“Golden parachute” as a claim from the performance contract and an adverse financial result of the company

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According to the law, it is possible to refuse the provision of performance for the performance of the function (including the so-called golden parachute, contractually agreed significant severance pay) only in the event that a member of the elected body of the company (e.g. executive officer) has apparently contributed to an unfavorable economic result . The High Court in Prague dealt with the interpretation of this provision of the Act on Business Corporations, specifically the conditions of denial of performance, and thus provided practical guidance on how to proceed in practice in a given situation.

In the dispute in question, the plaintiff demanded payment of remuneration from the defendant company on the basis of a contract for the performance of a function. The plaintiff worked for the defendant as a member of the board of directors from 2017 and, as the courts deduced from the 2016 annual report, the company was not in a stable economic state at the beginning of the plaintiff’s tenure. During the plaintiff’s tenure as CEO from 2017 to 2018, there was an increase in sales as well as a reduction in the company’s loss. However, these results did not meet the defendant’s expectations, so she refused to pay the promised performance, and due to the unsatisfactory economic results, the plaintiff was removed from office together with other members of the board of directors.

The plaintiff therefore turned his claim to the court, which found him to be right and rejected the defendant’s claim that he had contributed to the unfavorable economic result by his insufficient personal supervision of subordinates as unfounded, because in his opinion it is a matter of work organization. In addition, by comparing the annual reports from 2016 to 2019, it was not possible to conclude that this action of the plaintiff had an effect on the adverse economic result, therefore the plaintiff admitted the claim.

The court further explained that when assessing the performance of the function, other circumstances must also be taken into account, such as the degree of business risk, comparison of the results of management under different management and over a longer time horizon, so that the newly adopted changes can be sufficiently reflected in practice, or a possible economic crisis industry. As an unfavorable economic result is not defined in the law, the courts should first of all examine what is behind the unsatisfactory situation, because the company can be well managed, although it is in loss. After all, as the rule of business judgment assumes, if a member of an elected body acts sufficiently informed and in good faith in the defensible interest of the corporation, he is acting with the care of a proper steward.

In addition, the High Court in Prague added that the law does not (newly) state breach of duty in the performance of a function as a reason for denying performance from the performance of a function, in contrast to the legal regulation until 2014. The emphasis on proportionality and fairness in assessment can be traced from the decision-making practice of the Supreme Court the legitimacy of denying remuneration for the performance of office to members of elected bodies. In particular , the courts emphasize that the contribution to the adverse economic outcome would have to be “obvious” in the sense of significant.

Given that a breach of duty during the performance of a function or a breach of the care of a proper householder no longer constitute a legal reason for losing the right to remuneration or severance pay or “golden parachute”, it can only be recommended to negotiate these terms of the right to remuneration in the contract for the performance of the function. Otherwise, a similar argument will not stand up in court.