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Legal newsletter September 2020

Elected body member of a business corporation in the light of the amendment to Business Corporations Act

A contract for the performance of function concluded between a business corporation and an elected body member (e.g. a member of the Board of Directors) requires an approval by the company's supreme body (general meeting, sole shareholder). According to the current legislation, if it is not approved it is considered relatively invalid, i.e. the contract is valid only as long as no one invokes its invalidity within the statutory period. In the event that the contract is not concluded or is declared invalid due to reasons caused by the corporation, according to the current regulation, only the usual remuneration is due to a member of the body. This puts an elected body member in an uncertain situation.

The amendment seeks to prevent this by replacing the relative invalidity with infectivity. The contract on the performance of function will thus be valid, but without approval it will not take effect, i.e. no remuneration can be paid according to it. The contract shall enter into force upon approval, even retroactively, either on the date of its conclusion or on the date on which the function arises, whichever is earlier. At the same time, the amendment preserves the protection of a body member against the failure to approve his contract for the performance of function solely due to reasons caused by the company (that now include also force majeure events) by awarding a remuneration in the usual amount.

Another novelty introduced by the amendment concerns the conflict between the contract on the performance of function and the company articles of association. Similarly to the currently valid principle, the provisions in the articles of association take precedence. Newly, if the contract on the performance of function had been approved by the majority required for the articles of association change, the provisions of the contract on the performance of the function will prevail.

Other changes include measures against the chaining of legal entities in company bodies, where a legal entity that becomes a member of an elected body must immediately authorize a natural person who meets the conditions for the performance of function to represent it. Without this, it will no longer be possible to register a legal entity as a member of an elected body in the Commercial Register. At the same time, the elected representative will have the same obligations towards the company as another member of the body, even in the area of ​​responsibility for the performance of function, where he will be liable for damage jointly and severally with the legal entity who elected him as a representative.

The amendment also returns to the older regulation of resignation. The performance of function will again end on the day when the resignation was discussed or should have been discussed by the body which elected the resigning member, and not, as is currently the case, after one month has elapsed from the delivery of resignation notice. If a member of office elected body announces his resignation directly at a meeting of the competent body, the term will end 2 months after the announcement. If the powers of the General Meeting are performed by a sole shareholder, the term will now end 2 months after the notice delivery. However, another period may be approved at the request of the resigning party.

These changes can thus contribute to the simplification of approving process related to the contract for the performance of function and remuneration and to the legal certainty in relations to the elected body members.


Profit share in the light of amendment to Business Corporations Act

The amendment, which will take effect at the beginning of next year, addresses, among other things, the profit sharing. The same rules that apply to the profit distribution are also newly introduced for the share in other own resources, which are not included in the current legislation. Such other own resources are, for example, share premium.

The new law specifies the conditions under which it is possible to pay a share of profits and other own resources. The law takes over the wording of the balance test from the accounting rules. A new condition will also be the compliance of the profit-sharing payment with the legal regulation in general (i.e. any possible restrictions in specific legal regulations for certain business sectors). At the same time, it explicitly excludes from the sources for distribution any potential reduction of the registered capital.

It will be possible to distribute the profit share based on fulfilment of the balance test under both current and extraordinary financial statements until the end of the accounting period following to the accounting period for which the financial statements were prepared. The old wording did not contain any time limit for its division and its length was derived only from the Supreme Court case law; it was six months. The new law provides for a period of 3 months from the adoption of decision on the profits distribution. (However, a special six-month period will be maintained for public limited companies and general partners of limited partnerships.)

The amendment took another step in regulating the advance on profit sharing. It will be possible to pay an advance on profit only on the basis of interim financial statements showing that the company has sufficient resources to distribute profit (balance test). At the same time, the amendment abandons the principle of good faith in the event of returning any advances paid illegally. While at present such an advance had to be repaid only by a person who knew or ought to have known that the advance had been paid illegally, newly the obligation to repay the advances paid illegally arises always within three months of the date on which the regular extraordinary financial statements were to be approved. An exception applies to joint stock companies, where the legislator somewhat unsystematically continues to protect shareholders acting in good faith.

The amendment also explicitly significantly limited the company's ability to provide any performance without consideration to a shareholder or his close person. It allows only ordinary occasional gifts given in a reasonable amount and for a public benefit purpose, performances complying with a moral obligation or decency principles, or an advantage granted by the  company pursuant to a law.

The amendment should thus clarify in particular the conditions in cases which have so far been dealt with only by case law. The core importance and advantage of these changes lies in the strengthening of legal certainty for both members of the company bodies and shareholders. 


Providing one-time compensation of non pecuniary damage according to the Labor Code amendment

The Labor Code amendment changes the current conditions for providing one-off compensation to survivors in the event of an employee's death as a result of an accident at work or an occupational disease pursuant to Section 271i of the Labor Code, which will continue to be described somewhat more precisely as the compensation of non-pecuniary damage. This expands the group of persons to whom this compensation can be provided, and at the same time changes the minimum compensation amount and provides for the possibility of regular valorisation.

In addition to the spouse or registered partner of the deceased employee, children will now also be entitled to this compensation without regard to their care status, and parents, regardless of whether they shared the household with the deceased. In addition to these directly listed persons may also be entitled to compensation other persons in a family or similar relationship who perceive the employee’s injury as their own.

The amount of one-off compensation to these persons is at least twenty times the average wage in the national economy for the first to third quarters of the calendar year preceding the calendar year in which the right to this compensation arose. For illustration, if we enter the average wage for the first quarter of 2020 according to the data of the Czech Statistical Office, i.e. CZK 34,077 it will correspond to CZK 681,540. After rounding up to one hundred crowns the minimum entitlement of one survivor will be CZK 681,600, which is almost three times the minimum amount under the current legislation (CZK 240,000). Each survivor may be entitled to this amount separately; only if the compensation is paid to surviving parents each is entitled to half of this amount.

A completely new right to one-time compensation for non-pecuniary damage will arise also in the event of particularly serious injury to the health an employee under the new provisions of § 271f of the Labor Code, namely to their spouse, registered partner, child, and parent. This compensation can also be claimed by other persons in a family or similar relationship who would perceive the employee's injury as their own. According to the explanatory memorandum, this claim should only arise in the case of the most serious injuries the consequences of which are comparable to death, such as severe paralysis, brain damage, or coma. The method of determining the amount of compensation is not specified here. However, we can expect that there will be an inclination to build an analogy with compensation for survivors.

The amendment will thus bring a much greater financial burden to employers who will be obliged to pay the compensation for non-pecuniary damage to survivors due to the wider range of entitled persons and the increase in the minimum amount paid.