In a decision of 23 November 2022, the Supreme Court dealt with the issue of the law applicable to the internal organization of a legal entity registered abroad.
The complainant, a legal entity incorporated in the State of Nevada in the USA, as the seller had entered into a purchase agreement, recorded in the form of a notarial deed, with a Czech limited liability company, on the transfer of land plots in a value of CZK 209,600,000. One of the annexes to the notarial deed were the complainant’s Articles of Association, according to which it is being represented by two managers: “Manager 1” and “Manager 2”. According to the company’s Operating Agreement. it is being represented by two managers acting jointly unless stipulated otherwise. According to the Operating Agreement, Manager 1 was not authorized to dispose of property in a value exceeding USD 100,000. Manager 1 had acted alone when he signed the purchase agreement on behalf of the complainant (though a second version of the purchase agreement with identical wording was eventually signed by both managers).
The first-instance court and the appellate court were concerned with a slew of individual legal issues. By contrast, the Supreme Court limited itself to an assessment of the following initial question: In the situation at hand, what is the governing law for the internal organization of the complainant, i.e., a foreign legal entity engaged in a legal transaction in the Czech Republic? All subsequent issues raised by the original lawsuit have yet to be decided in court, which is why this article strictly focuses on the same question dealt with by the Supreme Court.
The first-instance court took as its point of departure Czech law, according to which internal limitations of the power of statutory representatives are only valid vis-a-vis third parties if the latter knew of this fact; in any case, the Articles of Association of the complainant did not reveal that such a restriction was in place. In addition, the first-instance court found that the second Manager “approved” the purchase agreement when he signed the restated version. The appellate court upheld the decision by the first-instance court.
By contrast, the Supreme Court pointed to the provisions of Sec. 30 (1) of the Czech Act on Private International Law (the “PIL Act”), according to which the legal personhood of a legal entity is subject to the jurisdiction of incorporation, also as regards such issues as internal structure, power of representation, etc. In this regard, the Supreme Court explained, the so-called incorporation principle applies whereby the jurisdiction in which a legal entity is being incorporated is the one which endows it with legal personhood and legal capacity, and thus is the relevant jurisdiction also for other matters, a non-exhaustive list of which is given in Sec. 30 of the PIL Act, such as the question who is to act and sign on behalf of the legal entity as its statutory representative.
According to the Nevada Revised Statutes, instruments and records which serve to acquire, encumber, or otherwise dispose of company assets are valid and binding upon the company if one or several managers have signed, unless the Articles of Association or the Operating Agreement stipulate otherwise. Consequently, when read in conjunction with Sec. 30 of the PIL Act, the aforementioned provisions of Nevada law governing the transfer of property of legal entities have impact also on the present “Czech” situation.
Hence, according to the Supreme Court, the conclusion drawn by the appellate court as to the limitation of managerial powers is in this case incorrect. With its ruling of 23 November 2022, the Supreme Court quashed the appellate decision and returned the matter for retrial before the appellate court, which will now have to focus, in particular, on the substance of the relevant statutory rules of Nevada governing the issue at hand – i.e., the laws of the state in which the complainant is incorporated.
Source:
Judgment 27 Cdo 1803/2021-599 by the Czech Supreme Court of 23 November 2022