The Supreme Court has confirmed that a general meeting’s decision on the distribution of profits in accordance with the memorandum of association cannot be declared invalid merely because it conflicts with an oral agreement between the shareholders.
An oral agreement on the distribution of profit – what was that about?
In its recent ruling of 30 April 2026, Ref. No. 27 Cdo 2390/2025, the Supreme Court considered a petition whereby the shareholder of a limited liability company (s.r.o.) asked to declare a resolution by the general meeting invalid, on the grounds that it was contrary to public policy.
The shareholder saw this conflict in the fact that the general meeting had decided to distribute the company’s profit among the shareholders in proportion to the relative size of their shares, as stipulated in the memorandum of association.
However, the shareholders’ oral agreement and the actual practice of previous years were different: the profit was to be distributed in a ratio corresponding to the contribution of the individual centres managed by each shareholder to the company’s total profit.
Rules for the distribution of profit
Generally, profit is distributed among the partners in proportion to their shares in the company unless the memorandum of association provides otherwise. A breach of the shareholders’ agreement (made outside the memorandum of association) gives rise, in addition to any penalties agreed directly in the shareholders’ agreement, to an obligation on the part of the infringing party to compensate for the resulting damage (i.e., in this case, the profit forfeited by the shareholder in question).
The memorandum of association takes precedence
Consequently, the Supreme Court held that a resolution of the general meeting to distribute profit amongst the shareholders in proportion to their shares which is in accordance with the company’s memorandum of association cannot be declared invalid merely because it conflicts with an oral agreement between the shareholders.
When assessing the validity of a resolution by the general meeting, the memorandum of association takes precedence over an agreement between the shareholders.
What advice can be given to shareholders?
→ If the shareholders wish to distribute profit in proportions other than those set out in the memorandum of association, we recommend in all cases that the rules for profit distribution be amended in the memorandum of association itself. An alternative is a so-called one-off derogation from the memorandum of association, whereby the general meeting decides on an unequal distribution of profit on an ad hoc basis. However, such a decision requires the consent of all shareholders (100% of the votes) and must be certified by a notarial deed.
Author: Pavla Kubáková, Associate, Corporate and M&A, LYNX (Czech Republic)
Source: Supreme Court
