Legal guide for company directors and CEOs in the Czech Republic

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

In general, directors do not have direct obligations aimed specifically at the ESG agenda. Directors of banks, insurance and reinsurance companies, pension companies, health insurance companies, asset managers and companies that issue investment securities which are traded on a European regulated market have certain reporting obligations in relation to ESG matters. (See question 4 for further information.) 

Directors are generally obliged to ensure the company’s compliance with all statutory obligations. This includes compliance with workplace health and safety regulations, anti-discrimination rules, and prevention of criminal acts such as bribery and corruption being committed by a company or for its benefit. 

On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. CSRD is scheduled to be implemented in the Czech Accounting Act in phases. As a first phase, starting in 2024, companies categorised as entities of public interest, those meeting the criteria of a large accounting unit irrespective of their status as entities of public interest, and which have more than 500 employees, are required to produce a sustainability report. This includes banks, insurance companies, companies listed on the European regulated market, and other large entities. It is expected that the scope of companies subject to ESG reporting obligations will be further extended to include: by 2025, companies meeting two out of these three criteria: (i) a minimum turnover of CZK 1 billion; (ii) over 250 employees; and (iii) assets exceeding CZK 500m; and by 2026, small and medium-sized enterprises (SMEs) listed on the stock exchange. 

Non-financial information reporting

The sustainability report will constitute an integral chapter of the annual report. The report should outline, in particular, the company’s: business model and strategy; time-bound sustainability goals; internal policies and measures adopted in relation to sustainability; sustainability-related incentives offered to and responsibilities divided between corporate bodies; actual or potential risks associated with its operational activities, value and supply chain, products and services, business relations and what measures were adopted to manage, prevent, mitigate, remedy or eliminate such risks. The report should clearly indicate which information is presented from a short, medium or long-term perspective and, in any case, should adhere to the European Sustainability Reporting Standards (ESRS).

Remuneration policy

Directors of companies that issue shares or similar securities which are traded on a European regulated market must draw up a policy regarding the remuneration of directors and managers (the “remuneration policy”). If the company provides a variable remuneration component to its directors and managers, the remuneration policy must include, among other things, key indicators of the company’s financial and non-financial performance including criteria relating to the company’s social responsibility, an explanation of how these indicators contribute to the company’s business strategy, long-term interests and sustainability, and the methods of determining the extent to which the indicators have been fulfilled. The remuneration policy must be approved by the general meeting and published on the company’s website.

Engagement policy

Directors of insurance and reinsurance companies holding shares or similar securities which are traded on a European regulated market must draw up a policy of the exercising of voting rights and their further involvement in relation to the issuer (the “engagement policy”). The same applies to asset managers. The engagement policy must include, among other things, the way the insurance/reinsurance company or asset manager monitors significant matters concerning the social and environmental impacts of the issuer’s activities and the way the issuer is managed and administered. The engagement policy must be published on the company’s website. 

In the Czech Republic, private limited companies typically have one or more executive directors, who may either act as individual corporate bodies or, rarely, form a collective board. 

Joint stock companies (“JSC”) by default form two collective boards: (i) a board of directors, members of which have an executive role in the company, and (ii) a supervisory board, which has a non-executive, controlling function. 

The Act on Business Corporations allows JSCs to implement a “monistic” structure. In such case, the executive powers are carried out by an administrative committee. 

This guide concentrates on the rules applicable to a limited liability company’s executive directors and members of a JSCs’ board of directors; i.e. directors who have an executive role within the company. 

The supervisory board oversees the activity of the board of directors on an ongoing basis. It makes requests and suggestions to the board of directors regarding organisational, technical, commercial, financial, personal and other business activities related to the company and its business activities. 

The supervisory board reviews the ordinary, extraordinary, consolidated and, where appropriate, interim financial statements as well as a proposal on profit distribution or coverage of loss and submits its opinions to the general meeting. The supervisory board is entitled to review all documents and records concerning the company’s activities, check whether the accounting records are kept properly and in accordance with reality, and check whether the company’s business or other activities are carried out in accordance with the articles of association and applicable legal regulations. 

Where applicable, the supervisory board also reviews the report on relations between related parties prepared by the directors and notifies the results of such review to the general meeting. 

In general, an individual or a legal entity may become a director. There are no restrictions on who can become a director as regards their residency or nationality. As of 1 January 2023, it is no longer necessary to submit a criminal register extract when registering a director. The Act on Business Corporations now specifies disqualification criteria which include prohibition to perform a corporate office, criminal convictions of certain crimes (e.g. embezzlement, fraud, insurance fraud, credit fraud, money laundering) and declaration of bankruptcy. Absence of such disqualification is now evidenced by a simple affidavit. 

Appointment of directors of certain regulated entities (e.g. banks, insurance companies) is subject to the approval of the Czech National Bank. 

A director may not simultaneously be a director of another company with an identical or similar business activity, unless the companies have the same holding company (i.e. they are part of one corporate group). However, this restriction may be removed if approval of all shareholders is obtained. 

