On 11 April 2012 the Supreme Court of the Czech Republic (the “Supreme Court”) issued a decision which has shed some light on section 193 subsection 2 of the Czech Commercial Code (Act no. 513/1991 Coll., as amended) (the “Commercial Code“).

Until 11 April 2012, there had not been a consensus on the consequences for a company of having not obtained the approval of the supervisory board or the general meeting prior to entering into an agreement under which the company acquired or disposed of property whose value exceeded one third of the company’s equity capital. It was unclear as to whether the lack of such approvals meant that the agreement was invalid or ineffective, or whether in fact the agreement remained valid, effective and binding upon the parties to the agreement.

In several decisions prior to 11 April 2012, the Supreme Court had applied a specific rule under which a legal act (typically the conclusion of an agreement) would be held invalid where there was the absence of an approval which should have been granted prior to performance of the legal act. Furthermore, legal acts were also deemed ineffective where there was an absence of an approval which should have been granted after performance of the legal act.

In its ruling of 11 April 2012, the Supreme Court expressly stated that company decisions that relate to the transfer of company property are to be made by the company’s board of directors (being the statutory body of the company) and, therefore, it is only the company’s board of directors who may handle such decisions.

Therefore, the lack of an approval from the general meeting or from the supervisory board to conclusion of an agreement under which the company acquires or disposes of property (under the conditions described above) does not cause such agreement to be held invalid or ineffective. The agreement is valid, effective and binding upon the parties to the agreement.

The decisions regarding transfer of company property fall under the category of business management, and, therefore shall be made only by the company’s board of directors. Neither the supervisory board nor the general meeting of the company may give the board of directors instructions regarding management of the company’s business.

Pursuant to the Supreme Court’s decision, the supervisory board or the general meeting may only forbid the board of directors from entering into such an agreement. However, this would be an internal instruction, which would not have repercussions towards third parties (such as counterparties to the agreement). In the event that the company enters into the agreement despite the supervisory board or the general meeting having forbidden entry into the agreement, the agreement would still be held valid and effective. Those members of the board of directors who acted contrary to the general meeting’s or supervisory board’s instructions would be found liable.

Although the Supreme Court’s decision has helped to unify opinion on the consequences of lack of approvals, court decisions (and even the decisions of the Supreme Court) are not a source of law in the Czech Republic. Therefore, it is possible (and indeed it happens from time to time) that the Supreme Court may decide differently from the in a similar case.