Taking Counsel: Termination of board members

  • 2009-03-04
  • By Annija Melko [Kronbergs & Cukste]
Under the Latvian Commercial Law, a member of a company board is elected and dismissed by a meeting of the shareholders. Section 44 of the Latvian Labor Law provides that the management of a company 's that is, a member of the board or where applicable a member of the supervisory council 's may enter into an employment agreement, unless such person is already employed under another agreement governed by the Civil Law. The Commercial Law does not set out the mandatory content of an employment agreement. It is the Labor Law that by default governs the terms of such an agreement. For this reason, an employment agreement with a board member may include a probation period of three months, giving the shareholder an opportunity to evaluate whether the employee can properly perform in such position.

Section 44 provides that an employment agreement with a board member is to be entered into for a fixed period of time. Based on subsection three of section 224 of the Commercial Law, a board member is elected for a term of three years unless the company's articles of association provide otherwise. It follows that an employment agreement with a board member is to have a term coinciding with that of the period for which they are appointed as a board member. Yet the Supreme Court has upheld that having a term in the employment agreement that does not coincide with the term of the appointment as board member does not constitute grounds for the treatment of the board member as an ordinary employee.

The job title set out in the employment agreement does not have to be 'board member' and may be 'country manager,' 'general director,' 'director,' 'general manager' or another suitable title. The district court has held that what is important is the scope of responsibility, not the job title per se. This would, however, appear to be limited by common sense in that the title cannot be misleading vis-a-vis the scope of responsibilities of the management employee.

If an appointed board member with whom an employment agreement has been concluded is terminated, the question may arise as to what Latvian law governs regarding the termination procedure. The Labor Law sets out a specific termination procedure with a mandatory fault requirement, unless the termination is due to cutbacks, and the law also sets out notice and severance pay requirements. In contrast, the Commercial Law does not set out any conditions for the termination of a board member. Unjust management dismissal claims based on mandatory Labor Law employee termination condition guarantees have been rejected by courts on the grounds that it is the Commercial Law that applies, not the Labor Law.

If prior to their appointment to the position of board member, the board member has been an employee of the employer, the employer should terminate the employment agreement and agree in writing over the new terms of engagement with the board member. Alternatively, if the old employer/employee conditions are maintained with the employee in the new position of board member, the applicable employee protection clauses contained in the Labor Law shall still apply, despite the practical conversion of the employee to a board member, and the application shall even survive the expiry of the person's appointment to the position of board member.
In order to better protect interests in employment law matters, it is advisable to seek the advice of a legal professional before concluding employment agreements, whether it is with board members or others.

Annija Melko is an associate with Kronbergs & Cukste.  Kronbergs & Cukste is a founding member of Baltic Legal Solutions providing quality legal services in the Baltics together with Jurevicius, Balciunas & Bartkus of Lithuania and Glikman & Partnerid in Estonia. Baltic Legal Solutions is a member of the Pinsent Masons Luther Group, an international grouping of business law firms.