Czech Supreme Court rules that shareholders may assume responsibility for specific decisions adopted by the management

In a recent judgment, the Supreme Court took position on the options available to shareholders of a joint-stock company to assume, in a shareholders’ agreement, the obligation to intercede with the board in favor of a concrete board decision, or the responsibility for the adoption of such decision.

The Supreme Court of the Czech Republic had to rule in a case which among other things involved the question whether shareholders may in a shareholders’ agreement undertake to intercede with the members of the board in favor of the adoption of a certain decision, or whether they may even accept responsibility for the outcome, i.e., for a specific decision taken by the board.

There can be no doubt that the shareholders may agree to intercede with board members in favor of the adoption of a certain decision. The board of directors will not be bound by such proposals in any way, but may review the recommendation, or viewpoint, of shareholders brought before them and take it into account when making a decision. If a board member were to thoughtlessly and automatically follow such recommendation without first assessing it, they would certainly not be acting with the requisite care of a prudent businessperson. Similarly, it is possible for shareholders to undertake in a shareholders’ agreement that they will compel the board of directors to pass a concrete decision, i.e., to assume a guarantee for the outcome.

The essence of the Supreme Court’s recent ruling however is that shareholders may only accept the obligation of intercession or assume responsibility for the passage of a certain decision by the board of directors if the decision is not in conflict with the law or with the articles of association of the company, i.e., the decision must not concern the management of the company’s business affairs. In the opposite case, says the Supreme Court, such a shareholders’ agreement may be invalid for conflict with the law.

The law prescribes that the business management of a joint-stock company lies in the hands of the board of directors, whereas no one has the authority to give instructions to the board concerning the business management. One must therefore in each individual case engage in a careful review, taking into account the specific circumstances, whether the decision which the shareholders agreed to recommend to the board (or for whose successful adoption they accept responsibility) concerns the business management of the company or not. For instance, decisions concerning the procurement of financing for the day-to-day operations of the company’s enterprise would certainly qualify as pertaining to business management. By contrast, a decision on the procurement of funding for major new projects may in certain cases go beyond standard business management and instead belong to the realm of strategic management. Unless the articles of association of the joint-stock company stipulate otherwise, the general meeting (though not individual shareholders) does in fact have the competence to give instructions to the board of directors regarding strategic management issues.

As we have seen, shareholders may assume a duty of intercession or a guarantee for the adoption of concrete decisions by the board of directors, though always only with respect to decisions by the board in accordance with the law and the articles of association of the company, so that the board members do not violate their duty of due care when passing them.

Supreme Court judgment 27 Cdo 1873/2019 of 16 March 2021

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