Slovakia experiences blow back on 2023 high court decision on managing director remuneration

Slovakia experiences blow back on 2023 high court decision on managing director remuneration

Eighteen months ago, the Supreme Court of the Slovak Republic rendered a decision (case No. 5Obdo/32/2022) regarding the remuneration for the performance of the office of the executive director in a limited liability company when no written agreement was made regarding the performance of this office. This ruling has had broader implications, not only for limited liability companies but also for joint-stock companies and limited partnerships, and the relationships between their governing bodies, such as executive directors, members of the board of directors, supervisory board members, and even procurists.

The following article describes the issues arising from the Supreme Court ruling and possible solutions.

Legal framework: the requirement for an agreement on the performance of the function

According to the current legal framework, if no written agreement on the performance of a role in the body (e.g. executive or managing director, board of directors member, procurist, or supervisory board member) has been made between the person fulfilling this role and the company and no agreement (e.g. an agreement specifying no remuneration) has been approved by the general meeting, the member of the governing body is entitled to remuneration for this role in line with what is customary in the market.

Although Czech courts adopted a reasonable approach considering all aspects of the managing directors’ position within the company (and holding), prevailing Slovak court opinions tend to be formalistic and support the full claim for remuneration (or a significant amount) if no agreement for remuneration or an agreement specifying that there be no remuneration was concluded and none was approved by the General Meeting of the company. The above issue arises upon the member’s termination of the position. The claim for remuneration expires after four years under the statute of limitations.

The basic approach to quantify the amount of due remuneration is multiplying months served in the function by market standard remuneration. Unfortunately, if not proven otherwise a court resolving the matter may tend to follow this approach.

It is suggested that the nature of the above rule – where, in the absence of an agreement on the performance of the function, the respective company body member is entitled to market-standard remuneration – serves as a safety net and a tool to incentivise both the company body member and the company to formalise their relationship.

Case facts and assessment

In the above case decided by the Supreme Court, the plaintiff served as the executive director of the defendant company for 19 months without a written agreement regarding the performance of the role and without remuneration. Consequently, by operation of law, this relationship was governed analogously by a mandate agreement, as there was no agreement on the performance of the office.

The Supreme court rejected the defendant’s argument that the plaintiff's entitlement to remuneration had been nullified by accepting payment under a consulting agreement for other activities within the group between the plaintiff and the holding company. It confirmed that the executive director has the right to remuneration for the office even if no written agreement for no remuneration exists. The ruling also emphasised that the time aspect does not determine the amount of remuneration. This means that the existence of the plaintiff’s claim is not determined by the number of hours per day the plaintiff, as the executive director, devoted to performing acts or duties on behalf of the defendant. Furthermore, the Supreme Court suggested that the entitlement to market-standard remuneration is triggered by the mere appointment to the office of managing director, regardless of whether it can be proven that the director actually performed the function (e.g. the number of hours spent carrying out duties associated with the role, due execution of the duties, remuneration from other companies from within the holding, remuneration practice, etc.).

The impact of the Supreme Court’s decision on practice

The decision of the Slovak Supreme Court regarding the remuneration of the executive director has sparked a mixed reaction among legal professionals and academics who have expressed doubt about the practical implications of this ruling on the actual performance of roles by members of the governing bodies.

In this case, the Supreme Court emphasised that, due to a different legal position of the managing director compare to an employee, the time spent in the role is not a determining factor for the amount of the actual remuneration. This means that a member of the governing body who has performed the role in a formal capacity with minimal time commitment may be entitled to usual remuneration if no written agreement on the performance of the role for no remuneration exists. Unfortunately, due to lack of a more specific point of appeal, the Supreme Court did not delve into greater detail and other specifics that may have an impact on the remuneration and its amount (e.g. scope of real activities of the managing directors, scope of real activities of the companies, possible holding structure implications, scope and magnitude of managerial duties, etc.).

This ruling largely affects setups when an individual within the structure of the mother or holding company is appointed as the executive director (or as another company’s body member) to the multiple local portfolio companies or SPVs. Usually, this individual has a separate agreement with the holding company regarding the performance of the function of the corporate body member. Such an agreement, however, may not contain the mandatory provision of the Slovak law and the approval of the General Meeting of the local SPVs is usually omitted. The implication of this absence is that lack of such an agreement does not affect the exclusion of remuneration for a member of the body since this arises by operation of law in the absence of a contract for the performance of the functions of the office or its sufficient remuneration.

Options for avoiding exposure to remuneration claims

The Supreme Court’s ruling has direct implications for companies, particularly when no clear written agreements on the performance of roles between the member of the respective body and the local company exist. Companies should consider various ways to mitigate the legal risks associated with remunerating members of governing bodies:

• Signing an agreement on the performance of the office: A written agreement on no remuneration regarding the performance of the role should be made and approved by the general meeting. If such an agreement is signed ex post, it may be necessary to waive any claims for remuneration. This is the safest option since it strictly follows the formal requirements of the Commercial Code.
• Agreement at the parent company level: If there is an agreement at the parent company level (e.g. under a different legal system) concerning the performance of roles in subsidiaries, it must comply with the requirements of the Slovak Commercial Code. It must also be approved by the general meeting of the company in question.
• Unpaid appointment: If there is no intention to conclude any agreement for whatever reason, the resolution of the General Meeting appointing the individual to the company should clearly state that the appointment is enacted without any claim on remuneration. Additionally, the Minutes of the General Meeting should state, for example, that the executive director is appointed without any claim for remuneration and by accepting appointment the director agrees to perform the role without remuneration. Furthermore, consent to such a requirement should be included in the consent to the appointment and the signature specimen should be an extra layer of protection for the company against potential litigation.
• Mandate agreement: A mandate agreement can be signed regulating the performance of the specific role. Such an agreement does not explicitly require approval by the company’s General Meeting. Such an agreement may exhaust the essence or the reason why the Commercial Code introduced this rule.

The last two options, while not battle-tested, clearly express the parties' intention for the function to be performed without remuneration.

Conclusion: the need to reevaluate contractual arrangements

The decision of the Supreme Court underscores the importance of properly structuring contractual relationships within business entities, particularly regarding the remuneration of governing body members. The issue of potential claims by members of a company’s bodies most commonly arises during due diligence in transaction processes. In our experience, this is typically one of the least burdensome scenarios since transaction parties are often motivated to resolve the matter by obtaining a waiver or agreeing to indemnity. The absence of an agreement on remuneration, however, can lead to far more significant consequences when a company body member or one of the startup’s founders exits the company as a bad leaver. Such situations can expose the company to significant, often speculative remuneration claims, and resolving the issue may prove costly, particularly if the matter escalates to litigation.

Subsequently, companies should reassess existing agreements on the performance of roles or their non-existence and consider legal options that can help minimise the risk of remuneration claims from the company’s governing body members. By taking these steps, they can ensure legal certainty and the correct structuring of relationships between the company and its governing bodies as well as avoidance of potential lengthy and costly legal disputes.

For more information on this ruling and Slovak employment law and advice on possible solutions, contact your CMS client partner or these CMS experts: Oliver Göndör, Associate and Martin Jurečko, Partner.