On the compensation of members of elected bodies of corporations, today and in the light of the amendment to the Czech Corporations Act

If the position of managing director or (executive or supervisory) board member at a corporation is to be filled with someone who receives compensation for their discharge of duties, then an agreement on performance as a corporate officer must be made.

This agreement on performance as a corporate officer must be made in writing and be approved by the general meeting (and if it is the supervisory board which elects the members of the board of directors at a joint-stock company, then the above-mentioned agreement must be approved also by the supervisory board). Further, the agreement must contain certain mandatory specifications on compensation under the law (i.e., specifically. Sec. 59 (2) and Sec. 60 of Act No. 90/2012 Coll., on business corporations, as amended – the “Corporations Act”). Specifically, the following must be stated in the agreement:

(i) All components of the compensation package, i.e., including any flat-rate compensation for cash outlays, performances-in-kind (company car, flat, notebook, mobile, etc.), and contributions to future material security (e.g. payments into a pension plan);

(ii) The amount of compensation, or the method for calculating this amount (which must be sufficiently specific), and its type – whereas some components may be performance-based (i.e., be contingent upon the attained earnings);

(iii) The rules which govern when and how special bonuses and profit shares will be paid out (note that profit shares may be distributed also among persons other than shareholders, as long as the memorandum of association or articles of association expressly allow for it); and

(iv) Stock options (if any).

If the agreement on performance as a corporate officer includes no specification of the compensation, or was not made in writing, or was not approved by the competent body, it is understood that the corporate officer discharges his or her duties for no consideration (Sec. 59 (3) of the Corporations Act). The exception is an agreement on the performance as a corporate officer which was executed or approved in deviation from the statutory requirements, for no fault of the member of the elected body. In such a case, the member of the elected body will be entitled to customary compensation. Another exception is the option to approve performances that are rendered for the welfare of the member of the elected body but are not listed in the agreement on the performance as a corporate officer, whereas this approval is to be given by the competent body of the corporation (see below) in accordance with Sec. 61 (1) of the Corporations Act.

If an agreement on performance as a corporate officer was concluded but has not been approved by the competent body, then this causes the agreement to be voidable (i.e., “relatively invalid” – that is to say, valid until the affected person invokes its invalidity), as per Sec. 48 of the Corporations Act. Under an amendment to the Corporations Act which will come into force on 1 January 2021, (Act No. 33/2020 Coll., on the amendment of the Corporations Act in the wording of Act No. 458/2016 Coll. and of certain other related laws – the “Amendment”), the consequence will no longer be this voidability (relative invalidity) but the inoperativeness of the agreement (Sec. 59 (2) of the Corporations Act in the wording of the Amendment), i.e., the agreement will not take effect until its approval. Unless the competent body decides otherwise, the agreement may also take effect retroactively.

Performances other than the compensation mentioned in the agreement on performance as a corporate officer may only be rendered if a law or legal regulation says so (or an internal policy that was approved by the same body which is competent to approve the agreement on performance as a corporate officer), or else with the consent of such body (and possibly an affirmative statement by the supervisory board, if a supervisory board was installed at the company), as per Sec. 61 (1) of the Corporations Act. This is true even if no agreement on performance as a corporate officer was made in the first place. If such performances were rendered to the member of an elected body under other circumstances (i.e., without approval or consent on the part of the competent body), then such member must return the performances to the corporation, following the principles of unjust enrichment.

If the member of an elected body is at the same time also an employee of the company, then their salary or other compensation is subject to consent by the body which is competent to approve the agreement on performance as a corporate officer (and possibly an affirmative statement by the supervisory board, if a supervisory board was installed at the company), as per Sec. 61 (3) of the Corporations Act. This applies also if the company employs a person close to the member of the elected body (their spouse or descendant, for instance). It is contentious, however, what consequences the absence of such consent might have: the conclusion that the employee’s performances are in such a case rendered for no consideration is in conflict with the protections afforded by employees under labor law.

Upon the effective date of the Amendment (1 January 2021), the third paragraph of Sec. 61 of the Corporations Act will be abolished, so that the salary of the member of an elected body who is also employed by the company (or the salary of an employee who is close to them) will no longer have to be greenlighted by the body that approves the agreement on performance as a corporate officer (nor will a statement by the supervisory board be needed). However, pay heed to the rules for conflicts of interest (Sec. 54 et seq.): in such a case, the member of the elected body must at least notify the general meeting, which has the power e.g. to prohibit the conclusion of the relevant contract.

 

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