21. 11. 2018
An amendment to Act No. 90/2012 Sb., on Companies and Cooperatives (Act on Business Corporations), as amended (“Act”) came into effect on 14 January 2017. The amendment has re-introduced so-called “co-determination”, or mandatory employee participation in corporate bodies of companies having more than 500 full-time employees. Even considering the fact that co-determination is not a novelty in Czech law, one can say that when preparing this re-introduced concept, the legislator did not learn from its problematic development prior to 2014 (in the process of re-codifying corporate law).
Who is subject to the amendment?
The first of the ambiguities of the relatively brief regulation of co-determination (this problematic concept is regulated by only four paragraphs of a single section) is the determination of what types of companies employee participation should apply to. To begin with, we can say with certainty that mandatory employee participation will apply to joint stock companies with dualistic company management that had more than 500 full-time employees as at 14 January 2017. Furthermore, we can state that mandatory employee participation does not apply to limited liability companies, even if the company has a supervisory board. As far as employee participation in the management board of a monistic joint stock company is concerned, the views of experts differ.
Advocates of the view that employee participation also applies to the management board argue that the Act stipulates that the provisions relating to the supervisory board shall apply mutatis mutandis to the management board. In addition, they consider it essential to argue that if co-determination did not apply to the management board, shareholders of joint stock companies would get a convenient tool to avoid the introduction of co-determination – to change the method of the corporate management to monistic and that such a procedure would discriminate against employees of monistic joint stock companies.
However, we cannot agree with this conclusion, especially for the following reasons. The mandatory employee participation was explicitly provided for in the original text of the amendment to the Act also in connection with the management board, but it was removed from the amendment in the course of the legislative process in relation to the management board. If the situation was the opposite, i.e. if co-determination in connection with the management board had never been discussed, we could conclude that this is an (intentional) omission by the legislator. However, in a situation where the legislator has actively omitted a regulation concerning the management board from the text of the amendment to the Act, there can be no doubt that the intention of the legislator was, ultimately, that the mandatory employee participation would not apply to the management board. In addition, unlike the regulation concerning the supervisory board, the Act does not provide for a possibility of electing the supervisory board members by a body other than the supreme corporate body.
Another argument against applying employee participation to the management board is the fact that, unlike the supervisory board, the management board is not a purely controlling body when it also decides on the company’s business management.
It is also worth mentioning the fact that the amendment to the Act currently being prepared does not also include the introduction of co-determination in monistic joint stock companies and provides for employee participation only in relation to the supervisory board.
By when do companies have to comply with the amendment?
Companies that are subject to mandatory employee participation, which, in our opinion, are only dualistic joint stock companies that had more than 500 full-time employees as at 14 January 2017, are obliged, by 14 January 2019, not only to amend their articles of association so that they are compliant with the discussed amendment to the Act, but also to ensure that the structure of their supervisory boards is also compliant with the amendment as at that date (i.e. a validly elected supervisory board member appointed by the employees).
Right to elect
An active electoral right, i.e. the right to elect an employee representative to the supervisory board, is limited to the company’s full-time employees. Those employees who perform work under agreements on performance of work outside employment shall not therefore participate in the election of employee representatives to the supervisory board.
A passive electoral right, i.e. the right to be elected as an employee representative to the supervisory board, may not be limited by the company in any way. At this point, it turns out again that when drafting the amendment to the Act, the legislator did not take into account at all the development of theory, practice or case law from the period before 2014, when the passive electoral right was limited only to the company’s employees. Although Section 448(4) of the Act, the second sentence, (which states that the “provisions of paragraph 3 shall apply mutatis mutandis to the recall of an employee from the supervisory board”) could cause some ambiguities, we suppose that in this case it is not the legislator’s intention to limit the passive electoral right but rather an administrative error.
However, a supervisory board member elected by the employees must meet all the requirements imposed on any member of the corporate body – i.e. legal capacity, legal age, and clean criminal record pursuant to the Trade Licensing Act. In addition, if a corporate body member, for example, needs a security clearance to perform the function, this will not be a limitation of the passive electoral right if the company determines that a supervisory board member elected by the employees must prove to the company the obtaining of such clearance.
What if a joint stock company does not introduce co-determination?
The registry court will call on the joint stock company to remedy the situation, and if the company fails to do so, this may result in the dissolution of the company as an extreme sanction. However, it should be noted that such a situation should not happen if the company has taken all necessary steps to introduce employee participation, but, for example, due to the absence of employees in the election, a new supervisory board member has not been elected.
Our corporate law legal team is ready to assist you with all the steps to implement employee participation, including:
- convening and managing the general meeting approving necessary amendments to the articles of association, including proposal of such amendments;
- preparation of internal regulations (electoral procedure rules);
- election organization;
- subsequent registration of changes in the Commercial Register.
In addition to the above changes, we can also analyse and implement alternative solutions for clients so that the amendment to the Act does not apply to the respective joint stock company.
In view of the fast-approaching statutory deadline, we strongly recommend that you do not wait to implement the above-mentioned in whatever form.
Authors: Ondřej Florián, Alexandra Parnaiová