Unlimited term of office for members of governing bodies and its effect on current members

In its decision from last year (ref. no. 27 Cdo 1915/2022), the Supreme Court addressed the fundamental issue of the contractual nature of the articles of association of a joint-stock company and the effectiveness of amendments to these articles concerning members of governing bodies whose terms of office had already commenced. Specifically, it considered whether an extension of a member’s term of office to an indefinite period, achieved by amending the articles, also applies to current members whose original terms were set for a defined period.

The Contractual Nature of Articles and the Dispositive Nature of Office Duration

The Supreme Court confirmed that the articles of association of a joint-stock company are a sui generis contract, binding not only on shareholders but also, notably, on the members of the company's elected bodies.

The Supreme Court summarized: “Given the contractual nature of the articles, when assessing the temporal effects of a general meeting's resolution amending the articles to extend the terms of elected officials, it is appropriate to rely primarily on general principles of contract law regarding the effectiveness of agreements that alter the content of obligations. Generally, unless otherwise agreed, a change in the content of obligations (§ 1901 Civil Code) starts producing the intended legal effects as soon as the agreement between the parties regarding the change takes effect (regarding contract formation, see § 1745 Civil Code). The legislature has constructed a similar rule for amendments to the articles decided by the general meeting; unless the law states otherwise, an amendment to the articles, as decided by the general meeting, takes effect when the general meeting resolution is adopted or at a later time specified in the resolution.”

Possibility of Setting an Unlimited Term of Office and Its Effects on Current Members of Governing Bodies

The unique nature of the articles of association is particularly reflected in the fact that their amendment does not require the consent of all persons bound by them, nor the consent of all parties to the articles as a sui generis contract. Amendments to the articles are decided by the general meeting with the necessary majority vote.

The principle of dispositive private law, which the Supreme Court bases its decision on, confirms that the statutory provision on term duration under § 439(3) of the Business Corporations Act (in force until December 31, 2020) is dispositive.

There is no statutory prohibition that would prevent the term of office of members of elected bodies from being set as unlimited.

If the articles of association of a joint-stock company are amended to establish an indefinite term for elected members, this amendment may (after meeting the condition mentioned below) apply even to those members who were elected before its adoption and remain in office.

The Supreme Court also emphasized that a general meeting resolution extending the term of office in the articles becomes effective for existing members of the governing body provided that these members express their consent, even if only implied. This consent can be expressed simply by the member continuing in office after the originally defined term expires. In the case at hand, this meant that a board member who continued to serve in office agreed with the amendment to an indefinite term in the articles, thereby extending their office until death.

Further Reasons Why Term Extensions Apply to Current Members of Governing Bodies

The Supreme Court’s conclusion can be seen as favoring an interpretation that minimizes formalism in implementing changes to legal actions. If the amendment to the articles did not allow for the extension of terms for current members of the governing body, the situation could be resolved by dismissing and re-electing the current members, leading to a purely formal (substantively meaningless) division of a single expression of intent into multiple legal acts.

The Supreme Court’s decision contributes to the needs of flexibility and legal certainty in corporate law.

Conclusion

The Supreme Court’s decision establishes an important rule for the application of amendments to articles of association concerning the extension of terms for current members of the governing bodies of joint-stock companies to an indefinite period. This decision confirms that the extension of terms by amending the articles also applies to current members of the governing body if these members express at least implied consent by continuing in office.

From a practical perspective, this decision strengthens legal certainty and grants corporate entities greater freedom in adjusting their internal rules without unnecessary formalism and complications.