Does the Supervisory Board need a request from a shareholder to sue a member of the statutory body?

The decision-making practice of the courts based on the repealed Commercial Code can still be applied to current legislation governing joint stock companies, by which the Supervisory Board can sue a member of the Board of Directors without a shareholder’s request. That is good news for companies, which can make a claim, even if their shareholders are passive. So how does this work? And what is the period of limitation on claims in this case? You will find the answers in the following article.

Section 182 of the Commercial Code, which was effective until 31 December 2013, stipulated that the Supervisory Board could make a claim for compensation against a member of the Board of Directors at the request of a qualified shareholder. If the Supervisory Board did not proceed as requested, the shareholder could make this claim him/herself.

A similar provision is contained in the Act on Business Corporations, which came into effect on 1 January 2014, which stipulates in Section 374 that prior to exercising the right to claim compensation for damages against a member of the Board of Directors, the shareholder must inform the Supervisory Board of his/her intention in writing. Only if the Supervisory Board fails to exercise this right without undue delay, can the shareholder bring such action him/herself.

In practice, however, the question was whether the Supervisory Board could file a lawsuit against a member of the Board of Directors even without a shareholder’s request, or whether this request was a condition for bringing legal action.

This question is also vital for determining the period of limitation on a claim for damages, which begins to run from the moment the entitled party becomes aware of, or could and should have become aware of the circumstances decisive for the commencement of the period of limitation. If the Supervisory Board can bring legal action without a shareholder’s request, the period of limitation would run from the moment the Supervisory Board became aware of the claim. However, if the Supervisory Board was not entitled to bring legal action without a request, the Supervisory Board’s knowledge of the claim for damages would not trigger the period of limitation.

This crucial question was recently addressed by the Supreme Court. The court of first instance concluded that the Supervisory Board in this particular case could bring legal action without a shareholder’s request, and that the claim had therefore lapsed. However, the court of appeal reached the opposite conclusion, i.e. that the Supervisory Board could not bring legal action without a shareholder’s request and that the claim had consequently not lapsed. It was thus clear that this was a point of dispute not only between the litigating parties, but also between the courts, and so the matter had to be resolved by the Supreme Court.

The Supreme Court agreed with the court of appeal that the Commercial Code (somewhat unhappily) only regulates the Supervisory Board’s authority in connection with the institute of shareholder action, thus presuming a qualified shareholder’s request is required to activate this authority.

However, according to the Supreme Court, such an opinion (adopted by the court of appeal) disregards the meaning and purpose of legislation on a qualified shareholder’s request in the latter provision and contradicts the systematic interpretation of legislation on the Supervisory Board. If a member of the Board of Directors causes damage through a breach of his/her duty to act with due care, it is up to the Board of Directors (or its remaining members) to seek compensation under the duty of due care. If it fails to do so, the Commercial Code establishes the Supervisory Board’s authority to decide on the recovery thereof.

The purpose of Section 182 (1) c) of the Commercial Code, which stipulates that the Supervisory Board will make a claim for damages at the request of a shareholder, is not to limit the Supervisory Board’s authority to claim damages against a member of the Board of Directors on behalf of the company, but rather to determine the conditions giving rise to the shareholders’ right, which is only activated in a situation where the competent body (Board of Directors or Supervisory Board) does not enforce this claim.

The Supreme Court therefore concluded that the Supervisory Board is entitled to make a claim for damages caused to the company by a member of the Board of Directors and to enforce this claim on behalf of the company regardless of whether it was requested to do so by a qualified shareholder. This conclusion undoubtedly also applies to current regulation under the Act on Business Corporations.

As previously mentioned, the moment the entitled party became aware of the circumstances decisive for the commencement of the period of limitation is vital for determining the commencement thereof for exercising the legal entity’s claim. In principle, a legal entity will learn of the occurrence of damage at the moment the person entitled to claim for damages incurred by the legal entity became or could have become aware of the occurrence thereof. In general, it applies that such a person is a member of the legal entity’s statutory body. However, this general conclusion does not apply if the interests of the statutory body (its members) are in conflict with the interests of the legal entity (i.e. in a situation where the statutory body caused the damage). In such a situation, there is the risk that the member of the statutory body whose interests are contrary to the interests of the legal entity will give priority to protecting his/her own interests over the protection of the interests of that entity. If, however, the damage was only caused by certain members of the statutory body, the period of limitation may run from the moment the members who did not cause the damage became aware thereof.

If all the members of the statutory body or other persons authorised to bring legal action for damages on behalf of the legal entity were involved in the occurrence of the damage, the period of limitation will run from the date on which a person authorised to bring legal action for damages against a member of the statutory body (for/on behalf of the legal entity) and who did not participate in the occurrence of the damage (i.e., as a rule, the Supervisory Board or a shareholder, if the damage was also caused by members of the Supervisory Board) became aware of, or could have become aware of the damage and who is obliged to pay compensation therefor.

The question of the period of limitation on a legal entity’s claim for damages caused by a member of the statutory body is therefore a very complicated one in that it requires the determination of which members of the statutory body participated in the damage and who did not, and at what specific moment members of the statutory body that did not participate therein learned of the damages. It is always advisable to seek professional legal advice in assessing this issue.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.

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