Board Member Roles, Duties and Liabilities in Estonian Companies
For an Estonian company board member, it is important to know the Estonian company board member’s role, representation, duties, taxation and Liability. In this article, we will discuss all of this.
This article contains a significant amount of legal references with our comments; we will be adding comments periodically. If you wish to leave feedback or discuss more, please contact us by email at support.estonia@comistar.com.
At the bottom of the page, we added a FAQ
For more board member posts, please see:
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Board member
The board member is a decision-making body in an Estonian company. The board decides on the Company’s strategic direction and sets the overall policy. Shareholders elect board members. Board members can be removed from office by a majority vote of shareholders.
The board member represents the Company in all legal matters. Board members have the power to bind the Company in contracts and other legal documents. Board members are also responsible for organizing its accounts, incl having the annual reports and other required documents with the Estonian Commercial Register.
The board member has a duty to act in the Company’s and its shareholders’ best interests. Board members must exercise due care, skill and diligence in the performance of their duties. Board members must avoid conflicts of interest and disclose any material interests in transactions entered into by the Company.
Board members are liable for damages caused to the Company or its shareholders as a result of a breach of their duties.
Board member applicable law
The board members, representation, duties and Liability, are covered in the Estonian General Part of the Civil Code act § 34-38 and Commercial code § 180-187. Firstly we will go over the Civil Code Act and then move over to the Commercial Code, which focuses on the board member role for a private limited company.
Part of the Civil Code act § 34-38 are.§ 34. Representation of legal person§ 35. General duties of members of directing body of legal person§ 36. Duty to submit bankruptcy petition§ 37. Liability of members of directing body of legal person§ 38. Invalidity of resolution of body of legal person
Civil Code act § 34-37.
§ 34. Representation of legal person.
(1) The management board or a body substituting for the management board of a legal person is deemed to be the legal representative of the legal person in relations with other persons unless otherwise provided by law. (2) In entry into transactions, a legal person may be represented by each member of its management board or of a body substituting for the management board unless the law or the articles of association prescribe that all or some of the members of the management board or the substituting body may only represent the legal person jointly (joint representation). In the case of joint representation, the members of the management board or the substituting body may authorize one or several of the members to enter into certain transactions or into certain types of transactions. (3) In the case of a legal person in private law, joint representation applies with regard to third persons only if a corresponding entry has been made in the corresponding register. (4) Restrictions on the right of representation which are not specified in this section do not apply with regard to third persons unless otherwise provided by law.
Example representation rights if more than one board member § 34
- 34 covers the representation of the legal person (Estonian Company). From (2), we can see that, in the case where there are two or more board members, the representation is a little more complex. In this case, the Article of Assionion should clarify how the representation is done. This enables a more complex way of how the Company can be represented.
Here are a few examples.
A company has board members A and B.
The Company can be represented by A alone or by both (A and B) Members of the Management Board jointly.
This means that board member B can’t represent the Company alone. But board member A can represent the Company alone without board member B.
A company has board members A; B; C.
The Company can decide that the Company is represented by 2 (two) board members jointly. This means that only two or more board members can represent the Company.
When shareholder’s approval is needed
A company has board members A and B, and every member of the Management Board may represent the Company in concluding all transactions.
But in the company article of association, shareholders’ decision is required on certain transactions, for example, buying real estate and establishing subsidiaries.
§ 35. General duties of members of directing body of legal person
The members of a directing body of a legal person shall perform their obligations arising from law or the articles of association with the diligence normally expected from a member of a directing body and shall be loyal to the legal person.
§ 36. Duty to submit bankruptcy petition
If a legal person is clearly permanently insolvent, the members of the management board or the body substituting for the management board shall submit a bankruptcy petition.
§ 37. Liability of members of directing body of legal person
(1) The members of a directing body of a legal person who cause damage to the legal person by violation of their duties shall be solidarily liable to the legal person. The members of a directing body shall not bear Liability if they act pursuant to a lawful resolution of the general meeting or any other competent body of the legal person. (2) A claim for payment of compensation to a legal person for damage specified in subsection (1) of this section may also be submitted by an obligee of the legal person if the assets of the legal person are not sufficient to satisfy the claims of the obligee. (3) An obligee has the right to submit a claim specified in subsection (2) of this section also if the legal person has waived a claim against a member of a directing body or has entered into a contract of compromise with such member. An obligee has the right to submit a claim also if the Liability of a member of a directing body is restricted in comparison with the provisions of law. (4) The limitation period for submission of claims against a member of a directing body of a legal person shall be five years as of violation of an obligation.
