In the issue of the consequences of violating the rules in the event of a conflict of interest in a business corporation, a major upheaval took place at the end of 2022 in the form of a revolutionary judgment of the Supreme Court no. stamp 31 Cdo 1640/2022. This caused a justified panic among the majority of the legal public, which was not helped to calm down even by the subsequent supplementary decisions of the Supreme Court, which develop the conclusion further. The aim was to close the debate regarding the consequences of breaking the rules once and for all, but there was no clarification, especially for the lay public. So how to report a conflict of interest correctly and what actually happens if we don't report it in accordance with the rules and what effect does it have on the meeting? And why was the said judgment revolutionary?
Conflict of interest in a business corporation
In the life of a business corporation, situations may arise when the interests of the company diverge from the interests of the members of its elected body, or at least there is a threat of such a divergence. For situations like this Act No. 90/2012 Coll., on commercial companies and cooperatives (hereinafter "Business Corporations Act") a Business Law it generally remembers and therefore contains a set of rules that members of elected bodies must follow. It applies not only if directly a member of an elected body in a conflict of interest or potential conflict of interest, but also when she could be in such a conflict of interest a person close to him or controlled or influenced by him.
The key provisions here are § 54 of the Act on Business Corporations, which regulates the so-called indirect or imminent conflict of interest, and § 55 of the Act on Business Corporations, which regulates the so-called direct conflict of interest.
The basic rule is that a member of an elected body must report direct or indirect conflicts of interest to the business corporation. These are the so-called notification, respectively notification, obligation.
Representation of a business corporation by a member of its elected body
Related to the topic is a considerably more abstract question, which legal doctrine has dealt with quite a bit, namely the question of the very nature of the representation of a business corporation by a member of its elected body. The conclusion was established here that it is not even legal representation in the sense of § 436 et seq. Act No. 89/2012 Coll., Civil Code (hereinafter "Civil Code"), nor about contractual representation according to § 441 et seq. of the Civil Code, but that it is about representation of its kind strange.[1]
Specifically, in the issue of dealing with a conflict of interest in a business corporation, it is decisive whether it is even possible to talk about exceeding the representative authority (cf. §§ 440 and 446 of the Civil Code) or whether it cannot be immediately concluded that in such a case a member of a free body with representative authority at all does not have, as his interests and those of the represented business corporation are in conflict (see § 437 of the Civil Code).
Earlier opinions of the professional public and outdated decision-making practice
Regarding the question the consequences of a breach of the notification obligation to the legal action taken, so the solution so far was falling apart into three groups:
- The first part the professional public was of the opinion that in such a case the legal action of a member of an elected body is that of a business corporation absolutely invalid even apparent, therefore her at all not binding and cannot bind.[2]
- Second part she was more restrained and stamped doctrine relative invalidity such action, with the fact that the represented business corporation must be null and void to call. This opinion was common among the professional public at the time majority.[3]
- Third part pretended a completely different solution, since according to him such legal action is not invalid, but only the represented business corporation not binding and it can be affected by it apply additionally.[4]
In the time before the revolutionary judgment of the great senate of the civil law and commercial college of the Supreme Court sp. Stamp No. 31 Cdo 1640/2022 (hereinafter only "Decision") thus the decision-making practice was settled on the conclusion that the actions of a member of the elected body of a business corporation, made in violation of the rules of conflict of interest, are affected relative invalidity.[5]
Current decision-making practice
Then, however, there was a revolution of opinion and the Supreme Court in its Decision came to the conclusion that this was not an invalid legal act, but rather valid legal action, which does not only bind the represented business corporation. This means that if the action was carried out in an unannounced conflict of interest and the interests of the represented and the representative are in conflict, in such a situation the representative does not actually have representative authority at all.
While the court makes a distinction two situations:
- third party about violation of rules she did not know about the conflict of interest, i.e. she was in good faith or
- third party about violation of rules she knew about the conflict of interest.
If there was a third person in good faith, so the legal action represented by the business binds the corporation regardless of any violation of conflict of interest rules.
