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Nominal membership in a Board of Directors is no excuse. Quite the contrary!

Nominal membership in a Board of Directors is no excuse. Quite the contrary!

17.9.2012 15:31
Autor: Petra Mirovská, KSB

According to the Supreme Court, however, if legal problems arise in a company, a purely “nominal” engagement can make things worse rather than offer relief from liability.

In practice, this situation is not unusual. Executives and board members are typically unaware of their company’s daily activities, and third parties often work on their behalf. Or they rely on colleagues from the statutory body and take a more or less hands-off approach to their role. They may even be foreigners who were placed in a Czech subsidiary’s statutory body by a foreign parent company. Thus, they do not actively participate in the company’s day-to-day business, only occasionally come to the Czech Republic, and only rarely intervene in business management decisions.

This may work out - that is, until a problem appears and litigation ensues. In such cases, judges look at how well management took care of the company. And their scrutiny is definitely not a mere formality.

Going the extra mile

The basic legal obligation of an executive or board member vis-a-vis a company is to act with “due managerial care”. Although this standard of care is not defined by law, over time legal practice has defined it as the care a prudent business person would extend to his own personal affairs. Thus, an agreement between a company and executives or board members that would release them from liability is not an option, because it would be legally invalid.

Statutory body members are required to conduct their activities professionally, which means that they must perform their duties to a certain professional level. Lack of knowledge or time is no excuse. If a statutory body member does not have professional knowledge, he must recognize that a given situation requires input from a specially qualified person and must look to them for assistance. In practice, this is frequently the case in relation to accounting matters. The statutory body must ensure accurate accounting (and record keeping), but of course the law does not require members to master these disciplines themselves.

The Czech Supreme Court has also commented on the issue of due managerial care, stating that it includes a proactive approach to compliance. This poses a problem for those who are merely nominal members of management. According to the Court, an inactive or even casual approach to conducting one’s office does not release that person from liability. On the contrary, it may be more dangerous. According to the Supreme Court, even the argument that the executive was merely carrying out a third party’s orders is no excuse. As due managerial care also includes a concept of loyalty, a person must act in the company’s best interests, not only in the interests of a certain owner (or that of himself or a third party).

Reversed burden of proof

The Supreme Court also upheld this position in an earlier case. The Court refuted a statement made by a statutory body member who sought to be released from any liability by stating that de facto he did not conduct his office. According to the Court, he conducted his office in a passive manner, since he was aware of the company’s financial situation but failed to step in. The Court therefore concluded that he had clearly violated his legal obligations.

In a dispute over whether an executive conducted his office with due managerial care, the burden of proof lies with the executive. This is known as a “reversed burden of proof”, where the burden does not lie with the claimant but with the defendant. What does this mean in practice? It means that if a claim is not disproven by the defendant, the claimant wins the dispute. In other words, the company. If more than one person is required to pay damages, they must do so jointly and severally and settle the amount among themselves according to the extent of their respective liability.

Simply put, membership in a company’s statutory body should not be taken lightly. A strictly nominal, passive, or hands-off approach is prohibited by law and may significantly weaken one’s position in litigation.

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