Picture a situation we see often at our firm, especially among foreign clients doing business in the Czech Republic: two or three shareholders set up an s.r.o. (the Czech limited liability company), sign a standard-form memorandum of association in front of a notary, and then settle the things that actually matter – how they will split the work, the management, and the profits – “their own way,” often just verbally or by email. It works for years. Until one of them decides the arrangement no longer suits him, and votes at the general meeting differently from what he had promised.
The Czech Supreme Court recently ruled on exactly this kind of dispute, and its reasoning is worth the attention of anyone doing business with a partner on the basis of something more than the memorandum of association alone – which, in practice, means almost everyone. The decision also illustrates, very clearly, the three different layers of rules that govern how a Czech company operates, and why it matters which layer a given commitment actually belongs to.
Three Layers of Company Rules
Before turning to the case itself, it helps to be clear about what documents actually govern a Czech company (typically an s.r.o. or an a.s., the Czech joint-stock company) and how they differ – in practice, these categories are frequently blurred together, particularly by clients coming from other legal cultures.
The law. The basic framework is set by the Business Corporations Act and the Civil Code. Many rules can be varied by agreement; a number of others are mandatory and cannot be departed from.
The memorandum of association (for an s.r.o.) or the articles of association (for an a.s.). This is the company’s “constitution.” It is filed with (or, in the case of articles, deposited in) the Commercial Register, is publicly available, and amending it generally requires a qualified majority at the general meeting and the form of a notarial deed. It is against the memorandum or articles – and the law – that the validity of a general meeting resolution is measured. If a resolution conflicts with the memorandum/articles or with the law, any shareholder may seek a court declaration that it is invalid.
Shareholders’ agreements. Alongside the company’s “constitution,” shareholders often – quite legitimately – enter into private contracts among themselves that are never filed with the Commercial Register and whose content the wider public never sees. These typically cover voting agreements, rules on filling corporate bodies, deadlock-resolution mechanisms, pre-emption and co-sale rights (rights of first refusal, tag-along, drag-along), or, as in the case below, an agreement to split profits differently from what the memorandum provides. Czech law does not expressly regulate this type of contract at all – it is a so-called innominate (unnamed) contract, governed by the general provisions of the Civil Code on obligations.
The difference between the second and third category is not merely formal. It is decisive for what happens when one of them is breached.
What Happened: Profit Split “The Old Way,” Voting “By the Book”
In the case decided under file no. 27 Cdo 2390/2025 (Supreme Court resolution of 30 April 2026), the shareholders of an s.r.o. had agreed that company profits would not be split pro rata to their ownership interests, as the memorandum of association provided, but according to the performance of the individual business divisions each of them ran. This informal arrangement was borne out in practice for two years – profits were in fact distributed by divisional performance rather than by shareholding, twice in a row.
The trouble started when two of the shareholders (apparently those running the less profitable divisions) outvoted the third at the general meeting and reverted to distributing profits according to shareholding – exactly as the memorandum of association provided, but in breach of what they had previously agreed verbally. The outvoted shareholder sought a court declaration that the resolution was invalid, arguing among other things that it was contrary to good morals.
The appellate court had previously held that the oral agreement on a different profit split effectively amounted to an agreement to amend the memorandum of association and, for want of the required notarial form, was void from the outset. The Supreme Court rejected that reasoning: a shareholders’ agreement on the exercise of voting rights is a separate, innominate contract standing alongside the memorandum of association, not a silent amendment to it, and its validity is assessed under the Civil Code’s general rules.
That, however, did not ultimately help the shareholder seeking to have the resolution declared invalid. The Supreme Court established a key principle: where a shareholder breaches an obligation under such an inter-shareholder agreement, that breach does not, by itself, render invalid a resolution otherwise adopted in accordance with the memorandum of association. Breach of a contractual duty generally does not, under Czech civil law, result in invalidity – it gives rise to liability for the resulting damage. Invalidity of a general meeting resolution, by contrast, is primarily linked to a conflict with the law or with the memorandum of association – and a resolution that properly follows the rules laid down in the company’s founding instrument survives that test even where it conflicts with what the shareholders privately promised one another.
The Supreme Court summarised the point as follows:
(Unofficial translation from the Czech original; the authoritative wording is the Czech text of the resolution.)
“The Supreme Court does not in any way question the legal relevance of shareholders’ (stockholders’) agreements, nor the binding nature of the undertakings contained in them; however, a failure to observe them when adopting a general meeting resolution will, as a rule, not constitute grounds for declaring the resolution invalid. This applies all the more where the founding legal act and the shareholders’ (stockholders’) agreement regulate the same matter differently, and the general meeting resolution corresponds to the rules agreed in the founding legal act.”
In other words: a shareholders’ agreement is alive and enforceable – just through different means, and with different consequences, than the memorandum of association.
Why This Matters Especially for Foreign Investors and Expats
In our practice, we see this pattern most often with clients coming from legal cultures where a shareholders’ agreement is a standard, essentially co-equal pillar of a company’s governance alongside its founding documents, and where it is common to use it to regulate matters that, under Czech law, properly belong in the memorandum of association or in a resolution requiring a qualified majority. International shareholders therefore often carry this habit over into their Czech s.r.o.s and a.s.s – drafting an extensive English- or German-language agreement covering voting, profit distribution, the appointment of managing directors, and dispute resolution, without ever reflecting those rules in the memorandum of association or otherwise anchoring them in the corporate documents.
The Supreme Court’s decision is not a reason to abandon shareholders’ agreements – quite the opposite: it confirms that they are legally relevant and enforceable like any other contract. But it is a clear reminder that such agreements are not a full substitute for the memorandum of association or the articles where the matter at hand is one whose breach is meant to affect the validity of a general meeting resolution itself. If shareholders want a particular rule (say, the method of profit distribution, a quorum requirement, or a veto right) to be “hard” enforceable against the company and third parties, and want its breach to be capable of undermining the resolution actually adopted, that rule needs to sit directly in the memorandum of association (or, where the law allows it, be adopted as a resolution with the consent of all shareholders). Leave the same rule only in a private shareholders’ agreement, and it remains binding – but its breach is remedied only through a claim for damages (or a contractual penalty, if one was agreed) against the shareholder who broke it, not by challenging the general meeting resolution itself.
Key Takeaways
Shareholders’ agreements have a solid and legitimate place in Czech corporate practice – they allow shareholders to arrange their relationship flexibly and discreetly, without a notarial deed and without disclosure in the Commercial Register. At the same time, they have real limits that need to be factored in from the moment they are drafted.
When setting up a corporate structure – whether you are forming a new company or revisiting an existing one – it is always worth carefully weighing which rules belong in the memorandum of association (or articles) and which are better suited to – or sufficiently covered by – a standalone shareholders’ agreement. That choice carries real legal consequences, as this Supreme Court decision illustrates.
We advise on exactly these questions on a regular basis – from setting profit-distribution rules, through voting agreements and deadlock-resolution mechanisms, to reviewing existing shareholders’ agreements so that they actually hold up once the shareholders stop agreeing. If you are facing a similar situation, or are simply not sure whether your shareholders’ agreement will hold where you need it most, please do not hesitate to get in touch.