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Legal newsletter April 2021

The requirement of an objective reason for terminating non-compete clause

The purpose of non-compete clauses is, as the name suggests, to oblige an employee to refrain from activities that would be competitive with the employer’s activities for a certain period of time after the employment termination. But what if the employer is no longer interested in maintaining the clause?

Legal regulations allow both the employer and the employee to withdraw from the non-compete clause, but only for reasons stipulated by law or those agreed between the employer and the employee. In addition, employers are limited in their ability to withdraw from the non-compete clause by the obligation to do so only throughout the employment duration and stating a specific reason.

These requirements place high demands on employers when drafting a functioning non-compete clause, especially in defining reasons for withdrawing from a non-compete clause. Considering the development of the case law on this topic, we have previously tended towards the conclusion that the reasons for withdrawing from a non-compete clause should be defined in such a way that their fulfilment does not depend solely on the employer’s will. The Supreme Court has recently upheld this view.

In the present case, an employer terminated employee’s non-compete clause the before the termination of the employment relationship. The employer stated that, given the value of the information, findings, knowledge of work and technological procedures acquired by the employee in the employment with employer, it would not be appropriate or purposeful for the employer to enforce the prohibition of competition and pay the related consideration.

However, the Supreme Court found to be problematic the clause wording according to which the employer could withdraw from if the above-mentioned reasons for dismissal arose in the employers view. The court compared the employer's right to decide in this manner on the withdrawal to a situation where the employer would have the option to withdraw from the non-compete clause without any reason or without stating any reason.

The leeway in defining a non-compete clause so that it remains utilisable for employers is thus narrowing. Therefore, in the future special attention should be paid to the precise and objective definition of the conditions for withdrawing from the non-compete clause.

 

Extraordinary contribution during imposed quarantine

On March 5, 2021, the Act on Extraordinary Contribution of Employees in the Imposed Quarantine (the “Act”) entered into force. Its main purpose is to improve the financial situation of employees who have to stay in quarantine. According to the former regulation employees in such a situation were only entitled to compensation of wages. According to the legislator this was supposed to be one of the reasons which led to the fact that employees infected with the COVID-19 virus did not report their contacts. The legislator expects that the contribution introduction will increase the willingness of employees to report their contacts and, as a result, the epidemic situation may improve.

The allowance is to be provided by employer to its employee during imposed quarantine, provided that the employee is also entitled to the compensation of wages, salary, or remuneration related to work performed outside the employment relationship.

Employees are entitled to a contribution of CZK 370 per day, for a maximum of 14 days. However, this does not apply if the employee became infected on vacation abroad. The law stipulates that the employee is not entitled to the allowance if the quarantine has been imposed within 5 days of the date of employee’s returning from abroad, with the exception of work trips or business trips.

Although this is another financial burden for employers in an already difficult time, the positive news remains that the amount that the employer pays to employees as this contribution can be deducted from the social insurance contributions. If the employer pays the employees more in contributions than for the social insurance, this difference is considered to be an overpayment on the social insurance contributions. The employer has to claim the corresponding deduction within three calendar months after the end of the imposed quarantine at the latest.

 

Shares and stocks after the amendment to the Business Corporations Act

The possibility to define more types of shares / stocks in the articles of association remains, but in such a case the company must now state in the articles of association or on ordinary share certificates (as the case may be) also their designation, i.e. the name of the share type. The law omits the distinction between "basic" and "special" shares or "ordinary" stocks and "stocks with special rights".

However, the amendment explicitly regulates two types of shares / stocks with special rights, namely shares / stocks without voting rights and shares / stocks with nomination rights.

The articles of association may - as before - stipulate that a certain type of share will not be associated with voting rights. However, the consent of such a shareholder to the decision of the general meeting will always have to be obtained when deciding on an amendment to the articles of association, or when deciding on a change that as a result may affect the rights and obligations of such a shareholder.

In the case of stocks, the law also explicitly regulates stocks without the right to vote, or with different voting weights. The sum of the stock nominal values with which no voting right is associated may not exceed 90% of the share capital. A shareholder owning stocks with which voting rights are not associated is then entitled to vote at the General Meeting if the law (ZOK) requires voting at the General Meeting according to the type of stocks.

A share with a nomination right means a share the owner of which has the right to appoint and remove one or more executives. The total number of these executives may not exceed the number of executives appointed by the General Meeting. Similarly, this right can be combined with the appointment of members of the Supervisory Board, if established.

A similar nomination right with the same limits is set forth for stock holders in relation to the appointment of members of the Board of Directors or the Supervisory Board.

The appointment and removal of members of the bodies on the basis of shares and stocks with nomination rights always requires a written form with an officially certified signature. The General Meeting may dismiss members of the bodies appointed on this basis only in the event that the nomination right associated with the share expires or if there is a serious reason for doing so following from the performance of the function of the appointed body member (especially serious or repeated breach of duties).

The ZOK amendment thus brings certain changes and clarifications in the area of ā€‹ā€‹defining shares and stocks, which may require amendments to the existing articles of association. At the same time, it will be necessary to adjust the designation of various share types in the shareholder and stockholder lists or on the ordinary share certificates.