Comments on Civil code act § 35-37
In § 35 General duties of members of directing body of a legal person, emphasis is that the board member is loyal and diligent to the Company. The more important part is § 36. In the case of bankruptcy, the board member is liable to submit the bankruptcy application. The law emphasizes the fact if the “legal person is clearly permanently insolvent“. And in the § 37. Liability of members of directing body of legal person the board member are liable for breach of board members obligations, which can be turned against the board member. The main exception is if the any would be liable in his own wrongdoing to the Company if he acted in accordance with a lawful decision, such as a shareholders decision.
Commercial code act on board members applicable law
Here we will cover the Commercial code paragraphs § 180-187. The detailed description can be found directly in the Estonian “Riigi teataja” those are:
- 180. Management board§ 1801. Remuneration of members of management board§ 181. Right of representation of management board§ 182. List of shareholders§ 183. Accounting§ 184. Election and removal of members of management board§ 185. Prohibition on competition§ 186. Preservation of business secrets§ 187. Liability of members of management board
§ 180. Management board
- 180 covers the management of the Company, including if the Company has a supervisory board.
(1) The management board is a managing body of the private limited Company which represents and manages the private limited Company. (2) The management board may have one member (director) or several members. A member of the management board need not be a shareholder. A member of the management board must be a natural person with active legal capacity.
Comment: The first point is a clarification that the board member is the representative of the Company. The second point is that a board member can be a shareholder as well. An exception applies if the Company has a supervisory board, which we will cover in a future article.
(3) A member of the supervisory board shall not be a member of the management board. The articles of association may prescribe other persons who shall not be members of the management board.
(31) A person with respect to whom a court has, pursuant to §§ 49 or 491 of the Penal Code, imposed a prohibition on acting as a member of the management board or a prohibition to engage in enterprise, a person who is prohibited from operating within the same area of activity as the private limited Company, or a person who is prohibited to act as a member of the management board on the basis of law or a court decision shall not be a member of the management board.
(4) If the private limited Company has a supervisory board, the management board shall, in managing, adhere to the lawful orders of the supervisory board. Transactions which are beyond the scope of everyday economic activities may only be concluded by the management board with the consent of the supervisory board. Such restriction shall not apply with regard to third persons.
(5) The management board shall present an overview of the economic activities and economic situation of the private limited Company to the supervisory board at least once every four months and shall immediately give notice of any material deterioration of the economic condition of the private limited Company or any other material circumstances related to the economic activities of the private limited Company. The management board shall also notify of any circumstances related to other private limited companies belonging to the same group as the private limited Company, which may significantly affect the operation of the private limited Company.
(51) If a private limited company is insolvent and the insolvency, due to the Company’s economic situation, is not temporary, the management board shall promptly but not later than within twenty days after the date on which the insolvency became evident, submit the bankruptcy petition of the private limited Company to a court. After insolvency has become evident, the members of the management board shall no longer make payments on behalf of the private limited Company, except in the case where making the payments in the situation of insolvency conforms to the due diligence requirements. The members of the management board shall solidarily compensate to the private limited Company for any payments made by the private limited Company after the insolvency of the Company became evident which, under the given circumstances, were not made with due diligence. The provisions of § 187 of this Code apply to the Liability of the members of the management board. If the private limited Company has no members of the management board, the obligation set forth in this subsection shall apply, if there is no supervisory board, to the shareholders if the shareholders were aware or should have been aware of the permanent insolvency.
(6) If the management board has more than two members, the members of the management board shall elect a chairman of the management board from among themselves, who shall organize the activities of the management board. If the private limited Company has a supervisory board, the articles of association of the private limited Company may prescribe that the chairman of the management board shall be appointed by the supervisory board.
Comment: We have not seen this done properly in practice, usually it happens based on mutual agreement, but if the Company has two board members and both of them are shareholders as well, there is a definite need to have an internally shareholders and board members agreed to avoid any disputes.
(8) The specific work procedure of the management board may be prescribed by the articles of association or by a decision of the shareholders, management board or supervisory board.
Comment: Here is a clarification on the time frame when a bankruptcy needs to be filled. We discussed this above in the General Part of the Civil Code act § 36. Duty to submit a bankruptcy petition.
§ 1801. Remuneration of members of management board
(1) The amount of remuneration payable to a member of the management board and the procedure for payment shall be determined by a resolution of the shareholders or, in the case there is a supervisory board, by a resolution of the supervisory board.
(2) Upon establishing the procedure for remuneration of the members of the management board and the amount of fees and other benefits, and entry into contracts with the members of the management board, the shareholders or the supervisory board shall ensure that the total amount of the payments made by the private limited Company to the members of the management board are in reasonable proportion to the duties of the members of the management board and the economic situation of the private limited Company.