Otherwise, however, it is true that the meeting binds only the member the elected body itself, as the law in such a case prefers the protection of the interests of the company (represented). In the Decision, the Court came to the conclusion that the language interpretation of § 437, paragraph 2 of the Civil Code, according to which "the represented may invoke it” means that the represented has yet to object to relative invalidity, which is contrary to a fair arrangement of relations. He therefore changed the interpretation, and the provision is therefore to be interpreted in the context of the representation of a business corporation contrary to the rules on conflict of interest in such a way that "invoking" refers to invoking the obligation for the represented. In other words, yes if the represented person does not additionally give his consent to the legal action, he is not bound by it.
Disclosure of Conflict of Interest in a Business Corporation
This was followed by several decisions of the Supreme Court of the Czech Republic, which further addressed the topic. However, the most fundamental ones are the judgment of 7 December 12, file no. Stamp No. 2022 Cdo 27/2699, judgment of 2021 February 15, file no. Stamp No. 2 Cdo 2023/27, as well as a completely new resolution of 2863 November 2022, file no. stamp 14 Cdo 11/2023.[6]
A. Content announcedí
In the first of the judgment of 7 December 12, file no. stamp 2022 Cdo 27/2699the Supreme Court dealt with a situation where an executive in a conflict of interest intends to enter into a contract with a limited liability company he announced, however, he did not present her with the contract itself. The lower courts concluded that only part of the intended contract had been presented to the company, finding such a procedure insufficient for the purposes of Section 55 of the Corporations Act.
However, the Supreme Court corrected this conclusion, stating that the rules for notification of conflicts of interest must be clarified. He summarized the detailed solution as follows: "As a rule, the obligation to provide information will also be fulfilled if a member of an elected body submits only a part of the draft contract to the relevant body of the business corporation or if the competent authority only informs about part of the content intended transaction, if it is evident from the submitted part of the draft contract or from the submitted information, whether the interests of the corporation may be affected by concluding the contract. […] the right of the members of the highest body of the business corporation (partners or shareholders, or members of the cooperative) to request that the presenting member of the elected body submit the full text of the draft contract or to inform the general meeting about the entire content of the intended transaction is not affected. If any of the members of the highest body demands that the presenting member of the elected body submit the full text of the draft contract or that the highest body informs about the entire content of the intended transaction, the presenting member of the elected body will not fulfill his obligation to provide information in accordance with § 55 paragraph 1 of the Code before will comply with the request of a member of the highest authority."[7]
The court therefore concluded that it is sufficient if the executive, in a conflict of interest, submits even just part of the draft contract or informs about part of the content of the intended transaction, except for cases where a member of the highest authority insists on providing complete information and the executive still does not provide it.
B. Individual partners as addressees of notices
Within the second of the judgment of 15 February 2, file no. stamp 2023 Cdo 27/2863 the Supreme Court dealt with a case where an executive in a conflict of interest made a notification of the intention to conclude a contract (in the sense of Section 55 of the Act on Business Corporations) in such a way that the intention informed the individual companions limited liability companies. Subsequently, the company's general meeting agreed to its closure, but the necessary number of shareholders did not participate in order for the general meeting to have a quorum. The court of first instance concluded that, as a result, the conclusion of the contract was not approved and therefore the legal action was invalid, as the company contested its invalidity in the proceedings.
However, the Supreme Court ultimately overturned the lower courts' decision. The purpose pursued by Section 55 of the Act on Business Corporations can also be achieved as follows (cit.) "that the manager of the limited liability company familiarizes himself with the content of the intended contract all companions, who express their agreement with his intention to conclude this contract with the company, or at least take note of this intention, with the fact that they waive the right to discuss this matter (and, if necessary, to pronounce a ban on concluding the contract) by the general meeting."[8]
The court came to the conclusion that it is sufficient if the executive in a conflict of interest made a notification of the intention to enter into the contract by notifying the individual partners of the limited liability company about the intention.
