Managing Director Liability and Business Management Under Czech Law

As a managing director of a Czech company, you balance on a thin line between the expectations of shareholders and your statutory liability. The pressure to fulfill instructions from the general meeting can be immense, but following them blindly could cost you not only your position but also your personal assets. In this article, you will find clear answers on exactly where the authority of the general meeting ends and your exclusive responsibility for business management under Czech law begins.

Do you need advice on this topic? Contact our Prague-based law firm ARROWS via email at office@arws.cz or by phone at +420 245 007 740. Your inquiry will be handled by Mgr. Pavel Čech, our expert on the Czech legal system and corporate governance.

Business Management: What exactly falls under your exclusive authority as a managing director?

The cornerstone of a managing director's position is the statutory authority for the business management of the company. Section 195(1) of the Czech Business Corporations Act (BCA) states quite clearly: "The business management of the company pertains to the managing director." This is not a mere formal phrase, but a definition of your autonomous sphere, in which no one else should interfere.

The concept of "business management" is not precisely defined in the Act, but its content has been detailed by long-standing Czech court practice and legal theory. It primarily refers to the organization and management of the company's ordinary business activities, i.e., the day-to-day business operations. This includes a wide range of decisions, from operational matters such as supply, sales, or advertising, to personnel issues, the conclusion of routine commercial contracts, and decisions on financing operations. Our Prague-based experts in employment law can assist you with this, ensuring all personnel steps comply with Czech legislation.

This exclusivity of your authority is protected by a key prohibition formulated in Section 195(2) of the BCA: "However, no one is entitled to give the managing director instructions regarding the business management of the company." This prohibition is not arbitrary. Its deeper purpose is to protect the company itself from uninformed, hasty, or potentially harmful interference by shareholders who may lack detailed insight into operational management and whose decisions might be based on incomplete data.

Defending your autonomy in business management is therefore not a sign of unwillingness, but rather the fulfillment of your legal duty to act in the best interests of the company. You can learn more in the article Profit Distribution in 2026 for 2025: Lawyer's Advice for Managing Directors and S.R.O. Companies, which covers other duties of statutory bodies in the Czech Republic. Our attorneys in Prague at ARROWS can help you communicate this division of powers clearly to shareholders and set up internal guidelines that define boundaries and prevent unnecessary conflicts.

Strategic Instruction vs. Impermissible Interference: Where is the dangerously thin line?

While interference in day-to-day business management is prohibited, the law grants the general meeting the power to issue so-called strategic and conceptual instructions to the managing director. An amendment to the Business Corporations Act effective since 2021 anchored this option directly in the law, whereas previously it had to be expressly agreed upon in the memorandum of association. This is where one of the greatest practical challenges for every managing director lies.

Strategic management concerns fundamental, extraordinary decisions that exceed the ordinary course of business in their significance. This might include, for example, a decision to sell a key branch, enter a completely new foreign market, fundamentally change the business purpose, or approve a long-term investment policy. In this area, ARROWS provides comprehensive company sales and transactional advisory services. Such an instruction, if in accordance with Czech law and the memorandum of association, is binding for you as a managing director.

A problem arises when shareholders try to push through decisions that actually fall under business management under the guise of "strategy." An instruction to "enter the Polish market and build a distribution network there by the end of the year" is likely a permissible strategic instruction. Conversely, an instruction to "conclude a contract for the supply of material with Company X at price Y" is almost certainly an impermissible interference in your authority.

This possibility of issuing strategic instructions is a double-edged sword for the managing director. On one hand, it can provide a clear mandate from the owners for large projects and align visions. On the other hand, it opens the door to more sophisticated attempts at micro-management.

A dominant shareholder can easily phrase an operational instruction to look like a strategic one (e.g., "Our strategic priority is to establish exclusive cooperation with my brother-in-law's company."). You then find yourself in an even more difficult position, having to assess not only the content but also the true intent of the instruction.

Distinguishing between these two types of instructions requires significant experience. ARROWS attorneys daily assist clients in drafting general meeting resolutions so they are legally unassailable, and prepare internal guidelines that clearly define this boundary for everyone. We are ready to provide you with a prompt legal opinion on proposed resolutions before the vote to ensure you have the necessary legal certainty under the Czech legal system.

"Duty of Care" (Péče řádného hospodáře): Your main defensive shield and greatest responsibility

Even if you receive an instruction that is formally valid and falls within the strategic competence of the general meeting, your responsibility does not end there. On the contrary, it is at this very moment that your key and non-transferable duty comes into play – to act with due managerial care. This duty is defined in Section 159 of the Czech Civil Code as the obligation to perform the function with necessary loyalty, and with the requisite knowledge and diligence.

The case law of the Czech Supreme Court has repeatedly confirmed that the duty of due managerial care applies fully even if you are acting on the basis of an instruction from the general meeting. This means that you must not "slavishly" follow an instruction that you know, or should know with due care, will harm the company. On the contrary, you are obliged to actively alert the general meeting to the inappropriateness or risks of such an instruction and provide them with all relevant information for a qualified decision.

