailed minutes that will document the proper procedure to the buyer and, if applicable, the supervisory body.

When remedying the situation, it is also necessary to resolve the relationship between the managing director's remuneration and any salary. According to the Supreme Court, an employment contract whose content is business management or another activity belonging to the managing director is not invalid in itself, but it is assessed as an agreement on the performance of office and requires the same form and approval by the general meeting. The difference between the two regimes is discussed in the text on the difference between a managing director's remuneration and an employee's salary, which the buyer also monitors during due diligence.

Market standards and warning signs

Established companies have an agreement on the performance of office for each managing director approved by the general meeting, and they approve changes to remuneration again. The agreement states the components of remuneration, the amount and method of calculation, and any bonuses; extraordinary performance outside the agreement is approved by the general meeting by a separate resolution. The minutes of the general meeting are stored together with the accounting documents, so that during due diligence, the basis on which the payments were made can be traced.

Established companies also regularly check whether payments to the managing director correspond to the approved agreement. The accountant compares the paid amounts with the agreement during the closing of accounts and submits any discrepancies to the general meeting. Such a check is not demanding and shortens negotiations during the sale of a company, as the buyer has no reason to question the payments and does not need to demand special warranties because of them.

During approval, it is useful to have a comparison with the customary remuneration for a similar position in a similarly sized company. Such a document justifies the amount of remuneration to minority shareholders and the buyer, and limits the scope for claims that the remuneration was disproportionate. The comparison does not need to be complex; it is enough to document the sources it is based on.

A warning sign is a company where the managing director has no agreement, remuneration is paid "by agreement," and payments are recorded as advances or loans. Another signal is a managing director who is also the owner and takes money as needed without approval. A third signal is a company where remuneration is increased without a new resolution of the general meeting.

A more detailed regulation of the contractual relationship between the company and the managing director, including the scope of powers and termination conditions, is discussed in the text on optimizing contractual relationships with managing directors. This is a supplement worth reading alongside this text, as remuneration is only one part of this relationship.

Typical mistakes and their cost

The first mistake is relying on an oral agreement between the shareholders. The shareholders agree that the managing director will receive a certain amount, and no one writes it down or approves it. Years later, it turns out that there is no agreement or resolution for the payments, and the company has to resolve whether and how the general meeting can grant them retroactively. The cost is a dispute with the buyer or the tax administration over whether it was a company expense.

The second mistake is an agreement that describes the remuneration incompletely. The agreement states a flat rate but is silent on bonuses and benefits that the managing director actually receives. Components outside the agreement require separate consent from the general meeting, and if this is missing, the buyer will flag them during due diligence. A complete description of all remuneration components is therefore just as important as the existence of the agreement itself.

The third mistake is changing the remuneration without new approval. The general meeting approves the agreement with a certain amount, later the amount is increased, but a resolution is missing. The law requires approval of the agreement, including its amendments, and therefore any change to the contractually agreed remuneration requires approval of an amendment to the agreement, or a separate decision of the general meeting on other performance. Otherwise, the difference is placed in the same position as payments without an agreement.

The fourth mistake is overlooking the situation when there is a change of shareholders. A new shareholder often does not know the history of remuneration and relies on everything being in order. After a few years, during a sale, it turns out that the agreements were never approved, and responsibility for the non-compliance is sought among the shareholders. Due diligence when a new shareholder enters prevents this dispute.

The fifth mistake is recording the remuneration in the accounting records under a different name. Payments labeled as an advance, loan, or reimbursement of costs may disguise remuneration, but both the buyer and the tax administration look at the substance, not the label. The naming of payments must correspond to what they actually represent and be supported by the agreement or a resolution of the general meeting.

The lawyers of the ARROWS Czech legal team assess for each company whether it has approved agreements on the performance of office, whether they correspond to the paid amounts, and the status of the general meeting minutes. Only then do they propose a method of remedy and communication with the buyer, as the correct procedure depends on how long the non-compliance has lasted and the size of the amounts involved.

Risks of managing director remuneration without an agreement

Final Summary

A managing director without an approved agreement on the performance of office essentially performs their office free of charge, and any paid performance must be documented with a legal basis when selling the company. The article showed that the agreement must be in writing, approved by the general meeting, and must describe all components of remuneration, that the general meeting can also grant remuneration independently and retroactively, and that the buyer will uncover any discrepancy during due diligence.

For the company owner, this leads to a clear task: review the agreements on the performance of office and general meeting resolutions, compare them with the paid amounts, and correct any non-compliance before the buyer finds it. The sooner the remedy is initiated, the less it costs and the less room remains for a dispute over past payments.

The lawyers of the ARROWS Czech legal team prepare agreements on the performance of office, ensure their approval by the general meeting, and manage the remediation of remuneration before the sale of a company. Write to us at consultation@arws.cz or explore our service for contracts and negotiations.