29. 4. 2020
PART TWO | SPECIAL DUTIES DURING THE CORONAVIRUS PANDEMIC AND THE QUESTION OF CONCERN INSTRUCTIONS
In the previous part we covered the main principles of the functioning of a governing body that should provide the basis for all its steps. This time we will present you with specific duties in the context of the current extraordinary situation and focus on specific questions that may be currently important. We will primarily expand on the loyalty duty, which we covered in the previous part. Below you can find information about the possibility of resigning from an office, the duty to call a general meeting and the question of concern instructions.
For very busy managers we have prepared a short summary in bold, nevertheless, we strongly recommend reading the whole article:
- The current crisis period may have triggered certain specific duties of a governing body that cannot be overlooked (calling a general meeting, creating appropriate crisis measures, the duty to remain in office, etc.);
- More often, instructions may be given to the business management of a governing body within a concern and the governing body may be bound by such an instruction if certain conditions are met;
- When acting in accordance with a concern instruction, a governing body is not released from the duty to act with due managerial care, but in certain circumstances it can be released from its liability to pay compensation for damage caused to the company by such an instruction.
Coronavirus-related duties and loyal conduct
The exceptionality of the coronavirus pandemic as a challenge never faced before by governing bodies in the Czech Republic may give rise to further duties that should not be overlooked by members of a governing body. In imposing different duties the lawmaker often uses concepts such as “inappropriate time” or “important / serious” reasons. But the global pandemic may often match these concepts.
In the last part of this series we discussed the so called duty of loyalty of a governing body member. This duty takes various forms, some of which become important at the moment. For example, the law prohibits a member of a company’s governing body from resigning from their office in a time that is inappropriate for the company. We believe that a state of emergency and the overall uncertainty on most markets in all business sectors are situations that can be by rule understood as a time that is inappropriate for leaving the office of a governing body member. However, such a situation also requires an assessment on an individual basis with respect to every business company.
Should I call a general meeting?
Furthermore, the law imposes a duty on a governing body to call a general meeting in a situation when the company is threatened by bankruptcy or if there are other reasons, in particular if the goal pursued by the company is threatened. Even in this case, we believe that the current crisis will in principle fulfil these conditions. Most likely, for a majority of companies the current situation can be regarded as a serious reason threatening their existence, as it can be presumed that for a company serious reasons of this type include e.g. the inability of an important business partner to pay their liabilities, the inability to pay a major part of its own liabilities due to limitations of production, a considerable drop in demand or in a situation when the whole business sector in which the company operates is badly affected. Even for the sole reason of protecting members of governing bodies, considering convocation of a general meeting can be indeed recommended (with particular regard to the specific situation of each individual company).
But the duty of a member of a governing body is not limited to calling a general meeting only. At the general meeting the governing body must either propose winding up the company (in an extreme case) or other suitable measures. The form of a suitable measure depends on how serious the situation is that caused a crisis to the company. Thus, these measures will range from the submission of a rescue plan explaining to the shareholders how the company will overcome this difficult period, to the fulfilment of duties imposed mainly by the insolvency act (typically filing an insolvency petition, non-disadvantaging creditors, etc.).
As mentioned in the previous part, the loyalty duty is embodied also in the basic principle that in decision-making a member of a governing body must prioritise the interests of the company over their own interests or interests of third parties, including shareholders. This duty should be certainly reflected in the proposed measures (similarly as in all acts of a governing body) and it certainly should not be primarily a recovery plan in relation to shareholders or the member of a governing body him/herself.
Should a governing body follow instructions?
In some cases, however, the loyalty duty may modify from loyalty to a company to loyalty to a concern. This typically occurs in the execution of so called concern instructions. As a general rule no one is authorised to give a governing body instructions relating to business management. Business management is the sole responsibility of the governing body. While a governing body may ask the general meeting to grant such an instruction, it is still not released from its duty to act with due managerial care. A request for an instruction is a tool for the selection of the most suitable option from several alternatives. Shareholders may help with the choice, but the governing body must present them with specific alternatives cautiously prepared with due managerial care.
Regarding the giving of instructions, the situation is different in the case of concern groupings. A body of a controlling person may give instructions regarding business management to bodies of a controlled person if such instructions are in the interest of the controlling person or a person that is also a part of the concern. A governing body of a controlled person is not released from the duty to act with due managerial care; however, in certain circumstances it may be released from liability for harm caused by the company. These are situations when the governing body proves that it could not reasonably presume that harm was caused to the company due to influence of the controlling person in the interest of the concern and would be compensated within a reasonable period within the concern by providing consideration or other provable advantages to the controlled person thanks to its membership in the concern. These concern advantages can be used only by members of a declared concern. As a matter of fact, a member of a grouping must publish the existence of a concern on its web pages; otherwise it is not possible to proceed in accordance with the above procedure.
Thus, in this respect a simple procedure can be provided to a corporate body for receiving a concern instruction and for assessing whether such an instruction can be executed or not. The respective steps are sequential; however, for each step a given instruction must be considered with due managerial care (please note that every individual situation may be different).
Please also note that in the case of some instructions other company’s bodies that should play a supervisory role can be involved in the whole procedure (typically the supervisory board). Please note that the controlling person may also be obligated to compensate damage caused, but the controlling person may be released from this obligation subject to compliance with certain criteria.
We hope that members of governing bodies will find this brief summary helpful and that it will provide them with a general idea about the new duties. However, the list of these duties may not be exhaustive. In this part of the series we attempted to outline the influence of the loyalty duty during the coronavirus pandemic. In the next part we will focus primarily on the distribution of equity (in particular profit) from a company that is also very closely related to due managerial care.
Our corporate team remains fully ready to aid you in any situation so that we could jointly handle this crisis.