Legal entities as managing directors or board members

Czech Republic: As of 1 January 2014, legal entities may serve as elected members of corporate bodies

The new civil law has made it possible that legal entities (e.g. another company or a cooperative), may become the managing director or a board member of a company.

Of course, the meetings of the relevant corporate body cannot be physically “attended” by such a legal entity. An important question thus arises: who will act on behalf of the legal entity after it was elected to the board? The law anticipates that the new corporate officer (i.e., the elected legal entity) will authorize someone else to discharge this responsibility. To somewhat simplify, that other person could be anybody who, as a natural person, would be fit for election to the given corporate body himself or herself. (If the elected legal entity does not authorize anybody in this manner, then it will be represented in its role as a corporate officer by its statutory representative).

A hotly debated issue is that of a potential violation of the duty to act with the “care of a prudent businessperson” (i.e., with due managerial care) by the individual who represents the elected legal entity, notably with respect to the matter of compensation for damages. This is because the law stipulates that the elected legal entity and its representative are jointly and severally liable for the damage caused. While this does not preclude a different indemnity arrangement between the two, their agreement would have no effect vis-a-vis third parties.

In this regard, it is rather problematic that the elected legal entity will regularly give instructions to its representative as to how to act on its behalf in the capacity of a corporate officer (member of a company body). After all, the representative is himself or herself obliged to act with due managerial care, and therefore ought to apply critical scrutiny to any such instructions (and disregard them, if he or she finds that they fall short of due care). It is clear from the above that the joint and several liability for a breach of the duty to act with due managerial care may well cause trouble in practice.

Tomáš Volejník, Senior legal asistent


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