Section 66 (3) of the Commercial Code states that except considerations that are awarded on the basis of any legal provision, a company´s internal regulation or agreement on execution of the office with the company, any consideration provided to a member of any of the company’s bodies (such as board of directors, supervisory board) must be approved by the general meeting of the company. The question is how to interpret the wording “any consideration”. In other words, what considerations given to the person who is actively involved in any of company’s bodies has to be approved?

This issue was recently addressed by the Supreme Court of the Czech Rep (Judgement of the Supreme Court of the Czech Rep. dated 16.06.2010, file no. 29 Cdo 2126/2009). In the given case, a member of the supervisory board of the company who is a lawyer by profession concluded a contract with the Company for the provision of legal services. He subsequently received payment for the provision of legal services from the Company.

The above payment was neither approved by the General Meeting of the Company, nor was it awarded based on an agreement on the performance of a function with the company, nor granted on the basis of any legal provision or internal regulation of the company. The company later raised a claim for unjust enrichment due to the lack of the General Meeting’s approval of the remuneration and claimed the refund of the paid consideration for the provision of the legal services by the supervisory board member.

The Supreme Court dismissed the company´s claim. The court reasoned that an approval of the general meeting would be  required solely in the connection with considerations, granted on the basis of the performance of the function of a member of the board of directors or supervisory board. The Court referred to systemic, teleological and historical interpretation as a counterweight to the extensive grammatical interpretation and particularly highlighted the second sentence of Section 66 (3) of the Commercial Code. According to the Supreme Court, the wording of this provision (“The company will not allow consideration if the performance of the function clearly contributed to unfavourable business results of the Company…”) clearly indicates the limits on the company’s right to approve the payment of the consideration..

On the basis of these arguments, the Supreme Court concluded that legal counselling could not be understood as an exercise of duties of a member of a supervisory board and the payment of the remuneration does not have to be approved by the genera meeting pursuant to Section 66 (3). Unfortunately, the Supreme Court did not provide any general interpretation guide on which activities of board members could be considered as “connected to the performance of function” and which could be not. In our view, each situation should be judged individually taking into consideration the provisions of the statutory regulations, internal company’s documents and agreements on the performance of function, which defines the scope of competences and activities of the members of the boards.

The Supreme Court indirectly commented on  the purposes of the cited provision, which is to protect the company and its shareholders from unauthorized enrichment on the side of the members of a company’s statutory body. A director with signatory rights could easily circumvent the law as he grants himself or to any other persons benefits from a title formally independent from his function (for example overpriced legal counselling). With respect to this point the Supreme Court correctly pointed out that the Commercial Code contains provisions serving the same purpose – protection against the conflict of interests. As an example the court referred to the ban on competition pursuant to Sections 65 and 196 of Commercial Code. In particular Section 196 (1) letter a) could have been applied to the cited case, as the provision set forth the general prohibition for members of the boards to enter into business relationship with the company.