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Governance system of joint-stock companies changed

The Companies Act (Act No. 90/2012 Sb., “Companies Act”), which took effect on 1 January 2014, has brought a number of changes. One of them applies to the management of joint-stock companies.

Previously, there was only a two-tier system in place with the board of directors as the executive body and the supervisory board as the monitoring body. Although, this system of corporate governance has been largely preserved, there are some changes compared to the previously applicable laws.

One of the changes relates to the minimum number of board members. The new rules no longer require that the board of directors have at least three members, but leave it to the discretion of the company to determine the number of board members, irrespective of whether the company has a sole shareholder. This similarly applies to members of the supervisory board. Unless the company’s articles of association stipulate otherwise, the board of directors as well as the supervisory board are deemed to have three members each. Another change is in the length of the term of office. Unless specified otherwise in the articles of association, the board of directors is elected for one year and the supervisory board is elected for three years.

In addition to the two-tier system, the amendment introduces a completely new system of corporate governance – the one-tier structure. A one-tier company has a management board as well as a managing director who is not only a managing director as in many foreign jurisdictions. However, parallel offices are permitted, which means that a management board member may be a managing director at the same time. This is advantageous for companies in terms of personnel and related cost savings. This type of corporate governance is suitable mainly for companies with a sole shareholder.

Some provisions of the Companies Act related to the one-tier system are ambiguous and will lead to a number of interpretation difficulties, such as who elects the managing director – the management board or the general meeting (Section 421 (2) (e) and Section 463 (1) of the Companies Act). Or, which matters fall within the powers of each body (such as approving financial statements and preparing a related-party transaction report), since both bodies are considered executive. These discrepancies may cause a number of problems that can complicate the practical aspects of running a company.

Only practice will show whether the new law will make life easier for companies and whether they will apply the new rules.

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