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H&P Corporate Judgment: Interpretation of constituting acts (May 2024)

H&P Corporate Judgment: Interpretation of constituting acts (May 2024)

In May, the Czech Supreme Court published a decision (Case No. 27 Cdo 2235/2023) with content relevant to corporate practice. The decision addressed the interpretation of the content of a company’s constituting acts. The case involved a dispute between shareholders over the voting quorum required for a capital increase, as set forth in the company’s articles of association. The key issue was whether the court should consider the company’s history and other contextual factors beyond the literal text, as this could suggest the parties' actual intent differed from the textual expression. This suggested that the actual intention of the parties may have been different from how the textual expression may appear to the public.

When interpreting legal acts, the primary focus is on determining the actual intention of the parties at the time they expressed their will, considering all the relevant preceding circumstances. Only if their true intention cannot be conclusively established will the text be given the meaning a reasonable person in the parties’ position would typically ascribe to it. Objective interpretation is thus a secondary consideration.

The Supreme Court has consistently held that such rules cannot be applied without further consideration of the founding documents of business companies. These documents are often acceded to by new partners and shareholders who were not present when the original will was expressed, and therefore may not be aware of it. For this reason, the appellate court prefers an objective interpretation to understand the content of the constituting act, unless the provisions in question bind only the founders or do not constitute the material (corporate) content of the given constituting act.

The decision at hand confirmed some correction of this approach for relations governed by the Companies Act (as similarly applied to the previously valid Commercial Code). The Supreme Court has stated that, in certain cases, a subjective interpretation of a company's governing documents may be appropriate to achieve a fair assessment. This allows consideration of the specific circumstances surrounding the adoption of the constituting act, rather than relying solely on an objective interpretation of the text. As a result, the core principle of objective interpretation can be overturned in order to reach a fair assessment of the case.

To avoid future disputes between the shareholders and the company, we recommend that the company's constituting documents be written clearly to minimise ambiguity. Additionally, we advise that the company carefully archive all past decisions and the processes that led to them. This documentation can be useful not only in terms of the duty of care and diligence, but it can also provide valuable context for understanding the company’s commercial relationships and internal corporate documents.

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