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Managers subject to mandatory duty of loyalty and requirement of business judgment

Managers subject to mandatory duty of loyalty and requirement of business judgment

30.5.2012 9:40
Autor: Alica Stegmannová, KSB

However, there is more than one way to define “due care”. The new legislation will introduce changes that should bring us one step closer to worldwide trends.

Pursuant to the new Civil Code (the “NCC”), the due care of a prudent businessperson will mean the duty to perform one’s office with “essential loyalty and necessary knowledge and thoroughness.” Save for the loyalty requirement, the rules are specified in greater detail in the new Corporations Act. Pursuant to that act, anyone who believes in good faith that he or she acted on an informed basis and in the justifiable interest of the company is deemed to have acted with necessary knowledge and thoroughness.

Greater freedom for managers one hand …

The Anglo-Saxon “business judgment rule” (the “BJR”) will soon be introduced into the Czech legal system. The rule is based on the principle that nobody can expect a company’s management to be liable for all potential risks relating to its conduct and that not even judges can assess certain conduct without an economic education and business experience. Therefore, a statutory body member who acted with a necessary degree of knowledge and believed in good faith that he or she acted in the interests of the company will not be held liable for such conduct even if the company suffers a financial loss due to his or her actions.

Given the BJR, the consequences of a decision made for the company by a statutory body member will no longer be relevant in reviewing and assessing in litigation whether such person acted with the due care of a prudent businessperson. The crux will be whether the statutory body member acted loyally, in good faith, on an informed basis and in the justifiable interest of the company.

… and loyalty on the other

The application of the BJR will not, however, be unlimited. The BJR cannot be applied in cases where the statutory body member fails to be loyal to the company, since a breach of loyalty cannot be outweighed by a belief that one’s actions constitute sound business judgement. In practice, this will typically include situations in which the relevant person jeopardizes the company for his or her own benefit.

The Corporations Act maintains the reversed burden of proof for the application of the BJR. This means that, in the event of a dispute, it is the statutory body member that will be required to prove that he or she indeed acted with the due care of a prudent businessperson, subject to the exemption of the court holding that the statutory body member could not have been reasonably and justly expected to do so.

The new legislation also explicitly responds to the practical situation in which an individual accepts his or her appointment knowing that he or she does not have sufficient knowledge or practical experience to perform the office to which he or she has been appointed. In these circumstances, the NCC establishes a rebuttable presumption that the individual failed to act with the due care of a prudent businessperson. For statutory body members this simply means that they will no longer be able to justify their failures by saying that they were not qualified to perform their particular office.

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