TALLINN - Estonia risks becoming a haven for disreputable corporations under legal changes that make company directors immune from liability. Under the changes, which will come into effect in March, directors and board members cannot not be prosecuted if their decisions were made in good faith. Justice Minister Rein Lang said the new corporate law was copied from the U.S. state of Delaware and was designed to attract more investment to Estonia.
Delaware is well known for its lax corporate laws, which allow company directors to absolve themselves of liability for any decisions, including those that adversely affect stock prices or even consumers.
More than half of all listed corporations in the U.S. are legally based in Delaware, a tiny state on the east coast which reaps a windfall of corporate tax.
Lang told a joint meeting of the foreign chambers of commerce on Feb. 19 that the changes were part of a plan to improve conditions for entrepeneurs.
He said plans were afoot to ease the bureaucracy surrounding business operation in Estonia to encourage more start-up enterprises.
Employment laws would also be updated to "find a middle ground between sufficient employee protection and a guarantee for entrepeneurs for acting quickly in a market situation".
Estonia already introduced quick online registrations and database checks for businesses on Jan. 1.
The Vice Dean of Business at International University Audentes, John Sullivan, said the Delaware law brings Estonia into conflict with the European Commission.
"Such laws allow boards to remove themselves of any sort of liability. They can hide behind the law in terms of product safety and fiducial responsibility. As long as they say their decisions were in good faith, they are protected," Sullivan said.
He said many directors were concerned about being held personally responsible for their corporate decisions because of an increasing number of prosecutions which sometimes end in imprisonment.
He pointed to the scandals surrounding the bankrupted American companies Enron and Worldcom, in which several senior officers were sentenced to prison.
"Boards of directors realize they are criminally responsible for their decisions. Any place that has this law will be a major attraction, particularly for companies dealing with a product that has the potential to cause harm," Sullivan said.
Andres Vutt, an expert in European business law and partner at Concordia Attorneys, said he did not believe the change would have a wide impact.
Vutt said the changes would narrow the legal description of a criminal act.
"Sometimes it seems it is easier to prosecute a board member than to claim damages from them," Vutt said.
"There have been situations where a director cannot be pursued for damages because they are bankrupt, but they can have a successful criminal case."
He said much now depended on interpretations of the law by prosecutors and judges.
"Now the description of a crime is so broad you can put everything under it. This will make it more narrow and exact."
A Ministry of Justice spokesman said amendments to the commercial code were made to limit the liability of members of a management board of a public limited company.
"Before this amendment, the liability of the members was regulated somewhat indefinitely in law. This allowed for broad interpretation and the results of court cases were somewhat different," the spokesman said.
"This situation was dangerous for members of the board, because the extent of their responsibility for damages may not have been evident before judiciary proceedings. Now there are clear provisions."
Board members could now be assured that they were released from liability if they could prove they had performed their obligations with due diligence, the spokesman said.
