bnt attorneys for CEE close.straight.forward

The Business Judgment Rule

Czech Republic: Liability of corporate officers is limited to adherence to proper procedure in reaching business decisions

The Corporations Act (which has been in force since 1 January 2014) contains provisions which expressly recognize the "Business Judgment Rule", with the objective to provide comfort (a "safe harbor") to elected corporate officers (i.e., in particular, managing directors and executive board members), so that they won't be held liable for loss incurred by the company as a consequence of their actions as long as they observe proper procedure. The Business Judgment Rule as a doctrine has its roots in U.S. case law, but it is recognized also by German law, among other jurisdictions.

The members of all elected corporate bodies are obliged to discharge their official duties with the due care of a prudent businessperson. This comprises two elements: (i.) loyalty, and (ii.) the requisite skills and circumspection.

"Loyalty" implies that the company's interest takes precedence over the officer's own interests, or the interests of any third party. A breach of loyalty is always also a breach of the duty of due care of a prudent businessperson, and thus not protected by the business judgment rule.

According to the law, acting with the "requisite skills and circumspection" means that the person who made the business decision was entitled to assume in good faith that he or she made an "informed decision" in the best interest of the company. In this somewhat convoluted manner, the business judgment rule essentially says that statutory bodies are not in breach of their duty of due care as long as certain principles are observed, and that they thus cannot be held liable for the loss or injury caused by their actions.

What does this mean in practice? The statutory body always ought to obtain the necessary information needed to make an "informed decision", and the decision thus made ought to be in the best interest of the company. If a corporate officer lacks the requisite knowledge or skill for a specific decision, he or she ought to consult an expert, so as to gain a better understanding of the matter at hand. It is also advisable to always properly document all decisions of key importance.

Source: Corporations Act (Act No. 90/2012 Coll.)

Lola Laštovičková, Lawyer