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Automatic Extension of a Board Member’s Term of Office

08.12.2008

In several of its recent judgments, the Supreme Court has analysed whether and in which cases can the term of office of a member of a private limited company’s management board be deemed automatically extended if the board member’s term of office has expired but the shareholders have failed to pass a resolution to remove the board member or to elect a new board member.

According to § 184 (1) of the Commercial Code, the members of a private limited company's management board are to be elected and removed by the shareholders. In order to elect a board member, the member's consent is required. As a rule, a board member is elected for a specified term of up to three years, but the company's articles of association can prescribe a different term. This term, however, cannot be longer than five years (§ 184 (2) of the CC). Entries regarding a board member and the beginning of his term of office must be made in the Commercial Register.

Recent case law has increasingly dealt with the issue of what happens if the term of office of a board member has expired but the shareholders have neither removed the board member nor elected a new one, while, at the same time, the board member whose term of office has expired actively continues performing his duties as a board member. In such a situation, the question arises whether the term of office of such a board member can be deemed automatically extended, given that the person in fact continues acting as a board member and the shareholders tacitly accept it and do not take steps to elect a new member.

The Supreme Court has addressed this issue in a similar manner in its recent judgments No 3-2-1-65-08, 3-2-1-74-08 and 3-2-1-92-08. In these judgments, the Supreme Court ruled that a board member's term of office cannot be deemed extended merely because the person continues acting as a board member. Generally, the only thing that can be inferred from such continuation of acting as a board member is that the board member is willing to continue acting as a board member. However, in the opinion of the Supreme Court a board member's term of office can be deemed extended by the indirect declaration of intention considering the declarations of intention and conduct of the board member and the shareholders. Yet, for the court to reach this conclusion, it is not enough that the willingness of the (former) board member to continue his activities can be inferred from his conduct but the company's shareholders must also pass a resolution that explicitly approves the person's acting as a board member, i.e. retroactively extends his term of office. It should be borne in mind, though, that such retroactive approval may be precluded by the articles of association.

The Supreme Court has held in several cases that, as an exception, another resolution of the shareholders can be considered to be a resolution extending a member's term of office if, by such a resolution, the position of the person as a board member is essentially recognized and this resolution meets the formal requirements applying to a resolution on the appointment of a board member, including the quorum requirements prescribed by law and the articles of association. It should be noted here that, as to a person's reasons for continuing his activities as a board member after the expiry of his term of office, it is not sufficient for the person to state that he simply continued his day-to-day activities as a board member. The shareholders must, after all, have an actual opportunity to decide whether they wish the person to continue as a board member or not. According to the Supreme Court, one of the so-called other resolutions whereby the extension of a member's term of office can be deemed resolved may be the approval of an annual report prepared by the company's management board and submitted to the shareholders. Having approved the annual report by its resolution, the shareholders are presumed to have also recognised the position of the persons who have, in their capacity as management board members, prepared the report and submitted it to the shareholders for approval.

In practice, disputes often arise in situations where the shareholders have simply forgotten to extend the term of office of a board member, especially if the shareholders and board members are actually the same persons. In such situations there is no real need to pass the resolution on the extension of a board member's term of office and to file a respective registration petition with the Commercial Register since a shareholder anyway accepts his own activities as a board member. In an ideal situation there should be no disputes in such a case, either. However, problems may arise if, for instance, one shareholder who also acts as a board member decides to leave the company and, in relation to that, submits certain claims against the other shareholder or the other shareholder submits claims against him. As a result, there might be a situation where the other shareholder contests the validity of the acts or transactions performed by the first shareholder as a board member, claiming that the member's term of office had expired and the transactions were therefore void. Such disputes cannot usually be resolved without costly and time consuming court proceedings. Therefore, shareholders should be careful about when a board member's term of office expires, and, when it does, should either elect a new member or extend the term of office of the former member.

The second important reason why shareholders should pay attention to when a board member's term of office expires is that, as stipulated by law, an application for making an entry on the election, removal or extension of the term of office of a board member must be promptly filed with the Commercial Register, along with the respective shareholders' resolution (§ 33 (7) and § 184 (1) and (2) of the CC). If the shareholders fail to perform their duty to inform the Commercial Register of the change of board members or their terms of office, the registrar may, according to § 71 (1) of the CC, impose a fine on the company or its shareholders as persons bound to submit the information to the register pursuant to the procedure provided by the Code of Civil Procedure. To avoid that, the shareholders should strictly abide by their statutory obligations and the deadlines for performing these obligations.

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