Changes in the Monistic System of Joint-Stock Companies

Dear Clients,

In connection with the new amendment to the Czech Business Corporations Act, which enters into force on 1 January 2021, we would like to inform you about significant changes affecting the bodies of joint-stock companies with a monistic (one-tier) corporate governance system. With effect from 1 January 2021, the amendment abolishes the position of statutory director by transferring the statutory director’s powers to the Board of Directors. More information on the practical implications of this amendment is provided in the article below.

Changes in the Monistic System of Joint-Stock Companies

Some joint-stock companies will enter the new year with a markedly lower administrative and regulatory burden. Under an extensive amendment to the Business Corporations Act, which goes into effect on 1 January 2021, the position of statutory director ceases to exist and the powers are transferred to the Board of Directors, which becomes the company’s sole mandatory, elected body.

This change is mainly to eliminate problems in the law’s interpretation. It is often impossible to deduce unequivocally from the current wording of the Business Corporations Act which provisions must be applied to the statutory director and which to the Board of Directors since,  with joint-stock companies with a monistic, or one-tier, internal structure, the statutory director and the Board of Directors both represent the company. The amendment should allow for greater transparency and user-friendliness.

Acting on behalf of a company after the New Year

As a consequence of transferring the statutory director’s powers to the Board of Directors, all members of the Board of Directors will be entitled to act on behalf of the company with effect from 1 January 2021. Thus, the current statutory director will lose the right to act on behalf of the company unless he/she is also a member of the Board of Directors. 

Some corporations may not warmly welcome this legislative change should they wish to have only certain members of the Board of Directors entitled to act on their behalf (and have the respective obligations). However there is a solution to this situation – to amend the Articles of Association. In the Articles of Association, it is possible to narrow the powers of individual members of the Board of Directors and, for example, to decide that some of the company’s members have only executive powers, while the others are entrusted with supervisory functions, or that only the chairman of the Board of Directors is entitled to act on behalf of the company. The new manner of acting on behalf of the company must be entered in the Commercial Register.

Statutory director and the chairman of the Board of Directors combined in one

Under the Business Corporations Act, the same person may simultaneously act as the statutory director and chairman of the Board of Directors of a business corporation, and many companies actually use this option. Termination of the statutory director’s position must be understood in relation to other existing contracts to perform the office (also known as “executive contracts”). A statutory director who acts concurrently as chairman of the Board of Directors will be required to sign two contracts with the company to perform the offices. Typically, he/she receives remuneration only under the contract to perform the office of statutory director, as this entails conducting the company’s business management and involves a greater time burden than performing the office of chairman of the Board of Directors.

On 1 January 2021 all contracts to perform the office of statutory director of a joint-stock company terminate along with the position of statutory director, while the position of chairman of the Board of Directors is maintained. Unless remuneration has been agreed in the contract to perform the office, in accordance with the Business Corporations Act, the performance of the office is free of remuneration. If your joint-stock company has a statutory director who concurrently acts as chairman of the Board of Directors, and the remuneration is agreed only in the contract to perform the office of statutory director, it would be desirable to amend the contract to perform the office of chairman of the Board of Directors to include a provision on remuneration of the chairman of the Board of Directors with effect from the first of next year. Please note that the contract to perform the office must be approved by the supreme body of the company (i.e. the General Meeting or the sole shareholder).

Change of Commercial Register entry and deadline to amend Articles of Association

The position of statutory director will cease to exist by law and, according to information from the Ministry of Justice, we can expect an automatic adjustment to company entries in the Commercial Register – whereby the statutory directors are deleted. For that reason there will likely be no need to submit a proposal to register the changes in the Commercial Register.

However, under the new legal regulation, joint-stock companies are obliged to delete from the Articles of Association all provisions regulating the statutory director’s office, which will cease to be in effect. This can be done in tandem with the requirement to specify the manner of acting of members of the Board of Directors, as well as with other amendments that will need to be made to the Articles of Association. The transitional provisions of the amendment set a deadline of one year for joint-stock companies to adapt their Articles of Association to the new wording of the Business Corporations Act and to file the updated version of the Articles of Association in the Collection of Deeds.

At the same time, however, the Board of Directors is obliged to prepare the full text of the Articles of Association and to file them in the Collection of Deeds without undue delay after they have been amended. Therefore, should a company decide to voluntarily amend its Articles of Association (e.g. to change the manner of acting on behalf of the company or to divide the powers of individual members of the Board of Directors), we recommend that they update the full text of the Articles of Association and file it in the Collection of Deeds without delay.