MAJOR AMENDMENT TO THE BUSINESS CORPORATIONS ACT – SIGNIFICANT CHANGES CONCERNING COMPANY BODIES

In our first article in the series of articles on the major amendment to the Business Corporations Act, we provided you with an overview of the changes that commercial companies will face in connection with the so-called major amendment to the Business Corporations Act and related laws, which will come into force on 1 January 2021, and a week ago we helped you understand selected significant changes in the functioning of companies that the amendment to the Business Corporations Act No. 33/2020 Coll. will bring.

This week we will explain how the amendment will affect the functioning of the corporate bodies themselves, and most importantly, what it means for you specifically.

An executive service agreement

According to the current legislation, a written executive service agreement between a company and a member of its body should be approved by the company’s supreme body. The contract is therefore typically concluded between an executive and a limited liability company or a member of the board of directors, a member of the supervisory board or a statutory director and a joint stock company. In the absence of approval by the general meeting, the interpretation so far has been that as long as the company or that member does not object to the invalidity, the contract has been validly concluded (so-called relative invalidity of the contract).

However, from 1 January 2020, without such approval, the contract will not take effect. If the contract is approved, the contract will be effective from the conclusion or from a specified later date. But what happens if the contract is not approved by the general meeting?

As far as rights and obligations are concerned, the provisions of the Civil Code governing an order (§2430 et seq. of the Civil Code) would reasonably apply, the executive partnership would nevertheless be validly created. However, with regard to remuneration, the Business Corporations Act expressly provides that if remuneration in a limited liability company is not agreed in the executive service agreement, the exercise of the office is free of charge. As a result, the failure of the supreme body of the company to approve the executive service agreement would render the contract absolutely null and void and the exercise of the office without remuneration. This could be an unpleasant surprise for an executive director who has negotiated a generous financial remuneration for his exceptional performance.

Furthermore, the amendment now explicitly provides that if the executive service agreement conflicts with the foundation legal act (articles of association, memorandum of association or articles of incorporation), the foundation legal act will be followed.

We therefore strongly recommend that you duly approve the executive service agreement at the general meetings, in the wording consistent with the foundation legal act. We will be happy to prepare the executive service agreement for you, assess its compliance with the foundation legal act, prepare the minutes of the general meeting or the resolution of the sole shareholder or shareholder in the capacity of the general meeting with all the necessary formalities so that the above described situation does not occur. And we will also arrange for the change of the data in the Commercial Register.

Resignation

Until now, a resigning member of a corporate body (an executive director in a limited liability company or a member of the board of directors, a member of the supervisory board or a statutory director in a joint-stock company) had to notify the body that elected him/her (usually the general meeting) of his/her resignation, and his/her office then expires 1 month after such notification.

The new term of office ends on the date on which the resignation was or should have been discussed by the supreme body. Upon receipt of the resignation by that body, that supreme body shall discuss the resignation without undue delay, at the latest at its next meeting. However, it is possible to further specify in the foundation act that the deliberation of the body of which the resigning member is a member is sufficient (i.e. typically, when a member of the board of directors resigns, his resignation would be deliberated by the remaining members of the board of directors of the joint stock company). If the resigning member announces his resignation directly at a meeting of the relevant body or delivers his resignation to the sole shareholder within the scope of the general meeting, his term of office expires 2 months after such announcement. In either case, resignation may be approved at an earlier date at the request of the resigning member.

If this process concerns you, we are ready to arrange for any resignation of the managing director, the minutes of the general meeting and the amendment of the articles of association.

Partner with so-called broadcasting rights

The amendment introduces an interesting option for a limited liability company. The managing director is normally appointed and dismissed by the general meeting. However, from the New Year, it will be possible to specify in the articles of association that this right will be linked to the share itself. The managing director could thus ultimately be appointed by the shareholder himself. And the shareholder could also dismiss the managing directors he or she has appointed. Without the need to convene a general meeting. This shareholder would have the so-called broadcasting right. The only condition is that the number of managing directors appointed in this way must not exceed the number of managing directors appointed by the general meeting, so a maximum ratio of 50:50 is allowed.

Therefore, if you are interested in facilitating and expediting the replacement of executive directors in the future, we will assist you with amending the articles of association for this purpose.

