How are the conditions of office of members (not only) of statutory bodies changing?
Act No. 90/2012 Coll., on Commercial Companies and Co-operatives (Act on Commercial Corporations) (hereinafter referred to as the "Act on Commercial Corporations") has undergone extensive changes since 1 January 2021 as a result of an amendment - Act No. 33/2020 Coll. (hereinafter referred to as the "Amendment"). Our law firm has prepared a series of articles on selected amendments. One of them is a change in the conditions of performance of duties of members of statutory and other bodies.
Author of the article: ARROWS (Mgr. Marek Hučík, office@arws.cz, +420 245 007 740)
New developments in performance and remuneration contracts
A significant innovation was the change in the consequences of non-approval of the contract by the relevant body (typically the general meeting). Until now, a contract that was not approved was considered invalid, but the person concerned had to appeal against such invalidity. If no one objected to the invalidity, the contract was considered valid, which raised a number of practical problems.
However, from then on, a contract of office without the approval of the competent authority would not even take effect. It would therefore have no legal effect without anyone having to invoke it. Pending approval of the contract by the competent authority, the performance of the duties will be free of charge. The amendment has also introduced a rule that the approval will make the contract effective at the moment of its conclusion (i.e. not at the moment of approval). Thus, the approval of the contract will "automatically" entitle the executive to remuneration for the performance of his/her duties also for the period between the conclusion and the approval of the contract. This rule may be waived by agreement of the parties.
It is still the case that if no remuneration is agreed in the performance contract, the performance of the function is free of charge. If the office is to be performed for remuneration, it is advisable to expressly provide for this in the contract. Compared to the existing regulation, the amendment introduced additional exceptions where the executive officer is entitled to remuneration when performing the function, even if it is not agreed or if the contract is not approved in the manner described above. The exceptions include in particular cases where the contract is invalid for reasons on the part of the company, or where the contract is not approved for reasons of force majeure. In such a case, the managing director is entitled to the usual remuneration for the performance of his duties[1]. In the event of a conflict between the contract and the articles of association, the provisions in the articles of association shall prevail. However, this does not prevent the parties from negotiating more favourable terms in the service contract.
New rules on the resignation of a member of an elected body
The office of a member of an elected body (i.e. not only of the statutory body) no longer ceases on the expiry of one month from the delivery of the notice of resignation. Now, the resignation will be terminated at the moment when the resignation has been (or should have been) discussed by the body that elected the member. The articles of association may provide that the resignation may be considered "only" by the body of which the resigning person is a member. The corporate body is obliged to consider the resignation without undue delay, at the latest at its first meeting. Thus, the amendment deletes the prohibition on a member resigning at an inopportune time and instead provides for the rule described in the introduction to this paragraph to protect the interests of the corporation. Resignations shall be delivered directly to the corporation.
Notice of resignation may be given directly at a meeting of the relevant body. In such a case, the office shall terminate on the expiry of two months from such notice, unless the body agrees on a different time of termination. In the case of a corporation with a sole member, the office shall terminate two months after the notice of resignation to the sole member, unless the sole member approves a different time of termination. The new regulation may make life for resigning members very difficult, as it is not clearly stated in advance when their duties end. The resigning member should therefore advocate in his/her own interest to convene a general meeting. The above can be partly modified by a special provision in the articles of association.
New developments in the process of expulsion (disqualification) of a member of the statutory body
Even without a petition, the court may decide that, under specified conditions, a member of the statutory body may be disqualified from holding office in any business corporation. Anyone who has an important interest may file a motion. The amendment provides for a uniform maximum period of disqualification for all types of unlawful conduct of a member of the statutory body of up to 3 years, which allows the court to individually assess the seriousness of the specific conduct.
Now, both repeated and serious breaches of duties in the performance of duties are sufficient separately, whereas before the amendment, the breach had to be both repeated and serious. The new regulation is thus stricter and makes it possible to punish even one-off but serious misconduct. A member of the statutory body who causes or contributes to the bankruptcy of the business corporation is also excluded. Such persons also risk more severe penalties on their personal assets. Upon the legal effect of the expulsion decision, the membership of a member of the statutory body in all business corporations shall cease.
Reintroduction of the so-called ban on chaining of legal entities
The then regulation allowed another legal person to become a member of the elected body of a legal person under very loose conditions. The legal entity should authorise a specific natural person to perform the function. If it did not do so, it was represented in the exercise of its functions by a member of its statutory body. However, another legal person could become a member of the statutory body and the chain of legal persons could be extended almost indefinitely in this way.
The amendment introduces a different, stricter regulation for capital companies and cooperatives. Now, a legal entity that is a member of an elected body of another business corporation is required to authorize a single natural person. If the legal entity fails to do so, it will not be entered in the Commercial Register as a member of the elected body. In addition, if the registration in the Commercial Register does not take place within three months of the creation of the office, the legal entity's office shall cease by operation of law. The new regulation also applies to legal persons currently serving as a member of an elected body of another commercial corporation. They were obliged to bring their current status into compliance with the new regulation by 1 April 2021 at the latest, otherwise they risk the termination of their office.
Conclusion
As can be seen from the foregoing, the amendment introduces a number of novelties, although these changes are largely derived from existing case law and should not be entirely unfamiliar to companies. However, a number of them need to be appropriately reflected in existing contractual documentation and company agreements. If you have any questions about the new legislation or are unsure how to update your existing documentation, please do not hesitate to contact us!