(3) If the economic situation of a private limited company significantly deteriorates and further payment to a member of the management board of the fees established for or agreed upon with the member, or further allowing of other benefits to the member would be extremely unfair to the private limited Company, the private limited Company may demand the decrease of the fees or benefits.
(4) The decrease specified in subsection 3 of this section does not affect other terms and conditions of contracts entered into with the member of the management board. If decrease of fees or other benefits is demanded, the member of the management board may exercise the right to extraordinary cancellation of a contract entered into with him or her upon one month’s advance notice of cancellation.
(5) Upon declaration of bankruptcy of a private limited company and termination of the contract of a member of the management board, the member of the management board has the right to demand, in the course of the bankruptcy proceeding, compensation of the damage caused by the termination of the contract within one year after the date of termination of the contract.
Comment, this paragraph covers the salary that can be paid to the board member. In simple terms, the salary paid to the board member can be decided by the shareholders. But if the Company is in bad standing the salary payment can be stopped.
§ 181. Right of representation of management board
(1) Every member of the management board may represent the private limited Company in all transactions unless the articles of association prescribe that some or all of the members of the management board shall represent the private limited Company jointly. Joint representation shall apply with regard to third persons only if it is entered in the commercial register.
(11) The differences concerning the right of representation of the members of the management board of a private limited company with articles of association used for expedited procedure shall be prescribed by the petition for entry of the Company in the register and later, in the resolution of the shareholders. The provisions on § 175 of this Code apply to the approval and entry into force of the resolution of the shareholders.
(2) Upon concluding transactions on behalf of a private limited company, the members of the management board are required to adhere, with respect to the private limited Company, the restrictions prescribed by the articles of association or established by the shareholders, the supervisory board or the management board. A restriction on the right of representation does not apply with regard to third persons.
(3) A transaction concluded between a private limited company and a member of the management board is void if the shareholders or the supervisory board do not agree to the transaction. The above does not apply to transactions concluded in the course of the everyday economic activities of the private limited Company or according to the market price of a service.
(4) A member of the management board has no right to represent the private limited Company in the performance of transactions for which, pursuant to law, the shareholders or the supervisory board must separately decide on the appointment of representatives.
Comment, this paragraph covers the cases that the board member has the right of representing. To put it simply, when shareholders or the supervisory board approval is also needed, then the board member has limited representing rights. The validity of the board members representation is not always checked. Which means that the board member is liably to know what is their repreenstion extent.
§ 182. List of shareholders
- is important for both the board member and the shareholders.
(1) The management board shall keep a list of shareholders which shall set out the names, addresses, personal identification codes or registry codes and the nominal value of their shares. (-this-) applies to the addresses and personal identification codes or registry codes.
(11) A shareholder shall immediately inform the management board about any changes in the information on the shareholders.
Comment: It is important for both the board member to keep the list of shareholders. And for the shareholders to inform the board member of any changes in the shareholder structure.
Side note: According to the Money Laundering and Terrorist Financing Prevention Act, the board member must submit to the registry the beneficial owners of the Company within 30 business days after any changes take place, failure to do so can result in a fine.
(12) The management board shall immediately inform the commercial register about any changes in the information on the shareholders, unless a notary sends a notice regarding a change pursuant to the second sentence of subsection 4 of § 149 or the second sentence of subsection 2 of § 151 of this Code or on any other grounds, or unless the shares of the private limited Company are registered with the Estonian register of securities.
(2) The shareholders, members of the management board and supervisory board, competent state agencies and other persons with a legitimate interest have the right to examine the list of shareholders.
(3) Upon a resolution of the shareholders, the list of the shareholders may be maintained by the registrar of the Estonian register of securities. A resolution of the shareholders shall be adopted if at least two-thirds of the votes represented at the meeting or, in the case specified in subsection 2 of § 173 of this Code, at least two-thirds of the votes of the shareholders are in favour, unless the articles of association prescribe a greater majority requirement. The management board of a private limited company shall ensure timely submission of correct information provided by law to the person maintaining the list of the shareholders.
(4) Upon entry of shares in the Estonian register of securities or deletion of shares from the Estonian register of securities, the management board of the private limited Company shall promptly submit a notice from the registrar of the Estonian register of securities concerning registration or deletion of the shares to the registrar of the commercial register.
(5) Upon a resolution of the shareholders, the shares of a private limited company may be deleted from the Estonian register of securities and the right to maintain the list of the shareholders may be granted to the management board. The second sentence of subsection 3 of this section shall apply to the adoption of such resolution.
