Shareholder's right to an explanation and the time limit for filing an action for an explanation

On 29 February 2024, the Supreme Court of the Czech Republic issued a judgment, Case No. 27 Cdo 1535/2023, in which it dealt with a shareholder's right to an explanation of matters discussed at a general meeting of a joint stock company. This decision brought important conclusions regarding the terms and conditions under which a shareholder is entitled to request an explanation from the company's board of directors. In particular, the Supreme Court addressed the point in time when the time limit for a shareholder's request for an explanation begins to run.

Background to the case

The plaintiff, a shareholder of the company, sought an explanation of the matters discussed at a general meeting held on 31 May 2019. That meeting did not have a quorum. The company's board of directors, in a statement dated 8 July 2019, refused to provide the requested explanation to the shareholder, justifying this mainly on the grounds of protecting business relations and competitiveness.

At the alternate general meeting on 11 July 2019, the shareholder requested the same explanation. However, the Board of Directors again refused to provide this explanation at the AGM.

Therefore, the shareholder filed a lawsuit against the company on 8/8/2019 seeking an explanation.

The Court of First Instance allowed the action, emphasizing that the statutory ground for denial of explanation was not fulfilled. The court held that the shareholder filed the suit within the one-month limitation period that begins to run after the refusal to provide an explanation.

The company appealed the decision. The Court of Appeal set aside the decision of the Court of First Instance, finding that the action had been brought after the expiry of the one-month limitation period. According to the Court of Appeal, this limitation period started to run on 16 June 2019, i.e. after the expiry of the additional 15-day period for providing explanations after the first general meeting pursuant to section 358(1) of the Companies Act, and thus expired in vain on 15 July 2019.

Supreme Court decision

The Supreme Court first considered the legislation and case law relating to the provision of explanations to shareholders. According to the Companies Act, an explanation must be given to a shareholder directly at a general meeting unless it is not possible due to the complexity of the explanation. In such case, the explanation may be provided to the shareholder subsequently within 15 days of the general meeting.

In its decision, the Supreme Court emphasised, inter alia, that it cannot be concluded with certainty in advance of the general meeting whether or not the board of directors will provide an explanation at the general meeting. The fact that the board of directors refuses to provide an explanation before the general meeting (as in this case, before the alternative general meeting) does not change that. Pending a vote on the matter or its consideration by the general meeting, the board of directors may change its mind and provide the requested explanation to the shareholder.

Thus, the Supreme Court has made it clear that the one-month time limit for filing a lawsuit to provide an explanation does not begin to run until the general meeting at which the matter is discussed. Since the matter in the cited case, in respect of which the shareholder sought an explanation, was not discussed at the first general meeting due to non-quorum, the period for filing the suit commenced only after the alternate general meeting on 11.7.2019. The period for filing the suit could therefore not have expired before 11.8.2019.

Conclusion and significance of the decision

The Supreme Court thus concludes that the Court of Appeal erred in its assessment of the running of the time-limit for bringing proceedings. The shareholder's action for an explanation was timely. Accordingly, the Supreme Court reversed the decision of the Court of Appeals and remanded the case for further proceedings.

The Supreme Court's decision underlines the importance of correctly understanding and applying the time limits for bringing an action for clarification. Ultimately, this decision ensures that shareholders' rights are not curtailed and that shareholders have the opportunity to participate competently in the company's decision-making and are fully informed of the matters discussed at the general meeting.

Are you a shareholder of the company or a member of its governing body? Do you need advice on exercising your right of clarification or any other company law matter? Do not hesitate to contact us, we will be happy to help you.