Czech Business Judgment Rule: Protecting Executive Directors from Liability

Mgr. Pavel Čech
Mgr. Pavel Čech
6.3.2026 | ARROWS law firm

If you are a company executive director (jednatel) and are concerned about personal liability for every business decision that does not go according to plan, it is essential to understand the business judgment rule under Czech law. This legal concept provides you with protection against liability for losses and failures that occurred even though you met the required conditions. This article will explain how the rule works in the Czech Republic, what conditions you must meet, and what mistakes to avoid.

ARROWS Team of Experts

Quick summary

  • The business judgment rule protects you if you acted on an informed basis, in good faith, and in a defensible best interest of the company under Czech law. This applies even if the business decision ultimately turned out to be loss-making.
  • In practice, the burden of proof is often on you, because Czech legislation presumes negligence unless you prove otherwise. In the event of a dispute, you must therefore demonstrate that you acted with due managerial care.
  • A breach of loyalty or the duty of due managerial care deprives you of this protection and may lead to an obligation to compensate damage. This may include disgorgement of benefits or even personal liability for the company’s debts with all of your assets.
  • In practice, the application is complex and Czech case law imposes high requirements on the decision-making process. That is why we recommend expert legal advice already when preparing important steps.

What the business judgment rule is and why it exists for you as an executive director

The business judgment rule (business judgment rule) is a legal mechanism that allows you, as a member of a statutory body in the Czech Republic, to make business decisions without fear of personal liability for their negative outcome, provided your procedure was lege artis. Put simply, if you act responsibly and with the aim of promoting the company’s interests, you will not be liable merely because a business plan did not work out.

The reason this rule exists is practical: there is no business without risk. If executive directors bore personal liability for every failure regardless of the circumstances and the effort invested, no one would be willing to serve as an executive director. This is precisely why the Business Corporations Act (ZOK) includes this rule—to encourage you to take reasonable business risks necessary for the company’s development.

In the Czech Republic, the business judgment rule is set out in Section 51 of the Business Corporations Act. Although it has been in force for many years, its application is still evolving in line with the decision-making practice of the Supreme Court of the Czech Republic.

This is why the attorneys at ARROWS advokátní kancelář focus intensively on this topic and apply current Czech case law in practice for their clients.

The rule’s origin in the USA and inspiration for Czech law

To better understand the purpose of the rule, it is useful to know its origin. The rule originated in the USA, specifically in the case law of the State of Delaware, which is considered a hub of corporate law.

A major milestone was the decision of the Supreme Court of the State of Delaware in Aronson vs. Lewis (1984). This decision established a presumption that board members act on an informed basis, in good faith, and in the belief that the decision is in the best interests of the company. In the USA, this rule functions as strong procedural protection, with courts often dismissing claims at the outset if the plaintiff fails to prove otherwise.

Czech legislation was inspired by this model, but did not adopt it verbatim. In the Czech legal environment, the position of an executive director is somewhat more complex, especially in the area of evidence.

How the business judgment rule works in the Czech Republic

In the Czech Republic, the business judgment rule is governed by Section 51(1) of the Business Corporations Act. It provides that a person acts with due care and the necessary knowledge if, when making a business decision, they could in good faith reasonably assume that they are acting on an informed basis and in a defensible interest of the business corporation.

Basic conditions: What must be met

For the business judgment rule to provide you with protection, you must cumulatively meet several conditions. The court will not retrospectively assess whether the decision was commercially “correct” or “profitable”, but will examine the process by which you arrived at it. The key conditions are:

  • A conscious decision (an act of will): It must be an active decision of the body (action or conscious inaction). This does not cover situations where an executive director fails to act due to negligence or merely mechanically fulfils a statutory duty without any room for discretion.
  • Being informed: In practice, this is a crucial condition. You must decide based on information that is reasonably available at the given time and in the given situation. You do not need to have every piece of information in the world, but you must use those that another diligent manager would obtain in a comparable situation.
  • A defensible interest of the company: Your only criterion must be the benefit of the company. If the decision primarily pursues your interest, the interest of a related party, or the interest of a majority shareholder at the company’s expense, the rule will not protect you. You must be able to rationally explain why the decision was advantageous for the business.
  • Good faith: Your decision must have been made with honest intent and the belief that you are acting correctly. There must be no fraudulent intent, obvious indifference, or an attempt to harm the company.
  • Absence of a conflict of interest: Decision-making must be independent. If you have a personal interest in the outcome (a conflict of interest), the business judgment rule generally will not apply, unless you have gone through the statutory process of notification and approval of the conflict of interest by the company’s bodies (Section 54 et seq. of the ZOK).
Frequently asked questions about the business judgment rule

1. Do I need to have every conceivable piece of information before I decide?
No. Czech law requires information that is “necessary” and “reasonably available”. The court will ask: “What information would another diligent executive director obtain in that situation, under time pressure and with the given costs?”

