When a management decision goes wrong: records, minutes and shareholder consent as protection for directors

An investment went wrong, a major customer failed to pay, or an acquisition turned out to have been overpriced. Several years later a new shareholder, a creditor or a bankruptcy trustee asks who is answerable for the loss. The court then also assesses how the decision came about: what information the director had, whether they weighed it, and whether they acted in their own interest. The answer must come from documentation created at the time of the decision, because it is hard to make good afterwards.

The burden of proof is on the director

The Slovak Commercial Code requires managing directors to obtain and take into account, when deciding, all available information relating to the subject matter of the decision, and not to prefer their own interests or the interests of only some shareholders over the interests of the company (Section 135a(1)). A managing director is released from liability only by proving that they proceeded correctly:

A managing director is not liable for damage where they prove that they acted in the exercise of their office with professional care and in the good-faith belief that they were acting in the interests of the company. Managing directors are not liable for damage caused to the company by conduct implementing a resolution of the general meeting; this does not apply where the resolution of the general meeting conflicts with legislation, the memorandum of association or the articles of association, or where the obligation to file a bankruptcy petition is concerned.

— Section 135a(3) of Act No. 513/1991 Coll. (unofficial English translation)

The same rule applies to members of the board of directors of a joint-stock company (Section 194(7)). Arrangements excluding or limiting liability in advance are prohibited (Section 135a(4)), and the company’s claim may in certain circumstances be asserted by its creditor as well, or in bankruptcy by the trustee (Section 135a(5)). The context is described in the question on whether a managing director is liable for an s.r.o.’s debts

The Czech rules rest on the business judgment rule. A person acts with care and with the necessary knowledge where, in business decision-making, they could in good faith reasonably assume that they were acting in an informed manner and in the defensible interests of the company; the protection does not apply where the decision was not made with the necessary loyalty (Section 51(1) of Act No. 90/2012 Coll.). In Czechia, too, the burden of proof lies on the member of the body unless the court decides that this cannot fairly be required of them (Section 52(2) of Act No. 90/2012 Coll.). In both countries, therefore, how the decision was prepared also matters, and it is for the director to produce the evidence of it in a dispute.

What should remain after a decision

The statutory concepts themselves indicate what the documentation should capture. Being informed concerns the materials the director had available: financial data, offers, a comparison of alternatives, expert reports or a legal opinion for risky steps. Good faith and loyalty concern whether any member of management had a personal interest in the matter and how that was handled. The interests of the company concern a brief statement of reasons why this particular option was chosen and what risks were weighed.

The law prescribes the form only in part. Minutes are drawn up of meetings of the board of directors of a Slovak joint-stock company and of its decisions, signed by the chair and the minute-taker, and every member has the right to have their dissenting opinion recorded in them (Section 195 of the Commercial Code). In Czechia, the dissenting opinion of a member of an elected body who opposed the proposal is recorded at that member’s request (Section 157(1) of Act No. 89/2012 Coll.). For managing directors of an s.r.o., Slovak law does not require minutes of their decision-making, which is precisely why it pays to agree on them in internal rules. A dissenting opinion recorded at the time of the vote allows a member who was against it to prove their position later.

Typical weaknesses are documentation added afterwards, or none at all where the company decides orally; a bundle of materials with no record of which of them management actually weighed; and a decision in which a member with a personal interest voted without that being recorded anywhere.

When the general meeting’s consent helps

In Slovakia, neither the managing directors nor the board of directors is liable for damage caused by implementing a resolution of the general meeting, as the quoted second sentence of Section 135a(3) provides. The protection has two limits: the resolution must not conflict with legislation, the memorandum of association or the articles of association, and it does not extend to the obligation to file a bankruptcy petition. The supervisory board’s consent does not release a director from liability, which the law states expressly in the last sentence of Section 135a(3) and in Section 194(7). In a single-member company the powers of the general meeting are exercised by that shareholder and their decision must be in writing and signed (Section 132(1)). For a resolution to be something that can be relied on, it should cover the specific step rather than a general intention, and the shareholders should receive the same materials as management.

The Czech rules are more cautious. A managing director follows the principles and instructions of the general meeting where they are consistent with legislation and the memorandum of association, but no one may give the director instructions on the management of the business (Section 195(2)). The exception is an instruction requested by a member of the statutory body of a capital company themselves; the law adds, however, that this is without prejudice to their duty to act with the care of a prudent manager (Section 51(2)). A requested instruction therefore does not automatically release a director from liability. In Czechia, too, it is worth putting before the general meeting the same materials on which management relies and documenting that it received them.

What to set up in advance

The rules are best introduced before a contentious decision arises: which steps management will consult with the general meeting or the supervisory board, what materials it prepares for them, who keeps the minutes and where the documentation is archived. This connects with how the managing directors’ limits are set (see the question on whether a contract above an internal limit binds the company), how disagreement between them is resolved (the question on what to do when two managing directors disagree) and what role is played by the supervisory board.

We prepare these rules as part of setting up company bodies. Where a particular decision is to go through the shareholders, we prepare the materials, the resolution and the minutes as part of our general meeting and shareholder decisions service.