AKMV 
Contract on the Performance of the Function of Managing Director
Question
“If a managing director has concluded a contract on the performance of their function with the company, the contract must be in written form and must be approved by the general meeting of the limited liability company (s.r.o.). The agreement on remuneration (or the consideration as such) may be regarded as one of its essential elements. I have also encountered doubts as to whether we are dealing with essential or rather regular elements of a legal act, since the Commercial Code does not define essential elements apart from the written form and the general meeting’s approval. Given the commercial-law nature of the relationship, the remuneration should be considered a material element. It can be assumed that if a contract on the performance of function is concluded with the company’s managing director, it will always include an agreement on remuneration for carrying out this function, with the method and amount of such remuneration depending solely on the agreement between the contracting parties. The remuneration or part of it may also be agreed in the contract as a share in the company’s profit or a fixed amount regardless of the company’s financial results.”
Answer:
Good day,
in connection with the payment of the managing director’s remuneration, the question arises as to the need for the approval of the general meeting (GM) for the payment of remuneration for the performance of the function of the managing director, if the contract on the performance of the function contains a provision on the determination of the remuneration and the contract was approved by the GM. I believe that in such a case it is not necessary, after the entitlement to remuneration for the performance of the function has arisen, for the amount of the managing director’s remuneration to be subsequently approved again. This is naturally related to the extent to which the managing director has fulfilled the duties determined in the contract on the performance of the function. If the contract does not regulate the individual rights and obligations of the managing director, or only regulates them generally, based on the duties set by the Commercial Code, it is possible to reasonably reduce the managing director’s remuneration due to insufficient fulfilment of duties. In an effort to avoid interpretative problems, it is advisable that the contract on the performance of the function of the managing director includes an obligation to approve the amount of remuneration for a specific period based on the assessment of the fulfilment of his duties by the general meeting. If such approval or expression does not occur within the time period set in the contract, it would be deemed that the remuneration was approved in the amount specified in the contract.
It may sound like a contradiction, but under certain circumstances, the function of the managing director can also be performed free of charge. Eliáš states that the managing director may agree with the company also on the unpaid performance of his function.
Eliáš, K.: Spoločnosť s ručením obmedzeným. 1st edition. Prague : Prospektrum, 1997, p. 179.
Such agreement requires the form of a contract on the performance of the function. A provision in the memorandum of association or articles of association that the function is performed free of charge, or so-called honorary, is irrelevant. Likewise, a mutual agreement of both parties on the unpaid performance of the function of a member of the statutory body of the company will also be unenforceable if it does not meet the formal requirements imposed on the contract on the performance of the function under § 66 para. 3 of the Commercial Code, i.e., if such an agreement is not concluded in writing or not approved by the general meeting, as stated above.
Rada, I. et al.: Managing Directors of s.r.o., Board of Directors of a.s. Prague : LINDE, 2004, p. 165.
“And what about the relationship of the managing director to the company by virtue of performing his function?”
In this case, it is not obligatory (mandatory) for it to be determined or established in writing. The Commercial Code clearly states that if a contractual relationship is not created, the provisions on a mandate contract according to the Commercial Code shall apply. Thus, the mutual rights and obligations will be governed by §§ 566 to 576 of the Commercial Code. And this applies even without the need to make any written contract.
In the event that the company decides it wants to resolve mutual rights and obligations with the managing director differently, a contract on the performance of the function may be concluded under § 66 para. 3 of the Commercial Code.
This must be in writing and approved by the general meeting (alternatively in writing by all partners who are liable for the company’s obligations without limitation).
Although the written contract on the performance of the function has no requirements apart from the mandatory written form and designated approving body, it must always be a contract which, as a legal bilateral act, is expressed clearly and understandably. That is, the mutual rights agreed upon between the company and the managing director must be defined clearly and precisely. A sample of such a contract is attached to the article. It is up to the company to decide what scope of rights and benefits it will offer the managing director. Standard provisions include a company car, laptop, share in profits, etc. Also commonly included in the contract on the performance of the function is the amount of remuneration to which the managing director is entitled for the performance of the function and for the business management of the company. Its amount may be flat (i.e., fixed each month) or may depend on the financial performance of the company (for example, expressed on a quarterly basis).