2. What if it later turns out that the information I relied on was incorrect?
What matters is the situation at the time of the decision (ex ante). If, in good faith, you relied on an analysis that later proved incorrect (e.g., an error by an external adviser) and you had no reason to doubt it, the rule protects you.

3. If I am the sole executive director and I decided on my own, is that a problem?
Individual decision-making in itself is not a problem. However, even as the sole executive director, you must be able to prove (e.g., by minutes, emails, supporting documents) what you based your decision on. The absence of any trace of the decision-making process is risky.

Burden of proof: Why documentation is key

Here we encounter a fundamental difference from what laypeople typically expect. Under Czech law, in a dispute over compensation for damage caused by a member of a statutory body, the burden of proof regarding the duty of due managerial care lies with the defendant managing director (§ 52(2) of the Business Corporations Act).

This means that you must prove to the court that you acted with due managerial care and met the conditions of the business judgment rule. The company proves that damage occurred and the causal link, but you must rebut the presumption of negligence.

That is why the attorneys at ARROWS, a Prague-based law firm, strongly recommend that managing directors carefully document their decision-making process. Emails, meeting minutes, external analyses, and expert opinions are your “insurance policies” for any future dispute.

Loyalty and due managerial care – Two pillars of your liability

The business judgment rule is inseparably linked to the duty to act with due managerial care (§ 159 of the Czech Civil Code). This duty has two components:

  1. Care (Duty of Care): The obligation to act on an informed basis, with the necessary knowledge and diligence. If something is beyond your expertise, you have a duty to obtain professional assistance.
  2. Loyalty (Duty of Loyalty): The obligation to prioritise the company’s interests over your own interests or the interests of third parties.

A breach of loyalty is fatal to the application of the business judgment rule. If a managing director pursues personal enrichment, they cannot rely on the protection of business risk, even if they formally produce stacks of analyses.

Practical consequences of breaching the duty of due managerial care

If the court finds that you did not act with due managerial care and you are not protected by the business judgment rule, the consequences may include the following:

  1. Obligation to compensate for damage: You must compensate the company for the loss you caused by your actions (§ 53 of the Business Corporations Act). If you do not compensate the damage, you are liable to the company’s creditors for its debts up to the amount of the uncompensated damage.
  2. Disgorgement of benefits: You must surrender any benefit you obtained by breaching your duties.
  3. Disqualification from office (Disqualification): The court may disqualify you from serving as a member of the statutory body of any business corporation, typically for a period of 3 years.
  4. Claim to cover the shortfall in assets: In the event of the company’s insolvency, the court may decide that you must cover the difference between the company’s assets and liabilities if you contributed to the insolvency by breaching your duties.
Special duty: Filing an insolvency petition

A managing director has a statutory duty to file an insolvency petition without undue delay after learning that the company is insolvent (§ 98 of the Czech Insolvency Act). A breach of this duty gives rise to the managing director’s personal liability for damage caused to creditors, equal to the difference in the satisfaction of the claim.

Risk table: What risks you face and how ARROWS can help

Risks and sanctions

How ARROWS helps (office@arws.cz)

Damages claim: The company (often under new management or an insolvency administrator) seeks to recover the loss directly from you.

We will represent you in court proceedings, help you meet the burden of proof, and demonstrate that the conditions of the business judgment rule were satisfied.

Liability for debts: If you do not reimburse the company for the damage, creditors may enforce their claims directly against your personal assets.

We will advise you on how to properly formalise decisions to minimise the risk of personal liability even before any issue arises.

Disqualification from office: A ban on serving on statutory bodies (disqualification) for up to 3 years, which can destroy your career.

We will fight against any motion to disqualify you and seek to prove that no breach of duties occurred.

Covering the shortfall in assets (§ 66 of the Business Corporations Act): An obligation to pay the company’s debts from your own funds in the event of insolvency.

