Risks of late convening of the general meeting to approve the financial statements

If the financial statements are not discussed in time for the annual general meeting, this can mean the loss of dividends and other unpleasant consequences. The directors of an LLC or the management of an LLC are required by law to convene a general meeting within 6 months after the end of the financial year (usually by 30 June, unless otherwise specified in the articles of association). The agenda of this general meeting usually includes the approval of the financial statements and the decision on the use of profits. If you fail to comply with this obligation, the law does not directly impose a fine for late convening, but in practice, other negative scenarios can be triggered - from blocking the payment of profits to the liability of the managing director for damages.

Author of the article: JUDr. Kateřina Müllerová, ARROWS (office@arws.cz, +420 245 007 740)

Obligation to convene a general meeting

The Companies Act clearly states that the general meeting must be held within 6 months of the last day of the accounting period. The managing director (or the board of directors in an Inc.) must inform the shareholders by invitation at least 15 days in advance. The invitation must include the date and place of the meeting and the exact agenda (items of business) including a draft resolution. If the invitation has not been sent or published within the statutory time limit, the general meeting may be held only on condition that all shareholders waive their right to a timely convocation in writing or on the spot. Even in extraordinary cases (unwillingness of the managing director, imminent bankruptcy, 10% minority), the GM must be convened immediately. In extreme cases, any shareholder with an appropriate shareholding (at least 10% of the share capital) or the Supervisory Board may also convene the GM. Similar rules apply in the case of a joint-stock company (Section 402 of the German Stock Corporation Act): if the Board of Directors fails to convene a general meeting within the statutory deadline, any member of the Board of Directors or the Supervisory Board may do so.

Legal Consequences of Failure to Convene a General Meeting

Let us recall what can happen if a general meeting with financial statements is not convened properly and on time. One of the very first consequences is the inability to distribute last year's profit. Under current legislation, the profit from last year's accounts can only be distributed by the end of the following financial year at the latest. More precisely: if you don't reach the AGM within 6 months, the financial statements will (with exceptions) become obsolete for profit decisions. Thus, the profit-sharing distribution will be blocked - in fact, it cannot be started after the deadline. If the AGM does not take place at all, profit distribution is not even considered.

There is also the risk of sanctions from the authorities. The Commercial Register requires that the approved financial statements be entered in the collection of documents within 30 days after the general meeting. If this is not done, the registry court may call on the company to remedy the situation and possibly impose a fine of up to CZK 100,000 (in the long term, it may decide to dissolve the company). In addition, according to the Accounting Act, a fine of up to CZK 500,000 (depending on the size and type of business) is imposed for breach of accounting obligations. Simply put, if the financial statements are not reviewed and filed, the company can be fined by both the registry court and the tax office.

In addition to financial penalties, liability for damages may arise for the managing director (or chairman of the board). If the managing director fails to convene the General Meeting in time without a serious reason, this is a breach of duty with due care and the shareholders may claim damages. If the company suffers a loss (e.g. in the form of lost profits) because of this delay, damages will be incurred. If the managing directors perform their duties collectively, they are jointly and severally liable for the damage. Finally - for persistent inaction, there is also the threat of dissolution of the company. According to the Companies Act, the court shall, on motion, dissolve a company (and order its liquidation) if it is unable to carry on its business and fulfil its purpose for more than 1 year. Failure to meet obligations to shareholders could be considered a loss of capacity to operate and give rise to such a petition.

Summary of the main risks:

• Inability to distribute and pay out profits for the past period.
  
  
• Register fines and administrative fines.
  
  
• Possibility of judicial dissolution of the company for long-term inactivity.
  
  
• Personal liability of the managing director for damage caused.

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Practical implications and solutions

In practice, the wrong convening of a general meeting can manifest itself in various ways. For example, company X did not hold its AGM by the end of June and so was unable to discuss and file its accounts. As a result, last year's dividend could not be paid by the end of the year and a dispute with the shareholders ensued. Moreover, the registry court viewed the company as inactive and threatened to fine it.

How to remedy such a situation? It is important to call an extraordinary general meeting as soon as possible. Even if you have missed the legal deadline, you can approve the resolution at the AGM afterwards - just follow the legal requirements (send invitations to all shareholders in good time, draw up the minutes). Then file the approved financial statements in the collection of documents within 30 days. If you later discover that legal formalities have been violated (e.g. the invitation was shorter than the deadline), get the shareholders' approval to remedy this or call a new meeting.

In case of reluctance of the partners or restrictions of the managing director, legal instruments can be used. Each shareholder with a minimum 10% shareholding may request a General Meeting on his/her own. If the managing director does not respond at all (e.g. the LLC does not have a managing director), the court may appoint a convener of the event by order even without a motion. In reality, therefore, there is no deadlock: the law allows for alternative procedures (convening the AGM by the shareholder or appointment of the chairman of the AGM by the court) to avoid permanent delays.

Recommended steps for remediation and prevention:

• Immediately convene a new general meeting - as a substitute or extraordinary meeting.
  
  
• Check that the formal requirements are met - invitation to all partners at least 15 days in advance (or according to the articles of association). If you technically have a late invitation, have the partners declare that they waive their right to a timely convocation.
  
  
• After the approval of the financial statements, file them immediately in the collection of documents (within 30 days of the AGM). Do not delay the registration of documents, otherwise you may be fined.
  
  
• Document the proceedings of the general meeting in writing - the minutes and the presence of the shareholders are key to later proving its regularity.
  
  
• If the shareholders hesitate to convene, explain that delay devalues the profit payout and may lead to penalties. Tell them that they have the right to act outside the EGM (per rollam) or to arrange for a convocation on their own.

Conclusion

When managing a company, care must be taken to ensure that all statutory deadlines are met - from filing tax returns to approving financial statements. Although late convening a general meeting may not be a visible offence at first, the consequences can be painful: lost dividends, fines or legal disputes with shareholders. Proper management of the corporate agenda builds trust among shareholders and business partners.

Prevent these problems early - keep a calendar of corporate tasks, don't put off invitations, don't be afraid to reach out to experts. In case of uncertainty or complications, we recommend consulting a lawyer specializing in business law. Qualified legal assistance will help resolve the situation quickly, minimize risks and design internal procedures to prevent a repeat.

If you have any questions, please contact our law firm - we will be happy to advise you on the organisation of the general meeting, the preparation of documents and the resolution of conflicts between shareholders. Prevention and correct procedure will prevent complications and protect the company and the managing director from undesirable consequences.

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