One-off remuneration outside the executive service agreement

Remuneration Rules for Corporate Body Members: Why Are They So Strict?

If an agreement is not approved, or if it does not stipulate remuneration, the law provides that the performance of the function is unpaid. In other words, without proper approval, a member of a corporate body is not entitled to remuneration, and any additional payment provided may be considered an unjustified enrichment.

Similarly strict rules apply to the payment of a share of profits to persons other than the company's shareholders. As a standard, profits can only be distributed among shareholders/stockholders. Tantièmes (profit shares for members of corporate bodies) or employee bonuses from profit shares are possible only if expressly permitted by the memorandum of association or articles of association. 

If the company's "constitution" (memorandum or articles of association) does not provide for tantièmes, remuneration cannot be paid to members of corporate bodies from profits in the usual way—it would be contrary to the law. The law thereby once again protects ownership rights—profits belong primarily to the shareholders, and only with their consent (expressed in the founding document or a General Meeting resolution) can they be shared with anyone else.

One-Off Deviation from the Agreement or Articles of Association: A Solution Exists

But what if your articles of association or a manager's agreement do not provide for such an extraordinary bonus, yet you still want to grant it? You don't have to permanently amend the entire founding documents. The Czech Business Corporations Act allows for a so-called one-off override of the remuneration rules—that is, a one-time approval of remuneration outside the scope of the executive service agreement or the company's articles of association.

Since January 2021, the law has explicitly stated that the General Meeting may approve a one-off deviation from the articles of association/memorandum of association on the matter of remuneration for members of a corporate body. This is typically considered, for example, when you want to pay a new member of the board of directors a higher profit share than the current articles of association allow. 

The condition, however, is that the same rules apply to such a one-off approval as for amending the articles of association—the decision must be adopted by the qualified majority that would otherwise be required for an amendment to the founding deed. In practice, this usually means at least a 2/3 majority of votes (for an LLC, of all shareholders; for a JSC, 2/3 of the shareholders present, unless the articles of association specify a stricter quorum). However, it is not necessary to amend the articles of association permanently; it is truly just an exception for the given case—the law even states that such a General Meeting resolution does not need to be certified by a notarial deed. 

Note: If your company is supervised by a supervisory board that normally approves executive service agreements, the articles of association may require that the option to deviate from the articles of association must also be supported directly by the articles themselves. It is therefore always advisable to check the founding documents and proceed according to them.

The law also confirms that an ad hoc bonus can be granted to a member of a corporate body at any time, even outside the scope of the executive service agreement or articles of association, provided the company's supreme body agrees. In other words, the General Meeting can approve a one-off bonus for a management member at any time during the year, even if that type of bonus has not been regulated anywhere before. However, it must be a formal decision with the appropriate requisites. 

A legal entitlement to such remuneration arises only upon approval—until then, it is not certain whether the bonus will be paid. This ensures that the remunerated member of the corporate body cannot demand something in advance that has not been approved—the motivation for extra performance thus exists, but the company's owners have the final say.

How Does It Work in Practice? 

A practical example: Alfa LLC had only a basic provision on the executive director's remuneration in its memorandum of association—a fixed monthly salary. After a successful year, the shareholders (Mr. Novák and Ms. Svobodová) decided to reward their executive director with a special bonus of 10% of the profit achieved, even though the payment of profit shares was not explicitly mentioned in the memorandum of association. How did they solve it?

Both shareholders (each with a 50% stake) met at a General Meeting and unanimously (100% of the votes) approved the one-off payment of a bonus to the executive director from the net profit for the past year. By doing so, they effectively made a one-off override of the memorandum of association—for this specific case, they deviated from the rule that profit belongs only to the shareholders. 

They adopted the resolution in the form of a notarial deed (for certainty and transparency, although under Czech legislation, a notarial deed is primarily required for an LLC when amending the memorandum of association). The result? The executive director received his well-deserved bonus legally, all shareholders agreed, and everything was done in accordance with the law. 

At the same time, the company did not have to permanently amend its memorandum of association—it was just a one-off exception for that year. Thanks to the formal procedure, no doubts arose as to whether any shareholder had been harmed, and the company has everything properly documented for a potential audit.