C. CFO as Notice Recipient
In the third decision which was resolution of 14 December 11, file no. stamp 2023 Cdo 27/2699 The Supreme Court, on the other hand, explained how the requirements for notification of a conflict of interest in the sense of § 55 of the Act on Business Corporations cannot, on the contrary, look like. In a specific case, the manager, in a conflict of interest, made the announcement of the intention to conclude the contract in such a way that it submitted by the CFO limited liability company and it incorporated it into the company's accounting. Lower courts disgrace executive they refused and the Supreme Court unsurprisingly upheld their conclusion, citing its earlier decisions.
However, he also briefly addressed the question practices within the concern. According to the Supreme Court, it is undecided whether the conflict of interest was reported in the same way in another case. Unfortunately, another very interesting question of the appellant, namely (cit.) "whether the scope of the preliminary measure prohibiting the executive of the parent company from acting on its behalf can also be extended to the executive of this person in the subsidiary,"[9]was no longer dealt with by the Supreme Court, as the contested decision does not rely on its assessment.
According to the court, on the contrary, it is insufficient if the executive, in a conflict of interest, announces the intention to enter into a contract with the CFO or a similar person, and in such a case it is not possible to refer to customs within the concern.
záver
So what should a conflict of interest notice look like to meet the regulatory requirements in Section 55 of the Business Corporations Act?
First of all, the full wording of a specific contract does not have to be submitted to the competent authority, but only its text will suffice part, basic parameters or at least the intention to close it. However, it must always be clear to the business corporation from the content of the notification whether the conclusion of the contract in a conflict of interest is in accordance with the interests of the business corporation or not. This is of course not affected the right of the concerned authority to request complete information and if he uses it, then the member of the elected body must provide the information to the required extent. Otherwise, the notification obligation will not be fulfilled.
Notice to the contrary it does not have to be done exclusively at the general meeting company, but it is sufficient if a member of the elected body announces the intention to the individual partners (respectively shareholders) and they at least agree with the intention with the fact that they waive the right to discuss this matter at the general meeting.
Despite this slight loosening of the rules, however, the requirements of the legislation cannot be met, for example, when the notification is made only to the CFO of the company, and not to the competent authority or to individual partners (thus shareholders). At the same time obviously customs within the concern cannot be taken into account. The established rules must always be followed and the established practice between the parties is not capable of modifying the rules.
It can be assumed that decision-making practice will further develop the rules, so we definitely recommend following this topic in the future, as the consequences of violating the procedure can be fundamental for the life of a business corporation.
Source: epravo.cz
Do you have questions about conflicts of interest? Are you not sure whether your actions are not in conflict with the interests of the company? Did you report a conflict of interest, but the company did not accept your report? We can advise you on everything, contact us!
Mgr. Lucie Špičková, Attorney
[1] In detail, e.g. Havel, B. Conflict of interests in the management of business corporations (relationship between § 437 para. 2 of the Civil Code and § 54 et seq. ZOK). Legal Perspectives, 2015, No. 8, pp. 272-275.
[2] Tintěra, T. In: Petrov, J., Výtisk, M., Beran V. et al. Civil Code. Comment. 2nd edition. Prague: CH Beck, 2019, § 437, marg. no. 1.
[3] Of many, e.g. Melzer, F. In: Melzer, F., Tégl, P. et al. Civil Code III (§ 419 654). Comment. 1st edition. Prague: Leges, 2014, § 437 marg. No. 14.
[4] Above all, Dědič, J. Adjustment of conflicts of interest in the Act on Business Corporations in relation to the new Civil Code. Legal Perspectives, 2014, No. 15 16, p. 524.
[5] Among all, for example, the resolution of the Supreme Court of 23 October 10, file no. stamp 2018 Cdo 20/3298.
[6] Further, for example, the resolution of 20 July 7, file no. stamp 2023 Cdo 27/3160.
[7] Points 49–52 of the judgment of the Supreme Court of 7 December 12, file no. stamp 2022 Cdo 27/2699.
[8] See paragraph 12 point 22 of the given resolution.
[9] See point 6 of the given resolution.
