Can the (in)validity of the service contract affect the validity of the resolution approving the general meeting?
Author of the article: Mgr. Pavel Čech, ARROWS (office@arws.cz, +420 245 007 740)
The recent decision of the Supreme Court of Justice, Case No. 27 Cdo 1246/2024 of 29 October 2024, provided an answer to the question of the relationship between the validity of the contract of office and the validity of the resolution of the general meeting approving the contract of office. Can a resolution of a general meeting be invalid on the ground that it approved an invalid performance contract, but also any other invalid legal act? In this article, I will summarize the essential conclusions of the Supreme Court.
Context of the case
The general meeting of a limited liability company approved an executive contract, certain provisions of which were challenged as being contrary to the law. The appellants claimed that the resolution of the general meeting was invalid on the basis of the invalidity of the contract of office. The Regional Court in Pilsen granted their motion, but the High Court in Prague reversed the decision and dismissed the motion. The key argument of the Court of Appeal was that the courts are not entitled to review the content of the performance contract in the context of reviewing the resolution of the general meeting.
The Supreme Court corrected this conclusion of the Court of Appeal on the basis of the appellants' appeal.
The significance of the approval of the performance contract
According to the Companies Act, the service contract must be approved by the highest body of the company, i.e. the general meeting. In particular, this requirement is intended to ensure the important control of the shareholders over the remuneration of the members of the statutory bodies and to prevent abuse of their position. This ensures that members of the statutory body do not set their own remuneration, regardless of the state of the company.
Inconsistency of the service contract with the law in essential particulars
In its decision, the Supreme Court states: "... if the performance contract is invalid for contradiction with the law in the part concerning remuneration or the provision of other benefits arising from the performance of the duties of a member of an elected body, i.e. in the part which, according to teleological interpretation, is the main reason for the legal requirement for the approval of the performance contract by the general meeting, this invalidity may be the basis for invalidating the resolution of the general meeting approving the performance contract."
According to the Supreme Court, the court is therefore entitled to examine the (in)validity of the performance contract in its essential elements, in particular the remuneration, in proceedings for the annulment of the resolution of the general meeting approving the performance contract. The assessment of the validity or invalidity of such essential elements may have an impact on the validity of the resolution of the general meeting itself.
Contradiction of the service contract with the law in non-essential particulars
A different approach should be taken to provisions of the performance contract which are not essential elements thereof. In this respect, essentiality must be assessed in particular in the light of the meaning and purpose of the legislation and the need for approval by the general meeting: 'If the invalidity of a part of the contract does not constitute an essential element of the contract which, in the light of the meaning and purpose of the law , is necessarily subject to the approval of the general meeting, that invalidity cannot be a ground for invalidating the resolution of the general meeting approving the contract.'
General conclusion and relation to other approved acts
The Supreme Court's decision confirms that the court is entitled to examine the content of the contract of office if the nullity concerns its essential elements. This conclusion reflects the purpose of the statutory requirement for approval of the performance contract by the general meeting - to ensure transparency and protection of the rights of the shareholders.
The conclusions of the Supreme Court's decision can be applied without dispute to other legal acts or documents approved by the general meeting. An example is the financial statements approved by the general meeting. Even in the case of financial statements, the Supreme Court has previously reached similar conclusions as in the case of a performance contract (cf. e.g. the Supreme Court's decision of 24 September 2001, Case No. 29 Odo 88/2001, or of 10 May 2011, Case No. 29 Cdo 65/2010).
Practical implications
The decision is of fundamental importance for the practice of commercial companies and the judicial protection of shareholders' rights. It demonstrates that the approval of performance contracts is not a formal act, but must comply with legal requirements, in particular with regard to remuneration. At the same time, it protects the autonomy of companies by limiting the intervention of the courts to cases of material inconsistencies with the law.
With this decision, the Supreme Court has clarified the interpretation of the Commercial Corporations Act, which provides companies and their shareholders with clearer rules for assessing the validity of resolutions of general meetings.
Proper approval of a service contract is not a mere formality. We can help you set everything up correctly. We will ensure that your AGM is conducted in accordance with the law and that its resolutions withstand any legal challenges.