In another scenario, Beta JSC wanted to pay its board of directors extraordinary profit shares for completing a challenging project. However, their articles of association did not recognize profit shares at all. The solution came in the spirit of the new regulation: the General Meeting of shareholders first voted to amend the articles of association to allow for the distribution of profit to members of corporate bodies as well. A qualified majority (at least 2/3 of the votes present) was needed to enable these profit shares—which the shareholders achieved. 

Subsequently, in the same year, the shareholders voted on the actual payment of profit shares to the board of directors—and here the law required an even stricter majority. According to the amended version of the Business Corporations Act, each individual distribution of profit shares must be approved by at least a three-quarters majority of votes at the General Meeting (for a JSC, different classes of shares are counted separately). 

Beta managed to surpass this threshold as well. The profit shares were paid out, and everything proceeded legitimately, albeit at the cost of careful preparation and convincing a large portion of the shareholders. This example shows that the larger the company and the more shareholders, the more challenging the approval of a one-off bonus can be—but it is not impossible if there is the will.

What to Watch Out For 

If you are considering a similar extraordinary bonus for members of corporate bodies, do not underestimate the legal aspects. An incorrect procedure or omission of formal steps can have unpleasant consequences. Here are the key risks and how to prevent them:

• Invalidity of the paid remuneration: As mentioned, if the remuneration is not duly approved by the competent body, it may be considered unjustified. For capital companies, any payments to members of corporate bodies (apart from statutory exceptions) are subject to approval by the General Meeting. Without this consent, the remuneration may be relatively invalid—the company could demand the return of the amount paid, and the member of the corporate body would not be protected by a legal claim to it. 

Recommendation: Always obtain formal consent from the General Meeting (or the supervisory board, if the articles of association permit) before paying out any extraordinary bonus. Draft a proper resolution and, for significant decisions, consider a notarial deed for greater legal certainty.

• Breach of the duty of due managerial care: The governing bodies of a company have a duty to act with due managerial care. Paying a high bonus without support in an agreement or the articles of association and without the owners' consent can be assessed as a breach of this duty. The risks include liability for members of the statutory body (responsibility for damage caused to the company) and a loss of trust between management and shareholders. 

Recommendation: Ensure that any extraordinary bonus is transparent and defensible—ideally, justify in the General Meeting resolution why the member deserves the bonus (e.g., meeting specific targets, extraordinary contribution to the company). This will prevent disputes and demonstrate that you are acting in the company's best interest.

• Sanctions and legal disputes: Although ignorance of the law is no excuse, the reality is that many entrepreneurs are unaware of these rules. However, this does not prevent a dissatisfied shareholder, for example, from later challenging the validity of such a bonus in court. In an extreme case, a court may declare a General Meeting resolution invalid if the required majority was not reached or the law was violated. Tax authorities could also examine during an audit whether the bonus was paid in accordance with the law—if not, there is a risk of a tax assessment or penalties. 

Recommendation: Communicate openly with all shareholders/stockholders about the intended bonus so they are informed in advance and disputes do not arise. At the same time, consult with a lawyer and a tax advisor before implementation—they will help structure the bonus to comply with both the law and tax regulations.

In Conclusion

Extraordinary rewards, bonuses, or profit shares can be an excellent motivational tool for key people in your company. The legislator understands that rigid rules would tie companies' hands and therefore provides the option to make a one-off breach of the established rules when it makes good sense. However, it is important to maintain a balance—to reward fairly and in accordance with the law, so that neither the owners' trust nor the company's legal standing suffers.

If you are unsure how exactly to proceed, do not hesitate to contact our experienced Prague-based legal team. As a law firm with many years of practice in the corporate field, we will help you set up extraordinary bonuses in a way that is legally unchallengeable and at the same time fulfills its purpose—to reward and motivate those who deserve it most. 

With our guidance, you can act with confidence, knowing that every step—from preparing the General Meeting resolution to paying the bonus—is in accordance with the law. This will allow you to focus on growing your business while leaving the legal formalities to us. Together, we will strengthen trust and transparency in your company, which will be appreciated by your management as well as your shareholders and investors.

One-off bonuses outside the executive service agreement for an executive director or other third parties different from shareholders can be legally implemented, but always with the blessing of the General Meeting and adherence to the required majority. Do not underestimate the legal framework—with the right procedure, you will reward your people and protect the company at the same time. Such a fair-play reward strengthens loyalty and the company's reputation without risking conflicts or penalties. And that is a result that pays off.