Correcting an incorrect entry with retrospective effect: what it means for dividends, voting and any onward transfer

An incorrect entry in securities records is rarely discovered on the day it is made. By the time someone notices it and the central securities depository or a member recognises the objection, the company may have paid a dividend, held a general meeting and the shares may have been transferred onward. The Act provides that the correction is made retrospectively, but the retrospective correction does not automatically undo those intervening steps. For shareholders, issuers and subsequent acquirers alike, it is therefore important to know how far its effects reach.

Correction as at the day of the error

The rule on the date of correction is unambiguous:

It shall carry out the correction as at the day on which the incorrect entry was made, and the completion as at the day on which the incompleteness arose.

— Section 108(1) of Act No. 566/2001 Coll. (unofficial English translation)

After the correction, the depository or the member sends an extract with reasons to all persons in whose accounts or in whose issuer’s register the correction was made (Section 108(4) and (5)). Following the correction, the records therefore show the position as it should have been from the outset. To prevent the error from being compounded by further transfers before it is corrected, the Act allows the depository or the member to register a suspension of the right of disposal where it is going to carry out a correction in its own records (Section 28(3)(f)); an instruction to suspend may also be given by the competent State authority (Section 28(3)(g)).

A dividend paid in the meantime

A company pays a dividend to the person entitled as at the record date. That date is determined by the general meeting that resolved on the distribution of profit; if it does not determine one, it is the date on which the right to the dividend is exercised (Section 178(5) of the Commercial Code). For book-entry shares, the company obtains the list of entitled persons from the records (Section 156a(2)). If the records were incorrect as at the record date, the dividend went to the wrong person. The Commercial Code protects a recipient of a dividend acting in good faith as against the company:

A shareholder is not obliged to return to the company a dividend received in good faith.

— Section 179(1) of Act No. 513/1991 Zb. (unofficial English translation)

How the true shareholder is compensated after the correction is not expressly addressed by the Act. A claim for damages against whoever caused the error may be considered: against the person who gave an instruction without authority, incorrectly, incompletely or late (Section 108(6)), or against the depository or member that recorded the instruction incorrectly or late (Section 108(7) and (8)). Alongside this, a claim for unjust enrichment may be made against whoever received the dividend without legal ground (Section 451 of the Civil Code). Which route is viable depends on who caused the error and how the recipient of the dividend behaved.

Voting at a general meeting

Shareholder rights for which the Act specifies a record date may be exercised only by the person entitled as at that date (Section 156a(1)). If a person incorrectly entered in the records voted at a general meeting, a retrospective correction does not mean that the resolutions adopted cease to be valid. The invalidity of a resolution of a general meeting of a joint-stock company is dealt with by an application to the court under Section 183 in conjunction with Section 131 of the Commercial Code, and this right lapses if it is not exercised within three months of adoption of the resolution; if the general meeting was not duly convened, time runs from the day on which the entitled person could have learned of the resolution (Section 131(1)). A shareholder who attended the general meeting may pursue such a claim only if they lodged a protest for the minutes (Section 183). The time limit for the application to the court must therefore be monitored in parallel with the objection proceedings, because a decision on the objection may not come before that limit expires.

Shares transferred onward

If the shares were sold from the incorrectly credited account in the meantime, protection of an acquirer in good faith comes into play. The buyer becomes the holder of the security even if the seller had no right to transfer it, unless the buyer knew or must have known that they had no such right (Section 19(3) of the Securities Act). How far a correction can reach in such a case depends on the particular chain of entries and, in a contested case, will be decided by the court. For the person harmed by the error, the emphasis then often shifts from recovery of the shares to damages. The difference between an error in an entry and a dispute over ownership is explained in an error in an entry or a dispute over shares.

How to proceed where time matters

The error must be confirmed by an extract and a comparison with the underlying documents; guidance is given in how to verify a share entry at CDCP. The objection must then be filed with the right addressee straight away, and where the account is held with a bank or a dealer, with that entity, as described in an error in a member’s records. If a further transfer is a risk, a suspension of the right of disposal needs to be addressed and, if a general meeting has been held in the meantime, the time limit for an application to declare the resolution invalid must be calculated immediately. Claims for dividends and damages are pursued separately, not in the objection proceedings.

We prepare and file the objection with complete supporting documents through our objection against an incorrect entry service. Suspension of the right of disposal, extracts from the records and other filings with the depository are handled through representation before CDCP; we assess and prepare the court application and the claim for damages in light of the outcome of the objection.