As spring is approaching, the period of meetings of the highest bodies of business corporations is approaching, which will mainly have decisions on the approval of financial statements and the handling of profit or loss on their agenda. In this article, we will use the example of a limited liability company to remind you of the procedure for fulfilling this annual obligation.

Our expert corporate team will be happy to advise you on the detailed legal aspects of holding a general meeting, paying out profit shares and fulfilling your obligations to the registry court.

Discussion of the financial statements

The General Meeting is obliged to discuss the financial statements no later than 6 months after the end of the previous accounting period. For most companies, it means the obligation to hold a general meeting by 30 June of the calendar year following the period, for which the financial statements are approved. This means that, unless the articles of association provide otherwise, invitations to the general meeting must be delivered to the shareholders no later than mid-June.

Tip: The shareholders are entitled to waive their right to a duly convened general meeting. They may do so either in a written declaration with a certified signature or by a declaration made at a general meeting. In such a case, the formalities of convening a general meeting may be waived.

The law does not provide for any procedure for the discussion of the financial statements. Factual accuracy of the financial statements and compliance with the law is ensured in practice on the one hand by the statutory body, which supplies the documents for their preparation, and on the other hand by a commissioned accounting company. The function of the General Meeting is, in this respect, a control function.

Assuming the proper functioning of the company and the proper exercise of the functions of the statutory body of the company, the discussion of the financial statements usually ends with their approval. The reason for the potential disapproval of the financial statements may be either a formal conflict with the legal regulations on accounting or a conflict with the actual state of the company as known to the General Meeting.

Treatment of profit or loss

The result for the last accounting period can be treated in four ways:

i. retained in the accounting entity, i.e. transferred to retained earnings or unrelieved losses from previous years;

ii. profit can be used to offset losses from previous years;

iii. profit can be used to create funds;

iv. profit can be distributed among the shareholders in the form of a profit share.

Profit distribution

The most common form of profit distribution is a cash distribution. However, if the company’s articles of association allow it, the general meeting may also decide to distribute the profit in a non-cash form.

The General Meeting is required to carry out (i) a balance sheet test and (ii) an equity capital test before distributing profits. These tests aim in particular to ensure the financial stability of the company after the distribution of profits, including the protection of creditors. We have discussed their specific form in more detail in an article.

In practice, it is unthinkable to conduct the tests during a general meeting. The best practice is to instruct an accounting firm to perform the relevant tests well in advance of the general meeting. This task should in principle be performed by the statutory body or another convener of the general meeting. The aim is that the relevant draft resolution on the distribution of profits, which the convenor sends to the shareholders together with the invitation, properly reflects the financial situation of the company.

If the conditions of any of the tests are not met, the profit may not be distributed. A resolution of the general meeting on the distribution of profits made in conflict with any of the tests has no legal effect.

Attention! Even in the case of a company with a sole shareholder, the payment of a profit share is subject to the relevant decision of the sole shareholder – although there is no “distribution” of profits among the shareholders in the layman’s sense.

Payment of profit share

It is the duty of the managing director to make sure that all legal conditions for payment are met before paying out the profit share:

i. ordinary resolution of the General Meeting; ii. meeting the insolvency test (see more in article);

iii. proper registration of the company and all its shareholders, who are legal entities, in the register of beneficial owners;

iv. the fulfilment of any other conditions laid down by specific legislation.

By paying a profit share in conflict with the relevant applicable regulations, the managing director commits a breach of the duty to act with due care, which entails liability for damage.

Filing documents into the collection of documents

The company’s collection of documents must include both the financial statements and the relevant resolution of the general meeting on their approval and on the treatment of the economic result. The obligation to file in the collection of documents is not limited in time. Therefore, the registry court can also request the filing of historical deeds.

The consequence of a long-term and repeated violation of the obligation to file documents in the collection of documents may be, in particular, the imposition of a fine, or in extreme cases of non-cooperation, a decision of the registry court to dissolve the company.