Recently, the Czech Supreme Court has issued a groundbreaking decision file no. 27 Cdo 3885/2017 of 27 March 2019[1], in which it provides a legal analysis of fundamental and frequently discussed topics in the corporate law.
You will find below a summary of important information and further description of opinions made by the Supreme Court in the above mentioned decision.Within this decision, the Supreme Court primarily dealt with:
a) decision making by the General Meeting on the distribution of profit and the relationship to the applicability of the financial statement;
b) interpretation of the formalities of the invitation to the General Meeting pursuant to Section 407 paragraph (1) letter f) of Act No. 90/2012 Coll., on Commercial Companies and Cooperatives (Act on Business Corporations), as amended (hereinafter referred to as the “Act on Business Corporations”); and
c) compliance of the General Meeting´s resolution with good manners in relation to formal misconduct.
A. Decision making by the General Meeting on the distribution of profit and the relationship to the applicability of the financial statement
The Senate of the Supreme Court expressed in the decision its opinion on the topic of the deciding of General Meeting on the distribution of profit. After the recodification of private law, this is actually the first time that this iszsue has been addressed.
Also in this context the Supreme Court dealt with the applicability of financial statement for the previous financial year, whereas it is a breakthrough decision that will allow the General Meeting to decide on the distribution of profit at any time during the financial year, provided that the company meets the insolvency test and paying out dividends does not cause bankruptcy of the company. The Supreme Court concluded that “with effect from 1 January 2014, the regular financial statements prepared for the previous accounting period may serve as a basis for the distribution of profit until the end of the following accounting period.”.
Payment of royalties without distribution of profit to shareholders
In the light of the above, the Supreme Court has also commented on the issue of the inability to pay royalties when the profit is not paid to the shareholders. The Supreme Court has inclined to the fact that royalties can be paid, even though the profit was not paid to the shareholders. In particular, the court supported this view because of the argumentation that the profit may be distributed to the other persons, ie. members of elected bodies of the company, if the company’s statutes allow it.
Of course, the right to participate in profits is still a fundamental right belonging to the shareholder. That the profit will not be distributed among the shareholders may decide the General Meeting only for an important reasons and while respecting the prohibition of abuse of the majority of votes (e. g. a shareholder holding shares without the right on the profit).
B. Interpretation of the formalities of the invitation to the General Meeting
The Supreme Court also dealt with the issue of the invitation to the General Meeting, namely the interpretation of Section 407 paragraph (1) letter f) of Act on Business Corporations stipulating that the invitation to the General Meeting contains, inter alia, at least the draft resolution of the General Meeting and its reasoning. The principal question under consideration in this case was whether it is sufficient, as grounds for the General Meeting´s resolution on the distribution of profits, to only refer to documents on the company´s economic status, such as financial statements or a report on the company´s business activities and assets.
It was stipulated that, as regards the justification of the draft resolution which is to be voted at the General Meeting, it is up to the company (the persons who convene the general meeting) to submit the shareholders with the necessary documentation to ensure that they are given sufficient opportunity to prepare for the General Meeting and to vote on the proposed resolution, of course, within the limits that can be fairly demanded of them.
The important conclusion is that “The reasons for adopting a resolution should be in principle stated briefly, clearly and concisely. The reasoning should make it clear to the shareholders (without undue effort and time) why the Board of Directors (or other person convening the General Meeting) suggests that the General Meeting decide on the matter and why it should be the proposed way. If, in the light of the specific circumstances, it seems appropriate or even necessary for these reasons to be elaborated in more detail, it is possible […] to state these reasons briefly in the text of the invitation, and further elaborated in a separate annex (which will be part of the invitation and referred to in the text of the invitation, in the part of reasoning of the draft resolution.”.
C. Compliance with good manners and invalidity of General Meeting resolutions
In the last point, the Supreme Court addressed in its decision the issue of the compliance of resolution of the General Meeting with good manners as a reason for which the General Meeting may also be declared void.
Should you have any questions or queries, do not hesitate to contact us.
Mgr. Bc. Štěpánka Vajdová, junior lawyer – vajdova@plegal.cz
Mgr. Jakub Málek, partner – malek@plegal.cz
17. 04. 2019
[1] Text of the decision here: http://www.nsoud.cz/Judikatura/judikatura_ns.nsf/WebSearch/30EE34B5B4EF766CC12583D9002E4ADB?openDocument&Highlight=0,.