Corporate / M&A

Czech Republic: Management liability highlights after re-codification

From 1 January 2014, a new civil and commercial code entered into force imposing stringent obligations on statutory bodies of corporations.

New regime of management liability

Effective 1 January 2014, the re-codification of Czech civil law introduced a reinforced regime of management liability imposing a large number of new statutory requirements on members of statutory bodies of business corporations. In comparison to the regime that was in place until 31 December 2013, members of statutory bodies now need to exercise more vigilance and business awareness when making business decisions.

Due managerial care

Under the new civil law regime, members of statutory bodies have to act with due managerial care, requiring them to exercise requisite loyalty, expertise and caution when performing the office.

The member must demonstrate due managerial care throughout the term of the mandate, and if it is discovered that they cannot perform the office with due managerial care and do not adopt requisite measures (e.g., delegating the matter to another member), the member shall be deemed to have acted negligently.

Business judgment rule

The new civil law regime has introduced into written law a business judgment rule whereby members of statutory bodies are not liable to the business corporation if they could reasonably expect when adopting a good faith business decision that they acted with requisite loyalty towards the business corporation, and in the defensible interest of the business corporation on an informed basis.

In principle, the business judgment rule incorporates a principle whereby members of statutory bodies should not be retrospectively held liable for damages to the business corporation resulting from an incorrect business decision, if they acted in the above described manner.

Delegation

The new Civil Code allows powers to be delegated within a collective statutory body, whereby each member may be assigned a particular scope of the statutory body’s authority (e.g., financial matters, HR matters, legal matters). In each case, such delegation will not free other members of the statutory body from the duty to supervise the manner in which the matters of the business corporation will be handled.

In principle, members of statutory bodies must perform the office in person. The member newly can entrust other members to vote for them at the meeting of the statutory body in the event of their absence.

One member of the collective statutory body will also need to be authorised to deal with the business corporation’s employees; otherwise, the chairman of the collective statutory body will be automatically assigned to such a position.

Breach of duties

Generally, members of statutory bodies will be obliged to surrender any benefit derived from breach of the duty of due managerial care to the business corporation and to pay any damages resulting from such breach. If the member of the statutory body has not made good the damages to the business corporation, the member’s assets will be held as a surety to the business corporation’s creditors to the extent that the creditors cannot satisfy their receivables directly against the business corporation.

Reflexive damage

A court now will be permitted to impose the duty on a statutory body member to pay damages only to the business corporation if it is sufficiently apparent that such payment would also compensate a depreciation of the shareholder’s share in the business corporation.

Return of payments

Under the new regime, if the business corporation has been declared insolvent and if requested by the insolvency administrator, a statutory body member must return any benefit derived under a management contract and any other benefit received from the business corporation over the past two years.

This would only apply if the statutory body member knew or should have known that the business corporation is threatened by insolvency and has not taken – in breach of the duty of due managerial care – all necessary and reasonably expected steps to avert insolvency.

Sanction surety

Under the new regime, a court may determine to hold the assets of members of statutory bodies as a surety for the business corporation’s obligations, if the business corporation has been declared insolvent and if the member knew (or could have known) that the business corporation is threatened by insolvency and has not taken all necessary and reasonably expected steps to avert it.

Disqualification

Finally, an insolvency court dealing with the business corporation’s insolvency will impose a ban on the statutory body member of the insolvent business corporation on performing the office of a statutory body member or similar position in any business corporation for a period of three years (with possible extension to 10 years).

This would apply if the member contributed in all respects to the business corporation’s insolvency, or contributed to a decrease of insolvency assets and creditors’ prejudice after the commencement of insolvency proceedings, or repeatedly and seriously breached the duty of due managerial care in the last three years.

The new civil and commercial code imposes more stringent rules and requirements on the performance of office of a statutory body in a business corporation, requiring a more cautious and diligent approach.