On 13 October 2022, an amendment to the Commercial Companies Code came into force to regulate the method of calculating the term of office and the moment of expiry of the mandate of a limited liability company management board member appointed for a term of office exceeding one year.
Until then, this issue had given rise to considerable doubt, both in theory and in practice. The changes are crucial, since the correct determination of the term of the mandate has a significant impact on the validity of the actions taken by management board members on behalf of a company. If the term is calculated incorrectly, it may turn out that the member in question did not have a valid mandate and was therefore not entitled to represent the company.
Term of office vs. mandate
The terms “mandate” and “term of office” themselves are often confused.
The former is the authority to exercise the functions of a management board member, while the latter determines the validity of the mandate and, according to the amendment, is calculated in full financial years, unless the articles of association provide otherwise. In most cases, therefore, the term of office and the mandate do not overlap completely.
The key point is that a person can serve as a management board member as long as his or her mandate remains valid.
Method of calculating the mandate if the term of office exceeds 1 year
In practice, three concepts have emerged for determining when a management board member’s mandate expires.
Let’s illustrate this with a concrete example: a management board member appointed on 1 August 2021 for a two-year term of office:
- Prolongation concept – the last full financial year of the board member’s service is the year in which the term of office itself ends. In this case, this will be 2023, so the mandate of the board member so appointed will expire on the date of the general meeting that approves the financial statements for 2023, i.e. generally by 30 June 2024. The mandate of the member will therefore be longer than the term of office.
- Reduction concept – the last full financial year is 2022. The board member’s mandate will therefore expire on the date of the general meeting that approves the financial statements for 2022, i.e. generally by 30 June 2023. In this case, there will be a shortening of the mandate relative to the term of office.
- Third concept – the board member’s mandate will expire exactly two years after his or her appointment, i.e. in this case on 1 August 2023. This was the least preferred concept.
Supreme Court rules in favour of the prolongation concept
Even prior to the entry into force of the amendment to the Commercial Companies Code, the Supreme Court, in its resolution of 24 November 2016, ref. III CZP 72/16, ruled in favour of the prolongation concept, finding that:
“The last full financial year within the meaning of Article 369 § 4 read together with Article 386 § 2 of the CCC is the last financial year that began during the term of office of a joint-stock company supervisory board member”.
Although the resolution concerns the term of office of a joint-stock company supervisory board member, it could be applied per analogiam to the term of office of members of other company bodies.
The Commercial Companies Code after the amendment
At present, Article 202 § 2 of the Commercial Companies Code, which defines when the mandate expires and how the term of office is calculated, provides that:
“If a management board member is appointed for a period longer than one year, the mandate of that member shall expire on the date of the general meeting that approves the financial statements for the last full financial year of the member’s service as a management board member, unless the articles of association provide otherwise. The term of office shall be calculated in full financial years, unless the articles of association provide otherwise.“.
In this way, the lawmakers have finally determined that it is the prolongation concept that should be considered valid. Thus, the last full financial year is the last (financial) year that falls entirely within the term of office for which a limited liability company management board member has been appointed. Conversely, it cannot be a financial year that began but did not end during the term of office.
Assessment of the amendment
Although we have waited a long time for the lawmakers to take such a step, the amendment should be viewed positively. After all, it has finally clarified how the term of office is calculated, and how the moment of expiry of the mandate is determined. The latter is crucial from the perspective of a company and the validity of decisions taken by management board members on its behalf. If such decisions could be called into question, the security of transactions would be jeopardised.
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