“The 27th panel of the Supreme Court (hereinafter SC) consisting of chairperson Filip Cileček and the judges Marek Doležal and Petr Šuk, explained in a resolution from 27 March 2019, file no. 27 Cdo 3885/2017, what changes the Trade Corporations Act (hereinafter the TCA) has brought in the area of division of profit of a joint stock company – compared to the stipulation contained in the Commercial Code (hereinafter CC).”  We quote the introduction part of the Supreme Court press release.

According to the CC, a decision about division of profit could be made at a general meeting only within 6 months from the end of the accounting period[1]. According to the TCA, which took effect from 1 January 2014, a regular financial statement prepared for the previous accounting period may serve as the basis for division of profit until the end of the following accounting period.[2]  This is due to the fact that the TCA, unlike the CC, explicitly contains the so-called insolvency test[3].

According to the quoted judgment of the SC, the approach to decision on division of profit used according to the CC does not apply either[4]. Under the validity of CC, the share of members of the board of directors and the supervisory board in profit (directors' fees) could not be specified at a general meeting, without approving profit to be divided (as a whole) and shareholders' share in thus specified profit (dividend). As of 1 January 2014, this view will no longer prevail. This is due to a change in the stipulation of article 348 paragraph 1, sentence 1 of the TCA, which only establishes for shareholders a right to share in profit that was approved at the general meeting for being divided between shareholders (unlike article 178, paragraph 1 of CC). According to the stipulation of CC, the result of division had to be approved at a general meeting as a whole. According to the TCA, a shareholder is entitled to a share in profit approved at the general meeting for being divided between shareholders. It is thus possible to imagine a situation that at a general meeting not all profit, but only a part of profit is approved, which is to be divided only between some shareholders.

When dividing profit, though, a decision that a part of profit will not be divided between shareholders can only be made at a general meeting for important reasons, and while respecting the ban on misuse of votes. According to the judgment of the SC “from 1 January 2014 it is possible to also decide about division of profit at a general meeting in such a way that a part of it is divided in the form of directors' fees between the members of elected bodies (on the assumption that the articles of association of the company allow this), or it is assigned to a fund established by the articles of association and formed from profit, and the rest is left in the account of undivided profit; but important reasons must be given for non-division of the remaining part of profit between shareholders, too. The important reasons, due to which the board of directors (or a different subject calling the meeting) proposes that profit should not be divided between shareholders (including reasons given from the articles of association of the company), must be stated in the invitation to the general meeting”.

If we compare the version of the TCA applicable for joint stock companies with the version applicable for limited liability companies, we will reach the conclusion that the above-mentioned decision can be applied in both points to profits approved by a limited liability company as well.

Since, according to the TCA, the insolvency test also applies to limited liability companies, it should apply that payment of profit of a limited liability company can be made based on a decision from a general meeting approving division of profit and taking place in the course of the entire following accounting period, not in the course of its first half.

According to article 161, which governs payment of profit sharing to partners of a limited liability company, partners participate in the profit determined at a general meeting for division between partners according to the proportion of their  ownership interests, unless stipulated otherwise by the Memorandum of Association. At a general meeting of a limited liability company, profit is approved for being divided between partners, same as at a general meeting of a joint stock company profit is approved for being divided between shareholders, according to article 348.

We would only like to point out that the rule still applies that a financial statement must be discussed within six months after the date, as of which it had been compiled.

Ivan Fučík

[1] SC judgments 29 Cdo 4284/2007 (Collection of Court Judgments and Opinions no. R80/2010) and 29 Cdo 2363/2011 (R75/2013).

[2] Paragraph 45 of Supreme Court judgment 27 Cdo 3885/2017.

[3] article 40 paragraph 1 of the TCA.

[4] Collection of Court Judgments and Opinions no. R13/2011.