Duties and obligations of directors

What type of company is typically used in group structures?

Similar to most jurisdictions, the Czech form of a private limited company, “společnost s ručením omezeným” in Czech (s.r.o.) is the recommended type of corporate entity in group structures.

What is a "director"?

There is no specific definition of the term "director" in Czech company law.  Basically, the law defines a director by setting out the criteria for how directors can be appointed and what their duties are. It can therefore generally be said that a director describes someone who is a "statutory body" of a company, manages the affairs of a company on behalf of its shareholders as a director and is registered as such in the Commercial Register.

What are the different types of director?

There is only one type of director in an s.r.o. under Czech law.

However, for the sake of completeness, please note, that a fairly similar position to a director may be assumed by a proxy, who may be authorised by an s.r.o. to carry out juridical acts associated with the operation of a business enterprise or its branch, including those which otherwise require a special power of attorney. A proxy’s scope of power is however limited compared to a director.

Who can be a director?

A director must either be a natural person with full legal capacity or a legal person. If a legal person is appointed, it must authorise a natural person to represent it in the body (i.e. be the director); otherwise, the legal person is represented by a member of its governing body. Any such authorised person must fulfil all the eligibility requirements applying to a natural person who wishes to become a director.

Furthermore, a director has to be a person not lacking integrity within the meaning of the Czech Trade Licensing Act, must not have anything which is an obstacle to a trade and must not be a person whose property (or the property of a company in which the director has worked or has held the same position in the last three years) has been the subject of insolvency proceedings.

Minimum / maximum number of directors

An s.r.o. must have at least one director and no upper limit is set by Czech law. The company's articles of association may, however, specify a greater minimum number and/or specify a maximum.

How are directors appointed?

Directors of an s.r.o. are elected by the General Meeting or by the sole shareholder acting within the scope of the General Meeting. The registration of a director in the Commercial Register is only declaratory, and therefore the director may perform their duties and may represent the company from the date of the General Meeting's decision on their appointment, unless the decision determines the effectiveness of the appointment at a later date. Prior to or upon appointment, the director normally receives from the company a written draft management agreement concluded between the company and director, which regulates their mutual rights and obligations.

How are directors removed?

The termination of the office of the director occurs on the day of the decision of the General Meeting to dismiss that person from office, unless a later date is specified in the decision. If a director does not want to continue in the performance of their office for any reason, they may resign from their position by making a notification to the General Meeting. However, they may not resign in a situation unsuitable for the company and their position shall only end one month after the delivery of such notice, unless the articles of association or the management agreement stipulates otherwise or the General Meeting approves an earlier termination date.

Typical management structure

An s.r.o. is managed mainly by directors, whose duties are determined by the General Meeting, comprising of all shareholders.

A supervisory board may be established if required by the articles of association, but it is not required by law. This however does not apply to a joint stock company (akciová společnost in Czech), where a supervisory board (or an administrative board, depending on the form of corporate governance) is required.

How are decisions made by directors?

Generally, the law does not specify a decision-making process in an s.r.o. and as such this is therefore determined by the articles of association. However, the law requires that every director must fulfil their duties with managerial care, i.e. with the necessary loyalty as well as with the necessary knowledge and care.

Authority and powers

Every director has a so-called general executive power of attorney and may represent the company and make decisions individually in all matters, even if the company has a multi-member collective board of directors, unless the articles of association specify a different way of acting on behalf of the company (e.g. that two executives must act together). Where a company has multiple directors which do not constitute a collective body, decisions on the management of the company’s business require the consent of the majority of them, unless stipulated otherwise in the memorandum of association. The rules for representing the company set out in the articles of association and stated in the Czech Commercial Register must be followed by all directors, as if a breach of such rules occurs, the director will be liable to the company, as directors are contractually bound by such rules.

Delegation

Directors are not entitled to delegate the full scope of their management powers to third parties via a power of attorney and may only delegate a specific task among themselves or to third parties via a power of attorney. A general power of attorney is also prohibited even among the directors.

Breach of general duties

Any director who has violated the duty of due managerial care must return to the business corporation any benefit obtained in connection with such behaviour. Where such return of the benefit is impossible, the obliged person shall pay an equivalent amount to the business corporation in cash.

Every shareholder is entitled to claim, on behalf of the company, compensation or damage against a director or the fulfilment of their obligations, and is entitled to represent the company in the following proceedings. The same rights apply to the subsequent enforcement of the ruling on the matter.

Liabilities on insolvency

See What are directors’ other key obligations?

Other key risks

Although the company will be liable for any breach, a director is also personally liable for ensuring the company complies with all of the following requirements:

• Ensuring that there is no violation of contractual obligations.  Such violation constitutes an objective liability, i.e. no negligent or intentional conduct is required.  All obligations resulting from the Business Corporations Act have to be met.
• Ensuring that the company pays its taxes and advances in time and submits the respective tax declarations.
• Ensuring that the company makes payments in time, especially those regarding the company's employees' social security insurance, health insurance and contribution to the State Employment Policy.
• A director might be found personally liable for crimes defined by the Penal Code, especially economic crimes committed by them during the performance of their duties.
• Ensuring that all administrative law requirements are met fully and in a timely manner, especially those concerning business licences or other titles for executing business and environmental law requirements etc.
• Ensuring that the requirements of the Labour Code and any secondary legislation regarding employees' conditions are met.
• Ensuring that the company meets all the liability requirements specified in the Civil Code as "special liability" cases.

How can directors be protected from liability?

Liability for damage to the company caused by the director violating managerial care is unlimited. It cannot be limited by the articles of association,  management agreement or a contractual arrangement between the company and the director.

In practice, waivers of the company's claims against a member of the statutory body (so-called waiver letter used mainly in the termination of office) are widely used, but given the above inadmissibility of limitation of liability there is a risk of such statements being considered void. These statements may, however, be morally persuasive in preventing the company from enforcing claims against the statutory representative in the future.

Directors' and officers' (D&O) insurance is also common in the Czech Republic.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).

What practical steps can directors take to avoid liability?

Directors should:

• Keep informed about the affairs of the company, particularly its financial position.  Directors should have access to up to date financial information, prepare thoroughly for and regularly attend board meetings and familiarise themselves with key legislation affecting the business.
• Make full disclosures to the board and shareholders if they have outside positions or interests which may give rise to a conflict of interest and/or if they have a personal interest in any proposed or existing transaction or arrangement with the company.
• Keep records and take advice – directors should ensure that full written records of board proceedings are made reflecting the reasoning behind key decisions.  This should include any alternative courses of action considered.    Minutes should also record any disagreement amongst the board and the reasons for that. In addition, directors should ensure that returns and accounts and filed promptly and take professional advice for decisions based on areas outside their personal expertise, for example from legal professionals and accountants.
• Be aware of, and comply with, any group-wide governance policies.  These may cover areas such as health and safety, ethics, bribery/anti-corruption, and human rights.  Compliance with them is designed to help directors (and employees) fulfil their duties and obligations and minimise the risk of liability.
• Also in a group situation, keep in mind that directors must act in the best interest of their group company.  Whilst group interests and that company's interests are usually aligned, this may not always be the case (e.g. when their group company's solvency is adversely impacted).  It is important to keep communication and reporting lines as open and clear as possible between parent and subsidiary companies when issues may arise and seek appropriate advice.