A member of a board of directors may not at the same time be a member of the supervisory board or be another person authorised to act on behalf of the company, based on the records in the commercial register.  

In the case of a limited liability company: 

• a director is appointed by the general meeting, or by a written resolution of the shareholder(s)
• the law does not limit the term of office and the appointment is usually made for an unlimited term  minimum number of directors is 1 (or such higher number as is prescribed by the memorandum of association), and
• the memorandum of association must include the precise number of directors. 

In the case of a regular JSC: 

• the method for appointment of a director is determined by the general meeting, unless the articles of association expressly provide for appointment of directors by the supervisory board
• the appointment period is three years, unless the articles of association or the performance agreement provide otherwise; directors may be re-elected
• the number of directors is 3, unless otherwise provided for in the articles of association, and the articles of association must include the precise number of members of the board. 

In the case of a JSC with a monistic structure, the administrative committee members are appointed by the general meeting. 

Irrespective of the corporate structure of the entity, the appointment is effective immediately or from a future date specified in the decision. The name, address, date of birth and date of appointment of the director must be registered with the commercial register kept by the regional court. 

A director may resign from their office by giving notice of their resignation to the relevant corporate body which appointed the director, i.e. the supervisory board or the general meeting. The director’s office terminates on the day when the relevant corporate body of the company discusses the resignation. The resignation shall be discussed without undue delay but no later than at the next session following the delivery of the resignation notice. 

A director may be recalled by a resolution of the corporate body which is entrusted with appointment of the director, i.e. the general meeting or supervisory board, as applicable.

If directors are appointed for a fixed term, their appointment will also terminate by expiry of their term, if they are not reappointed in due time. 

Any changes to the director’s office must be registered in the commercial register kept by the regional court. Any such registration has a declaratory effect towards third parties.

The executive directors, board of directors and administrative committee, as applicable, are “statutory bodies” ("statutární orgány") of a company and their actions are deemed to be the actions of the company itself. This means that the directors have full authority to represent the company (solely or jointly – see below) and that this authority cannot be limited in any way in their actions towards third parties. There is no need for the directors to have special authorisation for certain acts to be valid (for example, the sale of real property), although certain material legal actions do require the approval of the general meeting, supervisory board or administrative committee, as applicable. A director’s act will always bind the company, unless the director acts outside the powers conferred on them by general law.

Only a general meeting of a company – not its directors – has the authority to decide (amongst other things) on:

• changes to the registered capital; changes of directors (limited liability company), members of the board of directors (JSC), supervisory board and administrative committee members;
• decisions as to a sale of the business or,
• in the case of a JSC, a decision to seek permission for shares to be publicly traded; and
• on such other matters set out in law, the memorandum of association or articles of the company. 

In case of limited liability companies, a memorandum of association specifies whether each director may bind the company individually or whether two or more signatories are required. This information is made publicly available in the commercial register. 

In case of a JSC, decisions of the board of directors are adopted by a simple majority of votes, unless otherwise specified in the company’s articles of association. The articles specify whether the members of the board of directors may bind the company individually or whether two or more signatories are required. Similarly to the limited liability companies, this information is also made publicly available in the commercial register. 

Notwithstanding the above, and regardless of whether the internal signing requirements are publicly accessible, the company will be bound by an act of a director (limited liability company) or the board of directors (JSC) towards third parties; even if such an act is contrary to the memorandum and articles of association of the company (but is otherwise lawful). 

Any limitation on the authority of the directors to represent the company (apart from the limitation described above, whereby a director acts contrary to the law) which is included in the memorandum or articles of association, or is given by a decision of the general meeting, will have no effect towards third parties. However, the company may sue the director who acted outside their authority for damages. 

A single director can manage a limited liability company by themselves, provided compliance with the company’s memorandum or articles of association is adhered to. 

As regards a board, a company is generally permitted considerable flexibility regarding its operation. All directors must be given notice of each meeting, although there are no specific requirements as to the form this should take, unless the company chooses to prescribe rules in its articles or internal rules. A board of directors adopts its resolutions by a simple majority of votes of the total number of its members, unless the company’s articles provide for a qualified majority. The company’s articles may even permit voting in writing, or by means of communication with persons outside the meeting room, provided that all members of the board agree. 

A director does not have to be, and in most cases is not, an employee of the company. The basic contractual instrument setting out the rights and responsibilities of a director toward the company is an executive service or performance agreement. It is not a statutory requirement to have such an agreement in place. Where concluded, the agreement must be approved by the company’s general meeting to become effective.

The general rights and duties between a company and a director are governed by the provisions of the Civil Code governing a mandate (“příkaz”), unless implied otherwise by an executive service or performance agreement, where concluded, and the Act on Business Corporations.

As regards remuneration, unless agreed otherwise in the executive service agreement it is presumed that the exercise of the office is free of charge. Any payment by the company to a director that is not specified by law, the internal rules of the company, or explicitly stated in a performance agreement concluded between the director and the company and approved by the general meeting can only be made with the general meeting’s approval. 

