Legal guide for company directors and CEOs in Slovakia

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Keeping up to date with changing government rules and following all relevant guidance from governmental bodies and regulators, as well as any relevant general industry guidance or industry sector-specific guidance.

Modifying workplaces and activity to comply with all health protection restrictions and requirements in place.

2. What government relief measures have been made available to directors?

Certain forms of distance voting have been made available to all collective bodies including to boards of directors by virtue of law (they can be applied even if the company’s memorandum of association does not allow distance voting). A large number of other measures have been introduced; these are, however, sector-specific and will therefore apply in the relevant situation.

Directors duties and responsibilities

1. What form does the board of directors take?

The board of directors is a collective body (in the case of joint stock companies). Unless the Commercial Code or the company’s articles of association provide otherwise, the board of directors may only make a decision if more than half of the board members are present at the meeting; the decision is approved if the majority of the members present vote for it.

2. What is the role of non-executive or supervisory directors?

Slovak law does not recognise a non-executive director.

3. Who can be appointed as a director?

There are certain restrictions on who can become a director. Amongst other things, it is important to note that:

  • only a natural person with full legal capacity may become a director
  • directors are required to have no criminal record for conviction of a criminal offence under commercial or bankruptcy law, a criminal offence against property, or some other intentionally committed criminal offence the facts of which relate to the entrepreneurial activity
  • a member of a supervisory board of a company may not at the same time be a director of the same company
  • due to conflict of interest provisions (see below), a director of a company cannot be at the same time a director of another company with an identical or similar business activity unless the companies are within the same group.

Directors of a limited liability company and members of the board of directors of a joint stock company from the EU or OECD member states are not required to be resident in Slovakia. There is no nationality requirement. Directors can also be shareholders of the same company.

4. How is a director appointed?

Limited liability companies

A director is appointed at the general meeting by the shareholders (i.e. by the resolution of the general meeting). Upon incorporation, the first director/directors must be designated in the company’s articles of association. The law prescribes no minimum or maximum number of directors. Directors are eligible for reappointment and may be elected either for definite or indefinite periods of time.

Joint stock companies

Members of the board of directors are appointed at the general meeting by the shareholders. The articles of association of the company may determine that members of the board of directors shall be appointed and dismissed by the supervisory board in the manner prescribed by the articles. The term of office of the members of the board of directors is specified in the articles and may not exceed 5 years. The number of directors is not prescribed by law and must likewise be determined by the articles. Directors are eligible for reappointment.

5. How is a director removed from office?

A director can be dismissed by a resolution of the general shareholders’ meeting or, in the case of a joint stock company, by a decision of the supervisory board if the articles of association so provide.

A director may resign at any time. The company must, however, be notified of his/her resignation. Subject to the memorandum of association or the articles of association, such resignation is effective as of the date of the next meeting of the company body authorised to elect a new director (i.e. the general meeting or the supervisory board). If the director resigns during a meeting of that body, the resignation is immediately effective. If the authorised body does not convene a meeting within three months after notification of the resignation, the resignation is effective after the expiry of that period. The removed or resigning director is required to inform the company of the steps which should be taken to avoid any potential loss to the company.

Any change in the director’s office must be registered with the Commercial Register. Such registration only has a declaratory effect towards third parties.

6. What authority does a director have to represent the company?

The directors are “statutory bodies” of the company and they manage all the company’s business, unless such business falls within the powers of another company body. The directors have full authority to represent the company and there is generally no need for the directors to have special authorisation for certain acts to be valid. However, for certain material legal actions as specified by the Commercial Code, the approval of the general meeting or supervisory board is required (e.g. sale of the business as a going concern).

Each director is authorised to act individually on behalf of the company, unless the memorandum of association (in the case of a limited liability company) or articles of association (in the case of a joint stock company) require that 2 or more directors act jointly on behalf of the company. The way in which the company is represented must be registered with the Commercial Register. Where a director does not act and sign on behalf of the company in accordance with the prescribed method of representation, his/her acts are invalid and will not bind the company. The authority of the directors to act on behalf of the company can be restricted by the memorandum of association or by a decision of the general meeting, and in the case of a joint stock company by the articles of association or by a decision of the general meeting or supervisory board. However, such restriction, even if it is registered with the Commercial Register, will have no effect towards third parties and the company will be bound by the acts of the director even if these are beyond his/her authority.

In relation to third parties, a company is bound by the conduct of its directors even if the director/directors act outside the company’s scope of business activity. Only if a director acts outside the powers entrusted by law will the company not be bound by the acts of the director.

The company may sue a director who has acted outside his/her powers for compensation by way of damages.

