This article is a continuation of series of contributions from our law firm dealing with the first amendment to the Act No. 90/2012 Coll., on Business Companies and Cooperatives (the Business Corporations Act), as amended (hereinafter the “Business Corporations Act”), most of which shall take effect as of 1 January 2021.
In the following article, we would like to introduce you to the changes that the above-mentioned amendment will bring in the area of concluding agreements between a business corporation and members of its bodies, i.e. executive (director´s) service agreements under the provisions of the Section 59 et seq. of the Business Corporations Act, as well as materially related legal instruments.
Validity and effectiveness of the executive service agreement
A fundamental change that the Business Corporations Act amendment will bring is conditionality of the effectiveness of the executive service agreement. Under the current legislation, we can imply that in the absence of the consent of the supreme body of the capital company, it is possible to invoke the invalidity of the agreement on the basis of Section 48 of the Business Corporations Act and such agreement can therefore be considered a relatively invalid legal action. However, this solution seems to be completely inappropriate in practice, as the agreement is considered valid until the entitled person (i.e. the business corporation itself) invokes its invalidity in court. The subsequent declaration of invalidity of the agreement is then associated with a number of undesirable consequences, such as bonuses already paid, etc.
In this respect, the Business Corporations Act amendment responds in substance to the existing case law on the subject matter and doctrinal conclusions, while newly stipulating that the executive service agreement without approval by the company’s supreme body will not take effect at all. It is therefore a statutory condition precedent, the fulfilment of which is directly linked to the legal effects of the executive service agreement concluded between a capital company and a member of its body.
Until the approval of the agreement, the performance of the function of a member of the body of a business corporation will be without remuneration, followed by the newly inserted last sentence of the provision on the basis of which the approved agreement will be effective from the date of its conclusion or from the date of employment, whichever is later, and at the same time allowing the supreme body to determine otherwise and in its decision to approve and award remuneration for the performance of the function of a member of the body retroactively.
According to the transitional provisions of the Business Corporations Act amendment, executive service agreements concluded even before its entry into force will be governed by new legislation after 1 January 2021. All agreements that are not approved by the General Meeting as of this date will be considered ineffective.
The procedure described above will significantly simplify the approval process in practice, as the supreme body will no longer have to adopt two resolutions on the basis of the Business Corporations Act amendment, i.e. one approving the executive service agreement and the other granting remuneration.
The new paragraph 5 of the referenced provision of Section 59 of the Business Corporations Act further stipulates that in the event of a conflict between the articles of association and the executive service agreement, the agreement contained in the articles of association will be applied. However, this does not affect the possibility of negotiating different terms in the agreement, but such an executive service agreement must be approved by the majority required to amend the articles of association, while the form of notarial deed is not required by law.
Remuneration for the performance of the function
Another change concerns the remuneration for the performance of the function, where the current regulation does not precisely specify the subjects of special remuneration for the performance of the function and can thus only be deduced from the context of the provisions in question. The amendment to the Business Corporations Act removes this shortcoming in Section 59 paras. 3 and 4 and Section 60 of the Business Corporations Act, when it explicitly stipulates that special remuneration will be applicable only to capital companies. For other types of business corporations, the general legal regulation of the order is followed in accordance with Section 2438 of Act No. 89/2012 Coll., the Civil Code, as amended.
Another noteworthy change is the extension of exceptions (for example: exception in case of force majeure) where, even if no executive service agreement has been concluded or in the event of its invalidity or ineffectiveness, the rule on unpaid service does not apply and the member concerned is entitled to the usual remuneration.
According to the transitional provisions of the Business Corporations Act amendment, executive service agreements and remuneration must be adjusted to the amount referred to within 6 months from the date of entry into force of the provisions of the amendment, i.e. by 1 July 2021, otherwise the performance of the function will be without remuneration.
A significant benefit of the Business Corporations Act amendment is the removal of the impractical rule for remuneration of employees who are also members of the statutory body or a person close to it, contained in Section 61 (3) of the Business Corporations Act, which followed the explicit acceptance of concurrence of functions taken over from Act No. 513/1991 Coll., the Commercial Code, as amended, and on the basis of which the remuneration of the above-mentioned persons had so far had to be approved by the General Meeting, which was quite rightly considered to be unreasonably strict. According to the explanatory memorandum to the amendment, there is no reason for such regulation in the Business Corporations Act and the legal regulation of conflict of interest is completely sufficient to achieve the desired state.
Exclusion of a member of a statutory body from the performance of the function
On the basis of the amendment to the Business Corporations Act, a general factual basis is introduced, resp. general process of exclusion of a member of a statutory body, on the basis of which the court may decide without a motion that a member of the statutory body of a business corporation who repeatedly or seriously violated his duties in the last 3 years before the proceedings may not perform the function of a member of the statutory body of any business corporation for up to 3 years from the legal force of the decision on exclusion.
At the same time, the new regulation aims to eliminate ambiguities, duplication, complexity of legal instruments and existing shortcomings in this area, such as unjustified differences between the individual facts of insolvency offenses.
The Business Corporations Act amendment brings with it several very beneficial changes in the current legal regulation of the issue of concluding executive service agreements, the aim of which is to specify the current legislation, eliminate inaccuracies and establish clearer and more concise rules that reflect existing case law.
If you have any questions regarding the topic of this article or corporate law in general, we are at your disposal – do not hesitate to contact us.
Mgr. Tereza Dvořáková – junior lawyer
Tereza Pšenčíková, LL.M. – junior lawyer
11. 12. 2020