Managing Directors of limited liability companies are not considered to be employees and thus do not enjoy protection under the Finnish labour law. The Board of Directors of a limited liability company is entitled to dismiss the Managing Director of the Company solely based on lack of confidence and without any obligation to pay compensation unless the parties have expressly agreed otherwise.
Relationship between the Board of Directors and Managing Director in Finland
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 liability company often also has a Managing Director. The Managing Director can be a member of the Board but according to the Finnish Corporate Governance Code, he should not act as the chair of the Board.
The Board of Directors appoints (and discharges) the Managing Director and supervises the operations of the Managing Director.
The duties of the Managing Director are outlined in the Finnish Limited Liability Companies Act. According to the said 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 only undertake measures that are unusual or extensive to the scope and nature of the operations of the Company with the explicit authorisation of the Board of Directors. The Managing Director is responsible for ensuring that the Company’s accounting practices are in compliance with the applicable law and that the financial matters are organized reliably.
The Managing Director Agreement – what is it and what is to be agreed
Managing Directors of limited liability companies are not considered as employees and, thus, they do not enjoy protection under the Employment Contracts Act. Accordingly, the Finnish labour legislation does not cover Managing Directors.
As there is no applicable labour law, the companies and their Managing Directors often enter into detailed agreements regarding the terms of the service relationship. The Managing Director Agreements are, therefore, regulated primarily by the Finnish Companies Act and general contract law.
The terms of the Managing Director’s service should be specified in writing in the Managing Director Agreement. The agreement, in itself, should be approved by the Board of Directors. The Managing Director Agreement should also specify the financial benefits of the service, including the Managing Director’s severance package and any other compensations. In addition, the parties usually agree on occupational health care, company car and other fringe benefits, pension payments and arrangements.
In the Managing Director Agreement, the Company’s interests should be secured by agreeing on the necessary restrictions for the Managing Director.
For example, the Company should seek to include non-competition and non-solicitation clauses. In addition, the Company’s interest should always be protected by non-disclosure obligation and provisions which dictate that the Company owns all immaterial property rights developed by the Managing Director. It is advisable to agree on the use of a liquidated damages clause for any possible breaches.
Below some of these restrictive clauses are commented on in more detail.
Non-competition clauses in Managing Director´s Agreements
As stated above, the Managing Directors of limited liability companies are excluded from the scope of Finnish labour legislation. Hence, the strict Finnish rules concerning non-competition agreements do not apply to them.
Accordingly, the validity of the contractual provisions must be determined under the Finnish Contracts Act. Provisions 36 and 38 of the Act grant the court or arbitral tribunal the power to adjust or set aside contractual provisions which are unreasonable or which restrict the right to work, earn one´s living, and practice one´s profession.
In practice, the non-competition clauses of the Managing Directors are usually from 6 to 24 months in duration. If the enforceability of the non-competition clause wants to be ensured, the prohibited competition activities should be restricted to cover only a certain geographical area or certain parts of the Company’s business. It is also possible, for example, to limit the restriction to cover activities only with the specified competitors.
The Finnish legislation or case law does not require that the whole salary is paid for the non-competition period. However, some compensation should be provided if the non-competition obligation is very lengthy.
Therefore, it is usually agreed in the Managing Director Agreement that the Managing Director shall receive in case of dismissal, for example, one year’s salary and the restriction of the competition is set accordingly. The compensation is typically paid either as a lump sum or in monthly instalments after the end of the employment.
If a valid non-competition agreement is breached, the Company may seek the court to order by injunctive relief the Managing Director from continuing the breach of the non-competition obligation. Hence, the Company’s remedy is not limited to claiming actual or liquidated damages.
Non-solicitation of customers and employees of the Company
Even with regards to employees governed by the Finnish labour legislation, there are no statutory rules regarding the non-solicitation of the customers and employees of the Company. Anyhow, it is recommended that non-solicitation restrictions are also in force for the limited time after leaving the Company, especially as lengthy and wide non-solicitation clauses may be interpreted to act as non-competition clauses. Therefore, even the non-solicitation clauses are null and void to the extent deemed unreasonable.