7. How does the board operate in practice?

The memorandum of association in the case of a limited liability company, or articles of association in the case of a joint stock company, may provide for virtually any number of directors and any combination of signing authorities.

The board of directors of a joint stock company is a collective statutory body. Unless the Commercial Code or the company’s articles of association provide otherwise, the board of directors may only make a decision if more than half of the board members are present at the meeting; the decision is approved if the majority of the members present vote for it. The business of a board meeting is recorded in the minutes of the meeting, which should be signed by the chairman of the board and the minute taker.

Business management decisions by directors of a limited liability company require the consent of a majority of directors, unless the company’s articles of association require a higher number of votes. In other, more common matters, like signing employment contracts or granting of powers of attorney for representation in court procedures, directors may decide and act individually, unless joint action is required by the memorandum of association.

The company’s memorandum of association or articles of association may also permit voting in writing or by other means of communication.

8. What contractual relationship does the director have with the company?

The relationship between the company and its directors is a commercial relationship and it may be regulated in a written service contract between the director and the company (the director of a company is not an employee by virtue of acting as a director). If they do not conclude such a contract, the relationship between company and director is automatically subject to the provisions of the Commercial Code governing mandate contracts. The contract between the company and the director must be in writing and must be approved by the general meeting, providing that such contract has actually been concluded. The articles of association of a joint stock company may determine that the service contract of a member of the board of directors needs to be approved by the company’s supervisory board.

Agreements between the company and the director seeking to limit the director’s liability are prohibited. The same applies to such provisions in the memorandum of association or articles of association. Remuneration of a director will be decided by the general meeting. Joint stock companies may delegate this power to the supervisory board if the articles of association provide for this. If remuneration is not agreed, the director is entitled to compensation commonly associated with the director’s duties. A mandate contract or service contract can also provide that performance of the director’s office will not be remunerated.

A joint stock company may only conclude a credit or loan contract with a member of its board of directors, transfer to or grant the director use of the company’s property, or secure the director’s obligations with the prior approval of the supervisory body and on terms which are customary in business transactions. The same applies to close relatives of directors and to persons who act on the directors’ account.

9. What rules apply in respect of conflicts of interest?

Directors are subject to a ban on competing in business. Unless the memorandum of association (limited liability company) or the articles of association (joint stock company) impose further restrictions, a director may not:

  • enter into transactions in his/her own name or on his/her own account which are related to the business activities of the company
  • act as an intermediary in respect of the company’s business activities towards third parties
  • participate in the business activity of another company as a partner with unlimited liability or
  • act as, or be a member of, a statutory body of another legal entity engaged in an identical or similar line of business as the company, unless the companies are members of the same group.

A company, through its shareholders, may require that a director who violates this prohibition must surrender to the company any benefit gained from such a transaction or that he/she transfers the corresponding rights to the company. These rights may be claimed against the director within 3 months of the company becoming aware of the prohibited act, but in any case no later than 12 months afterwards. The company also has the right to require the director to compensate it for any damage caused by any breach of the ban on competing in business.

10. What other general duties does a director have?

Directors’ duties are set out in the Commercial Code, which is supplemented by a number of other binding provisions. They include:

  • making arrangements to properly maintain prescribed records and accounts
  • monitoring on an ongoing basis the value of the company’s equity and its debts to evaluate whether the company is in crisis (a director who finds out or taking all circumstances into account should have found out that the company is in crisis, is obliged in accordance with the requirements of professional care to do everything that any other reasonably careful person would do in a similar situation to overcome such crisis)
  • maintaining a list of shareholders (if required by law)
  • informing members, shareholders and the company’s bodies about the company’s affairs
  • submitting annual financial statements, proposals for profit or loss distribution and annual reports to the general meeting for approval
  • applying for proper registration of relevant facts with the Commercial Register; directors submit proposals for the registration of (and any changes to) the relevant data with the Commercial Register and are responsible for ensuring that the registered information is correct
  • convening a general meeting on the basis stipulated in the Commercial Code
  • submitting to the general meeting a report on the company’s business affairs and assets at least once a year
  • notifying and explaining obligations to the supervisory board (or in the case of a limited liability company, when a supervisory body is not established, to the general meeting) with regard to the main business plans and the development of the company’s business and assets
  • immediately informing the supervisory board of all facts that may impact on important company business or assets, and
  • convening an extraordinary general meeting and submitting proposals for remedies if company losses exceed one third of its registered capital.

Directors must exercise their range of powers with due managerial care and in accordance with the interests of the company and all its members or shareholders. Directors are obliged to obtain and take into account all available information regarding the decision and not to disclose confidential information and facts to third parties if such disclosure might be detrimental to the company, its partners or shareholders. A director may also not put his/her own interests, the interests of third parties or the interests of his/her partners before the interests of the company.