We will identify insolvency in time and ensure the correct procedure, thereby eliminating the risk of this draconian sanction.


How to comprehensively document your decision-making process – A practical guide

Given that the burden of proof is shifted to the managing director under Czech law, documentation is your best defence. The recommended approach in line with the standards of due managerial care includes the following steps:

  1. Written materials: Before making a decision, gather relevant data (emails, market research, accounting outputs).
  2. Meeting minutes: Even in a company with a single managing director, it is advisable to prepare a “managing director’s resolution” with brief reasoning.
  3. Management summary (Executive Summary): For key projects, prepare a document summarising risks, benefits, and alternatives.
  4. External opinions: For complex legal or tax issues, obtain an expert opinion, but you must provide the correct input data and critically assess the opinion.
  5. Archiving: Keep the documents even after your term of office ends, at least for the duration of the limitation periods (objectively up to 10 years).

The attorneys at ARROWS, a Prague-based law firm, recommend that clients implement a “Compliance” system to ensure the automatic creation of this defensive documentation.

Special situation: Instructions from the controlling entity within a corporate group

If your company is part of a corporate group, you may be exposed to instructions from the parent company that are disadvantageous for your subsidiary. A specific regime under the Business Corporations Act applies here.

A managing director may be released from liability for damage arising from following an instruction if they prove that the instruction was in the interest of the group and that any detriment was or will be compensated within a reasonable time.

However, it must be noted that a managing director must not follow an instruction if it would lead to the subsidiary’s insolvency. In such a case, liability for damage remains.

Table: Risks in corporate group situations

Risk

ARROWS solution (office@arws.cz)

Disadvantageous instruction from the parent company: Pressure to transfer assets or enter into an unfavourable contract.

We will assess whether the instruction leads to insolvency and whether it is in the group’s interest.

Missing compensation for detriment: The parent company promises compensation, but it does not materialise.

We will put in place the legal framework for compensating the detriment so that the managing director is protected.


How to protect yourself: Practical tips for managing directors

  1. Educate yourself and ask questions. Ignorance is no excuse, so if you do not understand the area, hire an expert.
  2. Document everything. What is not on paper or in an email is, in Czech courts, as if it did not exist.
  3. Directors’ and Officers’ liability insurance (D&O). Consider taking out D&O insurance for members of corporate bodies, which covers legal representation costs as well as potential damages.
  4. Address problems early. If the company is heading into trouble, do not wait for a miracle—consult the situation with experts.

ARROWS advokátní kancelář has a team of specialists in corporate law and insolvency under Czech legislation. We are insured against professional negligence for amounts in the hundreds of millions of Czech crowns, which provides our clients with a guarantee of stability and professionalism even when handling the most demanding matters.

FAQ - Most common questions on the duty of due managerial care under Czech law

1. If a decision results in a loss, do I automatically breach the duty of due managerial care?
No. The duty of due managerial care is a duty of conduct, not a duty to achieve a particular result. If you followed the proper process (being duly informed, acting in good faith, and with loyalty), you are not liable for a poor outcome.

2. Can I, as a layperson without legal education, be excused from liability?
The role of an executive director is a professional position. Liability is assessed objectively under Czech law. If you do not have the necessary knowledge, you must ensure it is obtained (delegation, external advice). You cannot defend yourself by claiming ignorance.

3. How long should I keep the supporting documents for decisions?
We recommend at least 10 years, given potential objective limitation periods and the possibility of retrospective review in insolvency proceedings in the Czech Republic.

4. What is D&O insurance and is it worthwhile?
This is liability insurance for managers (Directors & Officers). In 2026, it is standard for mid-sized and larger companies. It covers, among other things, compensation for damage caused by negligence. We strongly recommend arranging it.

5. Am I at risk of sanctions even if I have already left office?
Yes. You remain liable for decisions made during your term of office. A claim may be brought even years after you leave.

Do you need an assessment of a specific situation or to set up preventive protection? Contact us at office@arws.cz.

“Notice: The information contained in this article is of a general informational nature only and is intended to provide basic guidance on the topic. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. To verify the current wording of the relevant regulations and their application to your specific situation, it is therefore necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages or complications arising from the independent use of the information in this article without our prior individual legal consultation and expert assessment. Each case requires a tailored solution, so please do not hesitate to contact us.”

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