Confidentiality
It should be agreed that the Managing Director shall not indefinitely make use of any confidential information of the Company or disclose it to third parties. Generally, confidential information is considered to be trade secrets as well as any other information – technical, commercial or of any other nature – concerning the Company, Group Companies, partners or its clients. That being said overly broad confidentiality obligation can act as a non-competition agreement. Hence, it is advisable that the Company would not draft the confidentiality obligation too “broadly”.
In general, a confidentiality obligation may continue as long as it is needed to secure the interest of the Company as there are no statutory limitations. The courts in Finland tend to be very strict about the breach of confidentiality, especially if the breach concerns trade secrets.
With regards to the information that can be classified as a trade secret, the Company may also rely on the remedies provided in the Finnish Trade Secrets Act. Thus, the Company may, for example, seek the court to prohibit the Managerial Director from continuing an action that breaches the Company’s trade secret.
Liquidated Damages
Unlike in some jurisdictions, in Finland, liquidated damages clauses can be invoked even if no actual damage has been suffered. Thus, it is always advisable to agree that the Managing Director must pay liquidated damages if he breaches the restrictions listed above. Especially regards to breaches of confidentiality obligations, the actual damages are very difficult to assess and prove, which is why the Company might not get the required protection without the liquidated damages clause.
Governing law and jurisdiction
It is recommended that the governing law and jurisdiction are agreed upon in the Managing Director Agreement and that the disputes shall be settled in arbitration as opposed to public state courts. Generally, arbitration is faster in addition to being a confidential way of settling disputes.
In addition to the language and the place of the arbitration, the parties should agree on the applicable rules of the arbitration and the number of arbitrators. Preferably, the disputes should be settled by arbitration in accordance with the Arbitration Rules of the Finland Chamber of Commerce by one arbitrator. Regards to the language of the arbitration, the parties should at least agree that witnesses can be heard in English, even if the rest of the arbitration would be conducted in Finnish.
Parties have in some cases agreed that the costs and expenses of arbitration shall be paid by the Company unless the arbitrator considers that the Managing Director has started the process without adequate cause. Use of a similar clause is advisable if the Managing Director would not otherwise agree to the arbitration clause.
Dismissal of Managing Director
The Finnish Supreme Court has confirmed in the 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.
Accordingly, the Board of Directors of a limited company are entitled to dismiss the Managing Director solely based on lack of confidence and without any obligation to pay compensation unless the parties have agreed otherwise.
In Finland, the standard practice is that after the termination of the Managing Director agreement, the Managing Director immediately leaves his position. The Managing Director may, however, continue as an advisor for some time and provide information to his successor or the Board of Directors.
It is not common that the Managing Director will continue in his position for the duration of the notice period. While this can be arranged, the Managing Director’s motivation would most likely to be very low. Hence, this alternative is rarely beneficial for either party.
Agreement of the termination of the Managing Director´s Agreement
In Finland, when the Managing Director’s or other manager’s agreements are terminated, the parties often conclude a separate agreement concerning the termination, a termination agreement. A separate termination agreement usually prevents costly and lengthy disputes. Therefore, it is recommended that the parties agree on the termination agreement, even if the Managing Director Agreement has been drafted well.
The termination agreement is usually concluded when the decision of termination of the Managing Director Agreement has been made. In the termination agreement, the payments to be made to the Managing Director, the restrictions, and other relevant terms are agreed upon in detail. Generally, the restrictive obligations (e.g. non-competition obligation) can be agreed upon more freely as the Managing Director can assess the restrictions better at the time of dismissal. Hence, the restriction agreed in the termination agreement are generally more easier to enforce.
Jari Sotka
Attorney-at-Law, MBA Helsinki, Finland
+358-40 544 0610