Case law
4 September 2019

What are the limits to a statutory body member’s loyalty?

In its case law, the Supreme Court (SC) has devoted considerable attention to the concept of due managerial care. Loyalty is an important component of this standard of care. The general rule stipulates that an elected member of a body of a legal entity shall be loyal to it. In recent months, the SC has repeatedly had to deal with breaches of this rule.

Petr Janíček
Roman Kuchař

By taking on an office, a member of a statutory body of a business corporation undertakes to exercise it with due managerial care,  i.e. with the necessary knowledge, care and loyalty. While the first two components are rather easy to grasp, the third can prove problematic in practice. The loyalty duty requires that members of statutory body put the company’s interests before those of other persons, including themselves or persons close to them. In this respect, SC case law also notes that the duty of loyalty to the company prevails over the interests of the shareholder/member who, by the power of their vote, installed the statutory body member in the respective office.

The loyalty duty takes on many forms. Usually, it obliges the members of a statutory body to abstain from any act harmful to the company; in other cases, it obliges them to act.

In its recent judgment, the SC also noted that a statutory body member’s office does not only apply during working hours but continues 24 hours a day and seven days a week. The loyalty duty thus binds statutory body members even when they are not engaged in business management. The above implies that without serious reason members of a statutory body should not do anything that clearly goes against their company’s interest, even after leaving their offices for the day. The continuity of this duty is well illustrated by the obligation to keep confidential all facts that the members of statutory body may have learned in connection with exercising their office.

On the other hand, the SC admits that members of statutory bodies may also protect other interests than just those of the company – usually their own or of their close persons. Yet, if these interests are in conflict, they must inform the other members of the statutory body and the supervisory body (if one has been appointed, otherwise the supreme body of the company) without delay. Consequently, their office may be temporarily suspended (or terminated), or they may be banned from entering into a specific contract.

The loyalty principle is also reflected in the no competition rule: a statutory body member must not carry out the same business as that of the company, or be a member of a statutory body of another legal entity with a similar scope of business, except where this involves a business group subject to single management (‘a concern’). If they are bound by loyalty to a number of companies, they should always have in mind the contradicting interest of these companies.

Any breach of the loyalty duty has the same consequences as any other breach of due managerial care, including the duty to compensate for the damage caused or handover any benefits obtained. The burden of proof is on the part of the statutory body, unless the court decides that this cannot be reasonably requested.  In serious cases, members may become liable for offences or criminal acts (for instance when siphoning off corporate funds for private purposes).
 

Share article
LinkedIn
Webdesign