Taking counsel

  • 2004-11-10
  • By Karin Madisson, senior associate at Sorainen Law Offices in Tallinn
How easy is it to fire a manager?

"Things tend to go from bad to worse." This Murphy's Law may be the only consolation for management board members in Estonia who are recalled, irrespective to whether the recall was justified or unjustified, without prior notification or without compensation payment.

There is nothing easier than recalling a management board member in Estonia. All it takes is a resolution by the supervisory board in case of a public limited company or by shareholders in case of a private limited company. Although generally the term of office for management board members is three years, this does not preclude recalling a board member before his or her term and is no guarantee for a three-year job. By law, the company is not required to provide an advance notification to the management board member being recalled, and an authorization agreement can be extraordinarily canceled without any compensation paid to that member.

Things get more complicated if the member has signed a written contract for fulfilling management duties or carrying out specific work duties (it cannot be concluded in respect of management duties). In this case, it is necessary to take into consideration that the rights and obligations arising from such contracts are terminated as provided by the contract. The contract can be terminated by a resolution of the supervisory board or shareholders, which should lay down the conditions of termination and appoint a person to represent the company in terminating contracts made with the management-board member.

In case the employment contract is also concluded with the management board member for carrying out some specific work duties, it is necessary to make sure that upon termination of such a contract, the provisions of the Employment Contracts Act are fulfilled. Employment contracts are notably more complex to terminate than the abovementioned.

In general, there is no requirement to justify the cause of the management-board member's recall. If, however, the member agreement provides for payment of compensation - in the case of a recall without cause - the board member should be notified of the reason. In case the management- board member is recalled because of failure to fulfil his or her duties, there is no obligation to pay him or her a severance fee.

Usually, the best option to avoid future disputes is to sign a corresponding agreement with the board member upon termination of his or her contract. Among other things, such an agreement could include provisions on competition prohibition or on employment prohibition. By law, the obligation to keep business secrets has no limitation period.

Another recommendation is to organize the transfer of the documentation and assets. An inventory should be made of accounting documentation and assets, in particular if the board member refuses to hand over the material voluntarily.

If the shareholders have signed the shareholders' agreement, the latter may include provisions regarding the member's recall, and these must be observed. Moreover, it is recommended to check whether the board member in question does not belong to a management body of some other unit of the same group and, this being the case, to make corresponding changes in these units. In case of listed companies or credit or financial institutions, it is necessary to inform the stock exchange or the financial supervision authority of the changes in the management board. Recalling management board members is likely to be an extremely unpleasant experience for both parties. In order to ensure that this unpleasant process is completed as quickly and with as little harm as possible, it is important to draw up all relevant documents accurately and comprehensibly to avoid lengthy, costly and stressful disputes in the future.