SC allows issuing strategic instruction to statutory body

A joint stock company’s general meeting may give binding strategic instructions to the board of directors if such authority has been vested in it by the company’s statutes. This is the conclusion formulated in the latest Supreme Court judgement. The court also emphasised the necessity to differentiate between an (admissible) instruction concerning a company’s strategic management, and a (generally inadmissible) intervention in business management.

Usually, a company’s strategic and business management are both within the authority of its statutory body. Strategic management involves extraordinary decisions which, by their significance, exceed the scope of common administration/management of a company or its business establishment, i.e. its business management. This differentiation is especially important as a statutory body must not be given any binding instructions concerning business management unless a member of the statutory body requests such instructions from the general meeting or unless the business group is governed by special regulations. Yet, as recent case law has now confirmed, this ban does not apply to instructions concerning strategic management.

In the context of a joint stock company, the SC deduced that another body’s authority to intervene in strategic management had to be stipulated in the statutes. For limited liability companies, this prerequisite is relativised, as the general meeting also has the power to reserve for itself decisions on matters that, under the law, fall within the authority of the statutory representative (meaning also decisions concerning strategic management). For both types of companies, there is also the possibility of a one-time ‘piercing’ of the deed of foundation/memorandum of association, changing the wording of the statutes (on a one-off basis) to give the general meeting the authority to issue a binding instruction to the statutory body; the general meeting would subsequently agree on the specific instruction to be given to the statutory body.

The possibility to issue strategic instructions will also be provided for in the amendment to the Corporations Act that is now being prepared. It explicitly gives this power to the general meeting (without the need for stipulation in the deed of foundation/memorandum of association). However, the explanatory report incorrectly states that under the existing regulation, such power has to be explicitly stipulated by the deed of foundation/memorandum of association also for limited liability companies. This is not arguable, precisely because of the above mentioned general meeting´s right to reserve to themselves decisions on matters otherwise falling under the authority of the statutory representative.

Please note that the Supreme Court has not explicitly limited the right to issue strategic instructions to a concrete body of the company. However, it will usually be the general meeting through which the members/shareholders would decide on the company’s strategic management.