(6) Upon replacement of the person maintaining the list of the shareholders, the management board or the Estonian register of securities shall use the list of the shareholders issued by the Estonian register of securities or the management board respectively as the basis for maintaining the list of the shareholders.
(7) The data specified in subsection 3 of this section, except for the addresses of shareholders, can be examined through the commercial register as the data of the business file.
§ 183. Accounting
The management board shall organize the accounting of the private limited Company
Comment: this means that the board member is liable to organize the accounting and not do the accounting. The accounting can be delegated to an accounting service provider. Comistar also provides accounting services which can be viewed from here.
§ 184. Election and removal of members of management board
The bases for this is fairly simple, the board member is elected and removed by the shareholders, if the Company has a supervisory board then it’s done via supervisory board decision. § 184. is quite extensive and covers a lot of details, which we will cover in our next update.
§ 185. Prohibition on competition
(1) Without the consent of the shareholders or, if a supervisory board exists, without the consent of the supervisory board, a member of the management board shall not:1) be a sole proprietor in the area of activity of the private limited Company;2) be a partner of a general partnership or a general partner of a limited partnership which operates in the same area of activity as the private limited Company;3) be a member of a managing body of a company which operates in the same area of activity as the private limited Company, except if the companies belong to one group.
(2) If the activities of a member of the management board are in conflict with the provisions of subsection 1 of this section, the private limited Company may demand that the member of the management board terminate the prohibited activity, transfer the income received from the prohibited activity to the private limited Company and compensate for damage to the extent exceeding the claimed income.
(3) The limitation period for a claim to terminate a prohibited activity and to transfer the income received from the prohibited activity shall be three months from the date the private limited Company becomes aware of the violation of the prohibition on competition but not longer than three years after the violation of the prohibition on competition. The general limitation period shall apply to a claim for compensation of damage.
The paragraph does not define what is a completion but notes on the sanctions (p 2) are there. The Management Board Member Agreements will defiantly need to address and define what are the competitors of the Company.
§ 186. Preservation of business secrets
(1) The members of the management board shall preserve the business secrets of the private limited Company.
(2) The private limited Company shall not claim compensation for any damage caused by violation of the obligation specified in subsection 1 of this section if the members of the management board acted in accordance with a lawful resolution of the meeting of shareholders or of the supervisory board.
Comment: The paragraph does not define the timeframe on how long the business secrets need to be kept, which also needs to be addressed in the Management Board Member Agreement.
§ 187. Liability of members of the management board
(1) A member of the management board shall perform his or her duties with due diligence.
(2) Members of the management board who cause damage to the private limited Company by violation of their obligations shall be solidarily liable for compensation for the damage caused. A member of the management board is released from Liability if he or she proves that he or she has performed his or her obligations with due diligence.
(3) The limitation period for assertion of a claim against a member of the management board is five years unless the articles of association of the private limited Company or an agreement with the member of the management board prescribes another limitation period.
(4) A claim for payment of compensation to a private limited company for damage specified in subsection 2 of this section may also be submitted by a creditor of the private limited Company if the assets of the private limited Company are not sufficient to satisfy the claims of the creditor. In the case of declaration of bankruptcy of a private limited company, only a trustee in bankruptcy may file a claim on behalf of the private limited Company.
(5) A creditor or trustee in bankruptcy has the right to file the claim specified in subsection 4 of this section also if the private limited Company has waived the claim against a member of the management board or has entered into a contract of compromise with such member or, upon agreement with the member of the management board, has limited the claim or filing thereof in another manner or reduced the limitation period.
Comment: To put it simply Due Diligence can mean doing your homework and acquiring of required knowledge before entering into any agreement or contract. In the case of a Due Diligence disaster by the board member third-party claims can be turned against the board member.
Bonus § 188. Liability of shareholders
(1) A shareholder shall be liable for any damage wrongfully caused to the private limited Company, another shareholder or a third person, in the capacity of shareholder.
(2) A shareholder shall not be liable for any damage caused if the shareholder did not participate in the adoption of the resolution which was the basis for the cause of damage or if the shareholder voted against the resolution. In the case provided for in subsection 2 of § 173 of this Code, a shareholder who does not give notice of whether the shareholder is in favour of or opposed to a resolution shall be deemed to vote against the resolution.
Summary
With all this, we now have covered the General Part of the Civil Code act § 34-38 and Commercial code § 180-187. We have added the links to each act and added points and comments where we see it was necessary.
