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How to Limit the Powers of an Executive

How to Limit the Powers of an Executive

1.10.2013 10:49
Autor: KŠB, KSB

A recent decision by the Czech Supreme Court helps to clarify both terms and the relationship between them.

In the beginning, the dispute in the proceedings was simple. A supplier filed a lawsuit in order to collect a debt from a former client. The debt exceeded CZK 200,000 and resulted from a services contract entered into between the supplier and one of the client’s two executives. The case eventually went all the way to the Supreme Court, which took a different view from the lower courts and held that the debt should be paid. The reason was found in one the clauses in the client’s memorandum of association, which stated that “both executives shall act jointly in transactions whose value exceeds CZK 40,000”. The same sentence was contained in documents filed in the Commercial Register.

Based on previous decisions, lawyers are well aware that the crux is how precise the company’s intention is expressed. The Supreme Court distinguishes between two types of clauses in a memorandum of association regarding the powers and authority of executives. One typically provides that either each executive may act individually or that both (or several) executives must act jointly to bind the company. If the requirement is to act jointly, and the executives do not, the company’s intention to enter into a contract is deemed never to have existed, and because we define a contract as a “mutual expression of intention” the company is not bound thereby. However, the other type of clause can limit the executive’s powers to act on behalf of the company but only with effects “inside” the company. Breaching this restriction has no impact on contracts concluded with third parties; it only establishes the executive’s liability in relation to the company. Such clauses typically prohibit executives from entering into contracts whose value exceeds a predetermined amount or subjects such transactions to the consent of the general meeting. However, this type of restriction is ineffective towards third parties and hence the contracts concluded in breach of it are binding for the company.

The Supreme Court had to interpret the clause in the memorandum of association that combined the transaction threshold method with the manner of acting on behalf of the company. The Supreme Court did not agree with the lower courts, which interpreted the clause as an internal restriction that has no effect vis-a-vis third parties, and ruled otherwise. The Supreme Court emphasized that where a memorandum of association provides that several executives are required to act jointly on behalf of the company, this should be deemed as establishing the manner of acting on behalf of the company. The logic of this conclusion is underlined by the fact that the manner of acting must be included not only in the memorandum of association but also in the Commercial Register, since it must be disclosed and available to third parties. The internal restriction of an executive’s power, on the other hand, is not subject to any such requirements.

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