The Act on Business Corporations sets out restrictions on a director’s activities to prevent conflict of interest situations. The articles of association may stipulate additional limitations. Under the Act on Business Corporations, a director may not:

• carry on, either on his/her own behalf or on behalf of a connected person, any business activity that is of the same kind as, or is connected to, a business activity of the company, or enter into business relationships with the company
• intermediate business activities of the company for other persons
• take part in the business activities of another company as an associate with unlimited liability, or hold a controlling interest in another company with the same or similar scope of business
• perform the office of a director or other statutory or other body, or be a member, of another legal entity which carries on the same or similar business, unless the companies are members of the same holding group. 

If a director becomes aware of a conflict that may arise between their interest and the interest of the company during the exercise of their office, they must declare that to the other members of the board as well as the supervisory body or, if not established, the general meeting. The same applies to potential conflicts of interest of persons who are closely related to a board member, and persons influenced or controlled by that member. 

In addition, a director must notify the general meeting of an intended entry into an agreement with the company where they are acting as a director. The same applies to contracts entered into between the company and any person who is closely related to the director, and persons influenced or controlled by them. 

The duties of a director are set out in the Act on Business Corporations and are supplemented by a number of other binding rules. In general, the directors must: 

• exercise their range of powers with due managerial care, i.e. the directors are obliged to act (a) in favour of the company (i.e. duty of loyalty) and (b) with sufficient diligence and knowledge, and (c) not disclose confidential information and facts to third parties if such disclosure might be detrimental to the company
• act in the best interest of the company; the burden of proof lies with the director if they are allegedly  in  breach of such duty of care
• follow the principles and instructions adopted by the general meeting, provided that they conform to law and the articles of association
• keep all mandatory evidence, accounts and a list of shareholders and keep shareholders informed of matters regarding the company
• convene a general meeting at least once a year. This period may be shortened, but not prolonged, by the company’s memorandum or articles of association or by-laws. In addition, the directors are obliged to convene a general meeting of the company in specific circumstances (for example, upon a shareholder's request or if the company is in a poor financial situation)  ,  attend the general meeting,
• produce minutes of general meetings and file notifications to the commercial register and other authorities as required
• file, without undue delay, an insolvency petition to initiate insolvency proceedings in respect of the company, if the conditions stipulated by insolvency law are met. If this duty is breached (even negligently) the directors will be personally liable for the damage corresponding to the difference between the amount of the receivable identified in the insolvency proceedings and the amount of the receivable that the creditor actually recovered. 

The director’s duties are owed to the company itself, rather than to its shareholders. 

Directors have a statutory duty to promote the company’s success for the benefit of its shareholders. This includes a duty to avoid insolvency. Directors are obliged to convene a general meeting and propose a solution,

e.g. additional (equity) funding or a stand-still agreement, in case of impending insolvency. If there is no apparent solution to the impending insolvency, the company will most likely become insolvent and the directors will be obliged to file an insolvency petition. Failing to do so would typically result in unlimited liability of the board members. This liability is significantly wider under Czech law than the English concept of wrongful trading. It may also lead to the directors being disqualified from taking up directorships in the future. 

On the other hand, filing an insolvency petition if the company is not insolvent could make board members liable for damaging the reputation of the company and decreasing its value. 

Directors are not expected to be experts in every area that will arise in connection with the company’s management, but they are expected to demonstrate that their decision-making and future expectations were based on sound reasoning, and to utilise the help of an expert when and where needed. 

Directors owe their duties to the company and are therefore potentially personally liable to the company itself in respect of any breach of those duties; directors will generally not incur direct liability towards individual shareholders. Most of the general duties under the Act on Business Corporations are fiduciary duties, and as a result, a director in breach may be liable to compensate or account to the company. 

In the event of bankruptcy, the insolvency court may decide that a director is obliged to provide funds to the bankruptcy estate of a company if he/she breached his/her obligations and, as a result of such breach, contributed to the company’s bankruptcy. The court may request the director to provide (i) funds that he/she received on the basis on executive service or performance agreement or any other benefits that he/she gained from the company in the two years preceding the commencement of the insolvency proceedings, or (ii) to cover the difference between the company’s debts and the value of its assets. 

It is also possible for directors to assume personal liability towards third parties if the circumstances show that they held themselves out as doing so, or if they led the third party to believe that they had the authority to act on the company’s behalf. 

Any arrangement between the company and a director for relieving the director from liability for damage caused by them to the company, or limiting their liability in advance, is null and void. 

If damage has occurred to a company due to a breach of duty of care by a director, the company can settle the damages through a contract concluded with the director. For such agreement to become effective, the approval of the general meeting is required. The approval must be granted by at least a two-thirds majority of the votes of all shareholders. 

A company is permitted to purchase directors’ and officers’ insurance on behalf of its directors, and it is usual for such insurance to be put in place.