“Golden parachutes” as a claim arising from an executive contract and the company’s negative business results

21. 2. 2023

According to the statutory regulation, it is possible to refuse to provide payment for the performance of an executive function (including the so-called golden parachute, a contractually agreed significant severance payment) only if a member of an elected body of the company (e.g. the managing director) has clearly contributed to an unfavorable economic result. The High Court in Prague dealt with the interpretation of this provision of the Business Corporations Act, specifically the conditions for denying renumeration and thus provided practical guidance on how to proceed in such situation.

In the present dispute, the plaintiff sought payment of remuneration from the company on the basis of an executive contract. The plaintiff had served as a member of the defendant's board of directors since 2017 and, as the courts concluded from the annual report from 2016, the company was not in a stable economic state at the beginning of the plaintiff's tenure. During Plaintiff's function from 2017 to 2018, there was an increase in sales as well as a decrease in the Company's losses. However, those results did not meet the company's expectations, so the company refused to pay the promised payout and the plaintiff was removed from their position, along with other members of the board of directors, due to the unsatisfactory results.

The plaintiff therefore pursued their claim before the court, which decided in their favor and rejected the defendant's argumentation that they had contributed to the unfavorable economic result by their inadequate personal supervision of the subordinates as unfounded, since in the court’s opinion it was a question of work organization. Moreover, by comparing the annual reports from 2016 to 2019, it was not possible to conclude that the plaintiff’s conduct had contributed to the economic result and therefore allowed the claim.

As the court explained, other circumstances must also be taken into account when assessing performance, such as the level of business risk, comparison of economic results under different management and over a longer timeframe to allow the newly adopted changes to have a sufficient impact in practice, or a possible economic crisis in the sector. As an unfavorable result is not defined in the law, the courts should examine what is behind the unsatisfactory result, as a company may be well run although it is in a loss-making position. Indeed, as the business judgment rule suggests, if a member of an elected body acts with sufficient knowledge and in good faith in the corporation's defensible interest, they are acting with the care of a prudent manager.

The High Court of Appeal in Prague concluded that (now) no statutory provision mentions a breach of duties in the performance of executive office as a reason for which renumeration could be denied, unlike the statutory regulation until 2014. The Supreme Court's decision-making practice shows an emphasis on proportionality and fairness when assessing the justification for denying remuneration for the performance of duties to members of elected bodies. The courts emphasize in particular that the contribution to the adverse economic result must be "obvious" in the sense of substantial.

 

Since neither breaches of duty in the exercise of office nor breaches of due diligence constitute a statutory reason for the loss of the entitlement to remuneration or severance pay or the "golden parachute", it can only be recommended that this be agreed as conditions of the entitlement to remuneration in the executive employment contract.

Otherwise, the argument of breach of duty as a reason for the loss of financial claims of elected members of a company's governing bodies will not hold up in court.

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