Management Board Member Agreements in Estonia
Firstly a Board Member Agreement is an agreement between the Board Member and the Company that sets out the Board Member’s duties, rights, and obligations. The Board Member Agreement is a way to ensure that the Board Member understands their role and responsibilities within the Company. A Board Member Agreement can help to avoid misunderstandings about the Board Member’s role and responsibilities. It can also help to protect the Board Member from personal Liability for actions taken on behalf of the Company.
So a Board Member Agreement is not required by law, but it is good practice to have one.
What does the law say about the agreement?
The law does not regulate the internal relationships between the members of the management board, i.e. there is no mandatory regulation of the division of labour, remuneration or other conditions related to their activities. Management Board Member Agreements are used to regulate these issues and they are entered into between the members of the management board, on one hand, and the Company, on the other hand.
The content of the Management Board Member Agreement is very important because it can determine, for example, how the members of the management board will act if they have a conflict of interest. It can also regulate what will happen if a member of the management board wants to leave the Company or if the Company wants to remove a member of the management board.
It is important to remember that the Management Board Member Agreement is an agreement between the members of the management board and the Company and not between the members of the management board themselves. This means that, if one member of the management board breaches the agreement, the other members of the management board cannot sue him or her. The Company can only sue the member of the management board who has breached the agreement.
The Employment Contracts Act (§ 1 Section 5) states expressly that provisions concerning employment contracts shall not be applied to contracts of members of a directing body (management board or supervisory board of a company. Thus, the legislator does not see the management board member as a weaker party who needs to be protected. Also, the board members’ agreement is not a separate type of agreement but an authorization agreement* under the Estonian Law of Obligations (Chapter 35).
*By an authorization agreement, one person (the mandatary) undertakes to provide services to another person (the mandator) pursuant to an agreement (to perform the mandate) and the mandator undertakes to pay remuneration to the mandatary therefore if so agreed.
By law, it does not expect or required to pay the management board members any fee for their duties. They can be recalled without any advance notice. The law does not determine working hours, board members can work 24/7, nor is the board member liable for any vacations, board member liability can be unlimited.
The board member service agreement can help to define all this.
Other board member FAQ
What about board member taxation?
Please read our Board Member taxation article.
Can a board member have an employment contract?
The Act does not prohibit the board from having an employment contract with the Company that the board member is representing. This means that, in principle, a member of the management board can be both an employee and a member of the Company at the same time. The employment contract can help to distinguish the roles of the person in the Company. For example, CFO and a board member.
The CFO will perform CFO duties on the employment contract, but will also have a board member agreement for board member roles.
Can a Board Member Have More Than One Board Member Agreement?
Yes, a board member can have more than one Board Member Agreement. For example, a board member could have a Board Member Agreement with the Company and also a Board Member Agreement with another company.
What is the role of a member of the board?
They determine and monitor the organization’s products, services, and programs. In addition, they keep up to date on competitors and developments in the organization’s field. Board members should periodically review the strategic plans and review whether goals are being met
What does it mean to be a board member?
Definition: A Board member is an elected participant on the board of directors of a corporation or the supervisory committee of an organization. The board of directors of a company is defined as the governing body that is tasked with decisions pertaining to the Company’s heading
What do you call a member of a board?
Members of the board usually include senior-most executives (called “inside directors” or “executive directors”) as well as experts or respected persons chosen from the wider community (called “outside directors” or “non-executive directors”)
Are board members employees?
Board directors are not “employees” and instead have a unique legal status with respect to corporations. Board directors are typically compensated for their service through a stipend, equity, or both. Board directors also clearly perform a “service” for the corporate entities that appoint them.
Who appoints board directors?
Board directors are typically appointed by the shareholders of a corporation.
Who can be Management Board of an Estonian company?
A member of the management board need not be a shareholder. A member of the management board must be a natural person with an active legal capacity.
Are board members different from directors?
Governing bodies are known by a variety of names including boards, committees, councils, trusts, etc. Likewise, the term “board members” can refer to those known as directors, committee members, councillors or trustees. In practice, and legally, they are the same thing.
What about the Liability of shareholders?
The Commercial code § 188 says that (1) A shareholder shall be liable for any damage wrongfully caused to the private limited Company, another shareholder or a third person, in the capacity of the shareholder. (2) A shareholder shall not be liable for any damage caused if the shareholder did not participate in the adoption of the resolution which was the basis for the cause of damage or if the shareholder voted against the resolution. A shareholder who does not give notice of whether the shareholder is in favour of or opposed to a resolution shall be deemed to vote against the resolution.
We hope this article was helpful in understanding the role of Board members in Estonian companies. If you have any questions, please feel free to contact us via support.estonia@comistar.com.
Thank you for reading!