Amendment to the Commercial Companies Code — the mandate and the term of office of a management board member

On 13 October 2022, an amendment to the Commercial Companies Code came into force. It resolved a long-standing dispute on how to correctly calculate the term of office and when the mandate of a member of the company management board member expires.

The amendment to the Commercial Companies Code changes the previous questionable method of calculating the term of office and the mandate of the management board members. Contrary to what it might seem, the duration of the mandate is not identical to that of the term of office. The mandate could continue despite the expiration of the term of office. And that issue gave rise to numerous disputes, which the amendment of the Commercial Companies Code has put an end to.

It is important to determine when the term of office of a member of the management board expires, as it translates into decisions taken by that person in and on behalf of the company. A defective representation of a company is of major importance to the security of business transactions and has far-reaching legal consequences, both for the company and for those who acted on the company’s behalf without authorization.

Concepts of mandate and term of office

When discussing the duration of the term of office of a member of the management board, it should be noted that the Commercial Companies Code of 15 September 2000 in Article 202 differentiates the concepts of mandate and the term of office. A mandate is an authorization given to a person to serve as a management board member while the term of office is the length of time that person serves. A situation where the mandate and the term of office do not fully overlap is possible.

1. Term of office of a management board member— one-year appointment

Article 202 §1 of the Commercial Companies Code provides that: “Unless otherwise provided in the company deed, the term of office of a management board member shall expire on the day on which the general meeting of shareholders is convened to approve financial statements for the first full financial year in which the member served on the management board.” If the company deed does not provide for appointing the management board members for an indefinite time or for multi-year term of office, the term of office of a management board member lasts one financial year.

However, the article provides that the service is to be performed for a full financial year (usually the same as calendar year) and the appointment of a member of the body usually takes place during the year rather than at the beginning of the year. As a consequence, if the management board member is appointed, for example, on 1 July 2020, the first full financial year of their service on the management board will end in 2021, and pursuant to the said article, their mandate will expire on the day of holding the general meeting of shareholders in 2022 approving the financial statements for 2021. As a result, the difference between the mandate and the term of office of a management board member could significantly extend their service on the board.

• Term of office of a management board member— appointment for a fixed period of more than one year

Under the previous wording of Article 202 §2 of the Commercial Companies Code, the appointment of a management board member for a fixed period of more than one year raised a number of doubts as to the expiry date of the term of office. The said article provided that: “If a management board member is appointed for a term of more than one year, that management board member’s mandate shall expire on the day on which the general meeting of shareholders is convened to approve financial statements for the last full financial year in which the member served on the management board, unless the company deed provides otherwise.” In practice, if a management board member was appointed on 1 July 2020 for a three-year term of office, the question was when their term of office would expire. The following scenarios were possible:

1. Applying the conceptof prolongation according to which the last full financial year of the service is the year in which the term of office ends, i.e. 2023. The mandate will then expire on the day of holding the general meeting approving financial statements for 2023, i.e. on 30 June 2024, which results in the extension of the mandate compared with the term of office.
2. Applying the concept of reduction according to which the last full financial year of the service is 2022. The mandate will then expire on the day of holding the general meeting approving financial statements for 2022, i.e. on 30 June 2023, which results in the shortening of the mandate compared with the term of office.
3. Assuming that the management board member’s mandate expires exactly at the end of the term of office, i.e. if we assume that the term of office is calculated from the date of appointment — 1 July 2023. This is the least popular concept.

3. Appointment of a management board member for an indefinite term

The company deed of a limited liability company may provide for the appointment of management board members for an indefinite term. Due to the existing doubts as to the then applicable wording of Article 202 §1 and §2 of the Commercial Companies Code, the company deed should preferably expressly exclude the said provisions. In relatively small companies, in a situation where the shareholders appoint the management board from their own circle or have confidence in the members of the board, appointment for an indefinite term is common and represents the best solution to the problem of expiry of the mandate described above.

Duration of the term of office and mandate of a management board member – previous regulations and interpretations

According to the previous provisions of the Commercial Companies Code, the problem with interpretation of the duration of mandate usually appeared in the case of terms of office lasting more than one year and resulted from decision of the Supreme Court of 2016. In resolution of 24 November 2016, case file ref. III CZP 72/16, issued with regard to the duration of the term of office of members of the supervisory board of a joint-stock company, but applicable to the term of office of other bodies of commercial companies, the Supreme Court ruled in favour of the concept of prolongation, stating that: “The last full financial year within the meaning of Article 369 §4 in conjunction with Article 386 §2 of the Code of Commercial Companies shall be the last financial year which began during the term of office of a member of the supervisory board of a joint-stock company’.

At the same time, the Supreme Court suggested that the prolongation concept is based on the calculation of the term of office in full financial years. Thus, in the above example, the appointment made on 1 July 2020 would lead to the assumption that a three-year term of office would expire on 31 December 2023 and that the mandate will expire on the day of holding the general meeting of shareholders approving financial statements for 2023, i.e. on 30 June 2024. The Supreme Court’s decision was met with varying perceptions among legal practitioners.

Situation of a management board member of a joint-stock company

The provision of Article 369 of the Commercial Companies Code governing the duration of the term of office of a management board member of a joint-stock company contains analogous provisions concerning the date of expiry of the mandate to that of Article 202 of the Commercial Companies Code. It should be emphasised, however, that Article 369 §1 of the Commercial Companies Code limits the term of office of a management board member to a maximum of five years, which excludes the appointment of a management board member for an indefinite period. The amendment also applies to management board members of joint-stock companies, introducing the calculation of terms of office in full financial years.

The term of office and the mandate — what has changed from 13 October 2022?

The amendment to the Commercial Companies Comes ends the dispute between the concept of reduction resulting from the previous unclear provisions and the concept of prolongation introduced by the Supreme Court’s decision concerning the expiry of the mandate.

The concept of prolongation presented in the resolution of the Supreme Court will prevail, so the last year of the management board member’s mandate is the full financial year which began during the term of office.

Summary of the changes

It is very good that the legislator finally settled disputes concerning the correct indication of the date of expiry of the mandate. For years, this issue has raised difficulties in interpretation and often returned when financial statements were approved.

The situation that has existed for many years, where such a fundamental issue as the length of service as a management board member has raised doubts, should have been changed. Uncertainty in this respect undermined the security of trading and could theoretically lead to attempts to challenge the actions of the companies. A final decision on the expiry of the term of office of a management board member was necessary. It is worth noting that from the point of view of the safety of trade, the most important is to be certain of proper application of law, which the amendment to the Commercial Companies Code has now ensured.

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