Corporate / M&A

Czech Republic: Acting on behalf of a company after the re-codification

The re-codification of Czech private law, which entered into force on 1 January 2014, has introduced many changes to the institute of acting on behalf of a company. Doing this correctly is one of the prerequisites for the proper formation of legal relationships. For the purposes of this article, a company means a limited liability company or a joint-stock company.

Acting of the statutory body

Under the new legislation, the company as the legal entity has legal capacity, i.e., the capacity to have rights and obligations, but is not legally competent, i.e., does not have the capacity to take legal acts. The company no longer creates its own will and the statutory body does not act “on behalf of the company”. The company newly takes over the will of the statutory body, which in turn “represents” the company as its statutory representative.

A legal entity as a statutory body

A legal entity can newly become a statutory body of a company. While performing the office of the statutory body, the legal entity will now be represented by its statutory body or an authorised representative.

Collective statutory body

The new legislation enables the emergence of a collective statutory body even in a limited liability company, and the division of powers between the members of the statutory body by individual areas. If a collective statutory body is created, one of the members will have to be entrusted to legally act towards the employees of the company. If no such member is determined, the powers will be exercised by the chairman.

Internal limitations of representative powers

The statutory body is now authorised to represent the company in all matters. Generally, internal limitations of representative powers will be permissible, if there is no intervention to business management. Such limitation, however, is not effective against third parties, even if it was published.

Statutory limitations of representative powers

A statutory limitation is given when approval of the general meeting for certain legal action is required by law. Lack of such approval would make such action void by operation of law.

Statutory limitation of representative powers will be constituted by rules regulating so-called “self-dealing”. If the statutory body or persons interlinked to the statutory body intend to enter into a contract with the company, the statutory body will be obliged to notify the body of which it is a member and the supervisory board, or the general meeting of the company. The same applies for the provision of security or affirmation of debts by the company in favour of the statutory body or persons interlinked to the statutory body. The notification obligation will not be set if the transaction is realised under ordinary business conditions. In case of conflicts, the appropriate body of the company is authorised to prohibit the respective legal action.

Proxy

The institute of proxy has only been changed slightly in the re-codification. The proxy holder is still authorised to perform all legal acts related to the operation of the enterprise. The new legislation preserves the division of proxy into basic proxy and extended proxy. Unlike basic proxy, extended proxy now includes the authorisation to alienate or encumber real estate. A special kind of proxy limited only for a branch of the company has been newly introduced.

Collective action

Granting a power of attorney to one member of the statutory body

The New Civil Code expressly permits the possibility of granting a power of attorney for certain legal action to one member of the statutory body while collective acting is set up. “Certain legal action” should not be interpreted as only one particular legal action, but as a set of partial legal actions leading to the fulfilment of a specifically stated purpose, such as entering into a contract.

Joint action of a statutory body and a proxy holder

Does the new legislation enable the joint action of the statutory body and the proxy holder, which was not permissible under the existing legislation? While the new legislation does not include any provision expressly prohibiting this, the existing case law might continue to be applicable. The case law states that the extent of representative powers of a statutory body and those of a proxy holder are not the same and the admission of joint acting would in fact grant the proxy holder the status of a statutory body, which is not permissible. Unlike the Austrian and German legislation, which served as the inspiration for the re-codification of the Czech legal system, the new Czech legislation does not expressly permit such joint acting. In light of the above, we would not recommend establishing such a model of combined acting until its permissibility is confirmed by Czech case law.

Other ways to represent the company

The new legislation has introduced only a few changes to other ways of representing a company.

Authorised representatives

Companies are bound by the actions of a person authorised in the operation of the enterprise to perform certain activities. This person (usually an employee) is entitled to perform all acts customarily involved in the course of such activity.

Unauthorised representatives

Companies are also bound by the action of other persons in the business premises who are not related to the company, provided that third parties involved could not have been aware in good faith that such persons were not entitled to represent the company.

The re-codification of Czech private law, including the institute of acting on behalf of a company, has made business practices more flexible.