Managing Directors of limited liability companies are not considered employees and thus do not enjoy protection under the Finnish labor law. The Board of Directors of a limited company are entitled to dismiss the Managing Director of the company solely on the basis of lack of confidence and without any obligation to pay compensation, unless the parties have agreed otherwise.
Board of Directors and Managing Director
The Board of Directors is responsible for the administration and the proper arrangement of the operations of the company, including measures that are unusual or extensive. A limited company may also have a Managing Director, but it is obligatory for privately owned companies. The Managing Director can be a member of the Board but, according to the Finnish Corporate Governance Code 2010, should not act as the chairman of the Board.
The Board of Directors appoints and discharges the Managing Director and supervises the operations of the Managing Director. The Board of Directors also approves the financial benefits of the service, including the Managing Director’s severance package and any other compensation and other terms of the service.
The duties of the Managing Director are set forth in the Limited Liability Companies Act. The Managing Director is a corporate body that is in charge of the day-to-day management of the company in accordance with the instructions and orders issued by the Board of Directors.
The Managing Director may undertake measures that are unusual or extensive, considering the scope and nature of the operations of the company, only with the authorisation of the Board of Directors. The Managing Director is responsible for ensuring that the company’s accounting practices are in compliance with the law and that the financial matters are organized in a reliable manner.
Managing Director´s Agreement
Managing Directors of limited liability companies are not considered employees and thus do not enjoy protection under the Employment Contracts Act. Accordingly, he or she is not covered by Finnish labour legislation. Companies and their Directors often enter into detailed agreements regarding the terms of the service relationship. Managing Director Agreements are, therefore, regulated primarily by the Companies Act and general contract law.
The terms of the Managing Director’s service should be specified in writing in the Managing Director’s Agreement, which should be approved by the Board of Directors. The Managing Director’s Agreement should also specify the financial benefits of the service, including the Managing Director’s severance package and any other compensation. Besides payment and Company incentives system and duties of the MD, it usually agreed on occupational health care, company car and other fringe benefits, pension payments and arrangements.
In the Managing Directors Agreement, it is also agreed on the restrictions of the MD for the benefit of the Company. These are the non-competition period and non-soliction to the customers and employees of the company, confidentiality, immaterial property rights and the contractual damages in breaking these commitments. Below I comment some of these restrictive clauses in detail, because these are the most common causes of disagreements and disputes.
Non-competition clauses in Managing Director´s Agreements
Managing Directors of limited liability companies are excluded from the scope of Finnish labour legislation and its strict rules concerning non-competition and other restrictive terms and conditions.
Finnish law provides that a contract that unreasonably prevents or restricts freedom of the party through a post-term non-compete covenant will not be effective against the party that accepted the obligation.
Section 38 of the Contracts Act (228/1929) states: “A contract under which a person, in order to prevent or restrict competition, has undertaken not to engage in a certain activity or not to conclude an employment contract with another person engaging in such activity shall not bind the party who has made such a promise to the extent that it unreasonably restricts his/her freedom.”
Freedom in this clause means freedom to work, earn one´s living and practice one´s profession. In practice, the non-competition undertakings applicable to Managing Directors are usually form 6 to 24 months in duration.
The prohibited activities may be restricted to cover only a certain geographical area or certain parts of the Company’s business. It is also possible to limit the restriction to cover activities with specified competitors, or to cover specific products or services of the Company. By doing this, then the non-competition undertaking is not considered to be so restrictive
The law itself or the court praxis does not require that the whole salary is paid during the non-competition period. It requires that some compensation is paid. Some reference can be found in the praxis of employment law, which is more restrictive. If the employee receives reasonable compensation for the restrictions imposed by the non-competition clause, the maximum duration of the restriction is one year. Based on legal practice, the level of reasonable compensation in such cases is set at a minimum of 50 per cent of the normal salary for the full duration of the restricted period.
Therefore, it is usually agreed in the Managing Director´s Agreement that he shall receive in case of dismissal for example one years salary and the restriction of competition is set according to that. The compensation is typically paid either as a lump sum or in monthly instalments after the end of employment.
Non-solicitation of customers and employees of the Company
There are no statutory rules regarding non-solicitation of customers and employees of the Company. Therefore, the use of non-solicitation clauses is less strict than the use of non-compete clauses. Anyhow I recommend that these restrictions are also in force for the limited time after leaving the Company. The use of non-solicitation clauses is limited by what is considered reasonable and such clauses are null and void to the extent deemed unreasonable.
It is usually agreed that the Managing Director shall not during the term of this Agreement or after its termination for an unlimited time make use of for his own benefit or the benefit of a third party or disclose to third parties any confidential information. As confidential information is considered trade secrets as well as any other information – technical, commercial or of any other nature – concerning the Company, Group Companies, partners or its clients.
Confidentiality obligation may continue as long as it is needed to secure the interest of the Company. There are no statutory limitations to that. Courts in Finland tend to be very strict about the breach of confidentiality.
Governing law and jurisdiction
I also recommend that the governing law and jurisdiction are to be agreed in the Agreement and that the disputes shall be settled in arbitration rather than in public courts. Arbitration is faster and non-public way of settling disputes. I usually prefer that the disputes are settled by arbitration in accordance with the Arbitration Rules of the Finland Chamber of Commerce by one arbitrator. Also, the place of arbitration and the language(s) of the process should be agreed in the Agreement.
Parties have also in some cases agreed that the costs and expenses of arbitration shall be paid by the Company, unless the arbitrator considers that Managing Director has started the process without the adequate cause. The legal and other costs and expenses incurred to the parties of using legal counsels shall be determined between the parties according to verdict of the arrbitratior(s).
Dismissal of Managing Director
The Finnish Supreme Court has confirmed in year 2002 that there are no limitations in the Finnish legislation regarding the termination of a Managing Director´s agreement. Therefore, the Supreme Court held that the termination of the Managing Director on the basis of lack of confidence was lawful. Since then this stand has not been challenged. The Board of Directors of a limited company are entitled to dismiss the Managing Director of the company solely on the basis of lack of confidence and without any obligation to pay compensation, unless the parties have agreed otherwise.
In Finland the standard practice is that after termination of the Managing Directors agreement, the Managing Director immediately leaves his position and may continue as an advisor for some period of time and give information to his successor or to the Board of Directors.
It is not common that Managing Director will continue in his position during the notice or termination period. This can be agreed in the MD Agreement also that way and the Company may expect the Managing Director to do that, but his motivation is most likely to be very low. I believe that choosing this alternative will not be beneficial for either of the parties.
Agreement of the termination of the Mananging Director´s Agreement
In Finland in the termination of managers or Managing Director´s Agreement usually is made an separate agreement about the termination of the Agreement. This is what I recommended to be made also in most of the cases.
This is usually done when terminating the contract of the Managing Director. In this the payments to be made to Managing Director and restrictions and other terms are agreed in detail. In these agreement´s the non-competition and other restrictive terms can be agreed more freely and those aren´t considered to be so restrictive as for example in many years earlier made MD agreement, because the Managing Director now knows the situation in hand at the time of dismissal.
Separate Termination Agreement usually also prevents costly and lengthy disputes.
Jari Sotka, Attorney-at-Law, LL.M., MBA