Your defense in any potential dispute is the so-called business judgment rule. If you prove that you acted in the given situation on an informed basis, in good faith, and in the defensible interest of the company, you are not liable for any negative outcome of your actions. However, this places immense emphasis on the careful documentation of the entire decision-making process.

The duty of due managerial care thus transforms you from a mere executor of orders into an active guardian of the company's interests, even against the momentary will of its owners. You are in a constant test of loyalty to the firm, not to individual shareholders. If you receive an instruction that seems risky to you, you are obliged to act. Our Prague-based attorneys can help you prepare professional materials for the general meeting that clearly describe the risks and provide you with a legal opinion on which you can base your decision not to follow the instruction. In doing so, we protect both you and your company.

Contact our experts:

Mgr. Jan Medek

associate, partner

• medek@arws.cz

JUDr. Ondřej Stehlík, LL.M., MBA

associate, partner

• stehlik@arws.cz

Common pitfalls when following instructions and how to avoid them with ARROWS

The following table summarizes the most common problems that managing directors encounter in practice and shows specifically how the ARROWS law firm in Prague can assist you.

International element: How to handle instructions from a foreign shareholder?

If you operate in a subsidiary of a foreign corporation, you face a specific challenge. Instructions coming from foreign headquarters may reflect a different legal culture and business customs. However, it is absolutely crucial to realize that as a managing director of a Czech company, you are always governed by Czech law and bear full responsibility under Czech legislation.

Conflicts of corporate cultures often occur in international structures. Foreign managers may expect a level of obedience that is not only inadmissible under Czech law but also dangerous for you personally. Even within a business group where instructions regarding business management can be given, such an instruction must not conflict with the company's interests and does not relieve you of the duty to act with due managerial care.

You find yourself under double pressure – from your foreign superior and from Czech law. You need a strong local partner who can not only explain the Czech rules but also clearly communicate and defend them to the foreign headquarters.

Thanks to our ARROWS International network, built over ten years, we handle situations daily where it is necessary to align the instructions of a foreign parent company with the requirements of Czech law. We act as "translators" and protectors of local management, ensuring that the managing director does not breach their personal liability or endanger themselves or the company. Furthermore, thanks to our extensive contacts, we can connect our clients and create new business opportunities for them.

Consequences of a Poor Decision: What Are the Real Risks?

Ignoring the rules described above is not just a theoretical risk. The consequences of breaching the duty of due managerial care under Czech law are very real and can fundamentally affect both your professional and personal life. This is not an academic debate, but specific threats to your assets and career.

The most serious sanctions include:

• Obligation to compensate for damages: If your actions cause harm to the company, you are obliged to compensate it in full from your personal assets. If there were multiple managing directors, you are jointly and severally liable for the damage under the Czech Civil Code.
• Obligation to surrender any benefit obtained: Any benefit you gained in connection with the breach of your duties must be surrendered to the company.
• Liability for company debts in insolvency: If your actions contribute to the company's insolvency, a Czech court may compel you to guarantee its debts with your personal property.
• Exclusion from holding office (disqualification): In serious cases, a court in the Czech Republic may prohibit you from serving on the statutory bodies of any business corporation for several years.

It is important to note that your liability cannot be waived or limited by an executive service contract or any other agreement under Czech commercial law.

Potential Sanctions and Their Prevention with ARROWS

This table illustrates how our Prague-based legal team can protect you from the most serious impacts.

Act with Confidence and the Support of Experts Who Understand Your Business

The line between the authority of the General Meeting and the responsibility of the managing director is complex, and ignorance of it represents an inexcusable risk. Correctly setting up the relationship between management and owners is the foundation for the healthy and safe operation of any company. At ARROWS, we pride ourselves on speed, high quality, and a deep understanding of our clients' businesses.

With the trust of more than 2,000 clients, including a portfolio of over 150 joint-stock companies and 250 limited liability companies (s.r.o.), we prove daily that we understand the challenges you face in the Czech market. Whether you need to prepare documents for a General Meeting, obtain a legal opinion on a risky instruction, review contracts, or train management, our Prague-based specialists are ready to protect you.

Do not wait for a problem to arise. Act proactively. Contact us today to arrange a non-binding consultation. We would be happy to hear about your business plans and discuss how we can help you grow safely and with legal certainty.

Disclaimer: The information contained in this article is of a general informative nature only and serves as a basic guide to the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS law firm in Prague directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailor-made solution, so please do not hesitate to contact us.

Read also:

• Appointing a Foreign Director in a Czech Company Legal Requirements and Risks
• Holding Structures and Beneficial Ownership in the Czech Republic: Compliance Checklist
• How to Transfer Shares in a Czech Company: Step-by-Step Legal Overview
• Company Closure vs. Liquidation: What’s the Difference?
• Compliance audits: How to conduct an internal audit before the authorities arrive