What conditions must be fulfilled before the managing director of a company may enter into contracts with himself or herself on behalf of that company? What steps should managing directors take if they find themselves exposed to a conflict of interest? What does the case law of the Supreme Court have to say in this respect?
The past year has yielded a generous harvest of decisions by the Czech Supreme Court related to the conclusion of contracts between a corporation and a member of one of its elected bodies – i.e., most frequently, a limited liability company and its managing director. In such a situation, the managing director finds themselves in a conflict of interest.
The Corporations Act requires that the member of an elected body who intends to enter into a contract with their “own” company inform the other members of the said body, as well as the supervisory body (if installed at the given company, or else the general meeting) of this intention, and of the terms under which the contract is to be made. Typically, this means that a managing director is obliged to inform the other managing directors and the general meeting of such plans. If the general meeting finds that the conclusion of the contract is not in the interest of the company, it may enjoin the managing director from executing the contract. The same rules apply also to contracts made between the company and a person close to the managing director, or between the company and a company under the influence or control of the managing director.
For the general meeting to be able to duly assess whether the given contract is appropriate, the managing director must present the general meeting with a sufficient amount of information. If the wording of the contract is provided in its entirety, this obligation is always deemed fulfilled; however, the Supreme Court believes that it is also sufficient to disclose the draft contract in relevant parts, or even just to inform about a part of the intended contents. However, if the information is found insufficient, the general meeting may demand additional information or the disclosure of the entire wording of the contract. In any case, the duty of information is not fulfilled if the managing director failed to disclose contractual terms which the general meeting could not have expected to be part of the contract.
In 2023, the Supreme Court handed down a number of landmark opinions on the issue. According to ruling 27 Cdo 1206/2022, one may in certain cases do away with the formal procedure (otherwise prescribed in the law) of informing the general meeting; instead, the managing director shall inform all shareholders individually. According to the Supreme Court, the disclosure duty may in exceptional cases also be fulfilled if the “managing director of a limited liability company familiarizes all shareholders with the contents of the intended contract and the shareholders either express their consent with his intention to enter into such contract or at least acknowledge the intention, waiving their right to have the matter properly heard by the general meeting (which may potentially prohibit the execution of the contract) even though such finding is essential for a complete legal assessment of the matter”.
In a later decision (27 Cdo 3160/2022), the Supreme Court went one step further: taking into account the specific circumstances of the case that had been brought before it, it inferred that the disclosure duty had been fulfilled simply by ‘telling the other shareholder’ (the managing director, who in this case was also one of two shareholders, had informed his partner, who agreed with the intention to enter into the contract in question and did not ask for the general meeting to convene).
Having said all this, the Supreme Court has provided no guidance as to when one might deviate from the requirements as they are stated in the law. Hence, it will still always be “safer” to act in strict accordance with the letter of the law. However, for the future, one may expect that the courts will take a less formalistic view of whether the managing director’s disclosure duty has been fulfilled or not.
Source:
Corporations Act (Act No. 90/2012 Coll., on companies and cooperatives)
Decision Ref. No. 27 Cdo 2699/2021
Decision Ref. No. 27 Cdo 1206/2022
Decision Ref. No. 27 Cdo 3160/2022