Of interest.

How to remedy unauthorized executive’s sole legal acts

In practice, it sometimes happens that a company is represented by only one member of its executive body (hereinafter the “executive”), although, according to the entry in the Commercial Register, joint representation by two or more executives is required. What a company should do if an executive has violated the “four eyes” principle, which is a binding way of acting for such a company, and the company still wants to be bound by such a legal act, the Supreme Court outlined in its recent decision.[i]

A typical situation

The company´s articles of association require that the company shall be represented by at least two executives jointly, regardless whether in all cases or only in specific cases (e.g. only in case of legal acts exceeding a specific value). The way of the company´s representation prescribed by the articles of association is duly registered in the Commercial Register.

In such a situation, when it is objectively ascertainable that only two executives may perform the given legal act together, only one of them acts (for whatever reason). It is therefore clear that the executive acting solely violates the prescribed way of the company´s representation.

The subsequent approval (in Czech: “ratihabice”)

If only one executive performs a legal act in the situation above, he/she breaches his/her representative authorization. In its ruling, the Supreme Court endorsed that, in this specific situation, only general rules of representation may be taken into account (in particular Section 440 of the Civil Code) according to which the legal act by which the agent has exceeded his/her authorization binds the principal only if the principal approves it without undue delay.

If a company intends to be bound by a legal act performed by only one of its executives, it must subsequently approve (ratify) it. If there is no additional approval made by the company, the company is not bound by such a legal act.

Nevertheless, the authorizing (ratification) act must be taken by an authorized person within the prescribed time limit and in the prescribed manner.

The effects of subsequent approval

The company is bound by the subsequently approved legal act from the beginning (ex tunc). In its ruling, the Supreme Court pointed out that it is necessary to distinguish between the subsequent approval of legal act and successive conduct of several executives of a company complying with the so-called “four or more eyes” principle. In the latter case, it is usually apparent from the beginning that the company is being (or going to be) by several executives together and the legal act becomes effective when the last of them expresses the will to perform the legal acts (ex nunc).

Persons authorized to subsequent approval

According to the Supreme Court, anyone who would be entitled to represent a given company in the legal act in question may express a company´s will to be bound by that sole act performed by (only) one executive. However, such a person does not need to be an executive. If (one) executive acts unlawfully, such an act may be subsequently approved by anyone who is entitled to conduct the approved act – i.e. not necessarily by another executive. However, it can be assumed that the executives will most often make subsequent approval when joint representation is registered in the Commercial Register.

If the executives decide subsequently to approve an act made by (only) one of them, it is necessary they adhere to the way of the company´s representation while performing the approving act. They must respect the “four eyes” principle and thus the approving act may not be performed by (only) one of them.

In its decision, the Supreme Court also lists persons who usually will be authorized to carry out approval acts – namely (i) persons who may represent an entrepreneur – legal entity in accordance with Section 430(1) of the Civil Code, (ii) proxy holder in the case of approval of a legal act made within the operation of the enterprise, (iii) another agent if the approved legal act falls within the scope of the granted power of attorney or (iv) other agents having the authority to conduct the legal act being approved (guardian, liquidator, head of a branch, etc.).

The form of approving the legal act

Quite surprisingly, the Supreme Court concluded in its decision that the choice of the subsequent approval form depends fully on the company. The company may freely choose the form for the approving act even that the law requires a specific form for the legal act being approved.

The Supreme Court also ruled in its decision that it must always be clear that the person expresses the company´s will to subsequently approve a certain legal act taken on behalf of the company by one of its executives. If these conditions are met, the subsequent approval may also happen in the form of a factual act, e.g. by way of fulfilment of obligations (by purchase price payment or a part of it, etc.).

Although the Supreme Court´s decision may seem practical while introducing the free choice of form, we would still recommend, for the sake of legal certainty between the parties, to follow the form prescribed for the legal act being approved, i.e. with the preference of a written form.

There might be a number of cases where the Supreme Court’s conclusion would, in our opinion, not be applicable. Typically, in case of transfer agreements regarding real estate registered in the Land Register. We can hardly imagine that the land register would successfully proceed with the registration of the company as a real estate´s new owner when the real estate acquisition agreement would have been signed by (only) one of its executives violated the “four eyes” principle. In this situation, we do not believe that participants to such a proceeding before the land register could rely on the Supreme Court’s conclusion and (successfully) claim that the real estate acquisition agreement has been subsequently approved by purchase price payment. Despite the Supreme Court’s decision, we assume that the Land Register will still require a deed accompanied by officially verified signatures of the parties on the same document. The same applies, in our opinion, in the case of share transfers in a limited liability company. Especially in these situations, the Supreme Court’s conclusion on the free choice of the form for the approving act is unlikely to apply.

The time period and its commencement

Pursuant to Section 440 of the Civil Code, a subsequent approval must be granted without undue delay. In this context, the Supreme Court followed in its decision previous case-law on the interpretation of the term “without undue delay”.[ii] And this time period commences starting at the moment when the company becomes aware of the legal act and of the fact that only one executive acted on behalf of the company.

The conclusion

We welcome the Supreme Court’s effort to provide a comprehensive judicial interpretation of individual legal institutes introduced by (still) new Civil Code. The subsequent approval is an appropriate instrument for a company to additionally express its will to be bound by an “excessive” sole act by one of its executives.

Nevertheless, we have reservations about the Supreme Court´s conclusion on the free choice of the form for the approving act. Especially, in case of very formalistic proceedings before Land register or another registration proceedings, the presented conclusion of the Supreme Court will be subjected to a hard test. For the sake of legal certainty, we recommend the parties to comply with the form required for the legal act being approved in order to avoid potential complications in the relevant registration proceedings.

If you have any questions regarding this topic or corporate law in general, please do not hesitate to contact us at any time.

 

Mgr. Martin Heinzel, attorney-at-law – heinzel@plegal.cz

Mgr. Jakub Málek, partner – malek@plegal.cz

www.peytonlegal.cz

 

15. 11. 2019

 

[i] Judgment of the Supreme Court of 23 July 2019, file number 27 Cdo 4593/2017.

[ii] Cf. eg the Supreme Court judgment of 10 December 2013, file number 32 Cdo 2484/2012, or a decision of the Supreme Court of 22 September 2015, file number. 29 Cdo 2970/2013.

 

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