Estonia

Author: | Published: 9 Oct 2003
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

A new Law of Obligations Act came into force in Estonia on July 1 2002 and a new Penal Code on September 1 2002. Taken together, these new laws have brought about considerable changes in the legal status and liability of management board and supervisory board members. This article provides a brief overview of the change in status caused by new rules on mandate agreements and changes in civil and criminal liability.

CHANGES IN LEGAL STATUS

Before the Law of Obligations Act came into force, the practice in Estonia was to execute service contracts with management and supervisory board members. These service contracts were governed by the general rules of civil law. The Law of Obligations has changed this.

In sections 619-634, the Law on Obligations sets out new provisions that apply to so-called mandate agreements (käsundusleping). These are agreements for the provision of services where the supplier is not required to achieve a specific result.

According to the Law of Obligations Act, the provisions regarding a mandate agreement are applicable to the relationships between members of the management or supervisory board of a company and the company. Furthermore, the provisions regarding a mandate agreement may be applicable even if no agreement has been entered into with a management board or supervisory board member in writing.

The provisions of the Law of Obligations Act impose several additional obligations on a management or supervisory board member who acts under a mandate agreement. Pursuant to a mandate agreement, a management or supervisory board member must:

  • act in a loyal manner to the company;
  • act with due diligence;
  • apply the generally recognized skills of the profession;
  • act according to his or her knowledge and abilities;
  • act to the maximum benefit of the company; and
  • prevent any loss to the property of the company.

Unless otherwise agreed in a mandate agreement, a management or supervisory board member is also required to:

  • notify the company (the governing body) of all material facts related to the performance of the mandate agreement;
  • report on the expenditure and income associated with the performance of the mandate agreement;
  • provide information regarding the performance of the mandate agreement if so required;
  • perform the mandate agreement in person (although third parties may also assist);
  • notify of direct or indirect conflict of interests.

There are also significant changes regarding the confidentiality obligation of management and supervisory board members. A management or supervisory board member is required to maintain the confidentiality of facts which become known to him or her in connection with the mandate and which the company has a legitimate interest in keeping confidential. The company is presumed to have a legitimate interest in maintaining the confidentiality of production and business secrets. The confidentiality obligation also continues after the expiry of the mandate agreement to the extent needed to protect the legitimate interests of the company. There is no confidentiality obligation if the company authorizes disclosure or if the obligation of disclosure arises from the law. Disclosure of business secrets in other cases may also be subject to criminal punishment.

As a rule, a mandate agreement is entered into for a specific term, that is, for the term of authority of the management or supervisory board member. Each party may unilaterally renounce (üles öelda) the mandate agreement if it becomes evident that, bearing in mind all the circumstances and the interests of both parties, the party wishing to renounce the agreement cannot be expected to continue performance of the mandate agreement.

Even if there are no grounds for renunciation of a mandate agreement, it is always possible to remove a management or supervisory board member pursuant to the procedure laid down in the Commercial Code and the articles of association. In such a case, all the rights of the management or supervisory board member terminate, and the rights and obligations arising under the mandate agreement terminate pursuant to the mandate agreement. Even if the mandate agreement does not contain relevant provisions, it becomes, as a rule, impossible for a person who is no longer a management or supervisory board member to perform the mandate agreement and no liability normally results from the non-performance of the basic obligations of the mandate agreement.

CHANGES IN LIABILITY

The principles governing the liability of management and supervisory board members have also changed. The civil liability of management board members and that of supervisory board members are regulated in a different manner.

The liability of a management board member is no longer dependent on culpability. Management board members who have caused loss to the company by breach of their obligations are jointly and severally liable for the loss caused. Joint and several liability means that any management board member may be required to compensate for the loss in full. The management board member compensating for the loss will, in turn, have a claim in respect of the other management board members in equal shares.

Supervisory board members are jointly and severally liable for any wrongfully caused loss by a violation of the requirements of the law or the articles of association or by failure to perform their duties.

The legislator has also introduced the obligation of supervisory board and management board members to evaluate the legality of decisions of the general meeting and other competent bodies of the company.

Performance of unlawful decisions may result in personal liability of supervisory board or management board members. A management board or supervisory board member is released from liability if the member acted according to a lawful decision of the general meeting or any other competent body. Therefore, compliance with unlawful decisions is not compulsory and does not release board members from liability. The principle still applies that a member of the supervisory board is released from liability to the company if he or she maintained a dissenting opinion in the adoption of the resolution which was the basis for the illegal activity, and the dissenting opinion has been recorded in the minutes.

The limitation period for claims against a management or supervisory board member is five years. The period is counted from the time of breach of an obligation but not from the time of becoming aware of the breach or of causing loss.

During the limitation period, both the company and the creditor of the company may make a claim against the management or supervisory board member. The creditor of the company may make a claim against the management or supervisory board member if the creditor cannot satisfy its claims out of the company's property. An important amendment is the introduction of the principle that a creditor may make a claim even if the company abandons the submission of a claim against its management or supervisory board member or has entered into a compromise agreement with the latter.

The Penal Code prescribes the criminal punishment of a company for an unlawful act (for example, economic activity without a licence, tax offences, competition offences) performed by a management or supervisory board member in the interests of the company. Charging a company with an offence does not preclude charging the management or supervisory board member who committed the offence if the facts show a basis for this liability.


Raidla & Partners
Roosikrantsi 2
Tallinn 10119
Estonia
Tel: +372 640 7170
Fax: +372 640 7171
www.raidla.ee