Directors must ensure that the company complies with all statutory requirements and that the company fulfils its duties and obligations in a proper way and on time (e.g. administrative law requirements, business licenses, environmental requirements, proper payments, social security insurance, payment of taxes, tax declarations, labour law, commercial law requirements). The law sets out many sanctions, particularly financial sanctions, for breaches of these requirements.

If the company becomes over-indebted under the Bankruptcy Act, a director must submit without undue delay a bankruptcy petition to the court. In the event of failing to file for bankruptcy the director will be obliged to pay a penalty amounting to EUR 12,500.00, unless (i) he/she proves that he/she was authorised to put measures in place to overcome the insolvency and after acting with due care filed the petition immediately after learning that the implemented measures will help to overcome the insolvency or (ii) within 30 days from learning about the over-indebtedness he/she instructed a restructuring trustee to prepare a restructuring report and file an application for restructuring with the relevant court that granted this application.

11. To whom does the director owe duties?

Directors who breach their duties are jointly and severally liable to compensate the company for the damage caused.

Such a breach is an objective liability i.e. no negligent or intentional conduct is required. However, directors will not be liable if they can prove that they acted with due managerial care, in good faith and that the act was in the interests of company. They also cannot be held responsible for executing resolutions of the general meeting, unless the resolution is in conflict with the law, memorandum of association or articles of association. Directors are not relieved from liability even if the supervisory board approves their acts.

A director can also be criminally liable for certain criminal offences defined in the Criminal Code, especially for economic crimes (e.g. credit fraud, abuse of information in commercial relations) committed during performance of his/her duties.

12. How do the director’s duties change if the company is in financial difficulties?

If the directors determine or, considering all facts, are able to determine that the company is in crisis (a company is in a crisis if it is (i) bankrupt or (ii) threatened by bankruptcy – a company is threatened by bankruptcy if the ratio between its net equity and its debts is lower than 8:100), they are obliged (in compliance with the requirements of necessary professional or due care) to do everything that a reasonable person would do in a similar situation to overcome the crisis.

The Commercial Code also defines in relation to the crisis the payments substituting for own resources, which are: (i) a credit or a similar performance which economically corresponds to it (could be also performed by means of mutual set-off, execution or realisation of the pledge with the same effect); (ii) any performance provided to a company before the crisis, whereas the maturity of this performance was postponed or prolonged during the crisis, such as prolongation of maturity of an invoice. The payments substituting for own resources can be provided inter alia by the controlling person (e.g. by a holding company). Under the relevant provisions of the Commercial Code, repayment of contributions substituted for own resources is not permitted if a company is in crisis or, as a consequence of the above, could get into a crisis (as a consequence of such a repayment).

If the company is over-indebted, the managing director is obliged to file for bankruptcy within 30 days from learning of this fact or from the moment he/she could have learned of this fact with due care.

13. What potential liabilities can a director incur?

As already specified in the sections above, directors can incur various potential liabilities as a consequence of a breach of their duties. These include, in particular, the following:

  • liability for compensation of loss caused to the company (and subsequently to its creditors)
  • criminal liability for certain criminal offences that can be attributed to the directors
  • personal liability for paying the penalty in the event of failing to file for bankruptcy
  • liability for returning the illegally repaid payments in the event of breach of the ban on repayment of contributions substituted for own resources if the company is or could get into crisis (in such a case the directors will become guarantors of the wrongfully disbursed payments by operation of the law).

14. How can a director limit his/her liability?

Any arrangement between the company and a director which seeks to limit or relieve the director of his/her liability for damage caused to the company is null and void. The same applies to such provisions in the company’s memorandum or articles of association.

However, there is no absolute ban on a holding company indemnifying the director of a subsidiary for such liabilities (unless this would be a breach of the parent company’s directors’ duty of care). A company may also take out directors’ and officers’ liability insurance.

The company can surrender its claims for damages against the director or enter into a settlement with the director, but no earlier than 3 years after these claims have arisen. Such a surrender or settlement will only be effective if the general meeting approves it and shareholders with a 10% share (5% in the case of a joint stock company) of the registered capital do not object to it.

Claims for damages that a company has against its executive officers may be exercised by a creditor of the company acting in the creditor’s name and on their own account, if they are unable to satisfy their receivable from the company’s property.

Petra Corba Stark
Petra Čorba Stark
Partner
Bratislava
Martin Balaz
Martin Baláž
Associate
Bratislava
Sona Hankova
Soňa Hanková
Partner
Bratislava