New obligations of persons who factually act as a member of an elected body, although they are not officially a member

With effect from 1 January 2020, the duties of a person who is not officially a member of an elected body but is factually a member of an elected body are expressly enacted. We can imagine a former executive director whose office has been terminated by removal but who nevertheless continues to act for the company. Even for such a “fake” managing director, the non-competition prohibition, the duty of care and the rules on conflicts of interest are newly enacted, which until now only resulted from case law. Now their liability is made clear.

Accompaniment at the general meeting

Another new feature will be the possibility of being accompanied at the general meeting. Unless the foundation legal act directly excludes it, a shareholder may be accompanied at the general meeting by a person he or she appoints. This can be a brother, a lawyer or your personal life coach, in short anyone. Provided that he or she complies with the same confidentiality requirements as the person he or she is accompanying, for which a non-disclosure agreement (NDA) will need to be presented. This obligation is expressly provided for in the law only for the accompaniment of a shareholder, but it can be inferred from the general provisions of the Civil Code that this obligation is likely to apply to the accompaniment of a shareholder as well.

We have extensive experience in drafting NDA agreements, so do not hesitate to consult it with us. And if you want us to advice you directly at the general meeting, we would be happy to make time for your entourage as well.

New conditions for protest at the general meeting

The amendment introduces a change in the fact that a protest raised at a general meeting, whether by a shareholder of a limited liability company or a shareholder of a joint stock company, must be justified. Respectively, in order to be able to challenge the validity of a resolution at a general meeting at a later date, it must be reasoned. At the same time, it will only be possible to challenge the resolution of the general meeting on the grounds for which the protest was lodged. However, the invalidity can also be claimed by those who did not lodge a protest for a valid reason. The range of cases in which the failure to lodge a protest is “forgiven” has therefore been extended to all serious reasons, from the original reasons that the protest was not recorded due to an error by the recording clerk, absence from the general meeting or the fact that the reasons for the invalidity could not be immediately discerned at the general meeting (e.g. due to lack of expertise).

If you disagree with the decision taken at the general meeting, make sure that the recorder has recorded your protest and the reasons for it in the minutes of the general meeting exactly as you have expressed it and as you mean it. And if you have a really important general meeting coming up, you might consider taking us along as the aforementioned accompaniment so that we can advise you on the spot on how to word your protest accurately.

Simplifying decision-making outside the general meeting (per rollam)

As you may already know, your company’s general meeting can meet per rollam, i.e. outside the general meeting, which can be particularly useful at this time of year when travel is not convenient. Until the end of the year, if a notarial deed was required for a decision of the general meeting (e.g. when amending the articles of incorporation, the articles of association or the articles of association), then such a form had to be expressed by each of the partners or shareholders in the case of per rollam decision-making, which was of course hugely expensive.

Therefore, since the new year, a change in this process is really beneficial, whereby it will now be sufficient if the draft decision of the general meeting sent to all the partners or shareholders is in the form of a notarial deed, but for the expression of these partners or shareholders, it is then sufficient if their signature is officially certified and sent back. After that, the notary will still need to certify the adoption of the resolution itself in the notarial deed.

If you have a company with partners or shareholders from different parts of the Czech Republic or even Europe, or if it is not convenient for you to convene a general meeting at the time of the COVID-19 pandemic, we will be happy to help you with the implementation of the entire per rollam process.

Additional shareholder consent to the decision of the general meeting

Until now, a shareholder of a limited liability company had the opportunity to exercise his voting rights within 7 days of a general meeting at which he was absent.

From the New Year, the possibility of an additional vote will be limited to consenting to an amendment to the articles of association that affects the rights and obligations of that shareholder who wishes to exercise an additional vote. The consent should specify the share(s) to which the voting right exercised is attached and it is recommended that the consent be accompanied by a certified signature so that the shareholder is properly identified. The 7 day time limit remains.

Retention of minutes of the supreme body

Finally, we would like to share with you that the amendment establishes an obligation for all legal persons to keep minutes of the proceedings of the supreme body of the legal person, i.e., for example, minutes of general meetings of limited liability companies or joint stock companies, for the entire existence of the legal person. It is time for a bigger filing cabinet.

Conclusion

It’s been pretty nourishing this time, we know. Nevertheless, we sincerely hope that we have explained everything clearly and that you have at least an outline of the changes that will affect your company’s bodies from the New Year and what will need to be dealt with legally as part of these changes. Now that you have an idea, we can start working on it together.

Well, next week, you can look forward to the last article in our series of articles on the amendment to the Business Corporations Act, where we will explain other significant changes that could still be relevant for you and your company.