Managing Directors of limited liability companies are not considered to be employees and thus do not enjoy protection under 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.
The relationship between the Board of Directors and the Managing Director (often referred to as the CEO in international contexts, but "toimitusjohtaja" in Finnish) in Finland is governed by the Finnish Companies Act (Osakeyhtiölaki). This act defines distinct roles and responsibilities for each. **Board of Directors:** * **Oversight and Strategic Direction:** The Board's primary role is to oversee the company's administration and operations on behalf of the shareholders. They are responsible for setting the company's strategy, approving major decisions, and ensuring the company is managed in accordance with the law and its articles of association. * **Appointment and Dismissal of the Managing Director:** The Board appoints and dismisses the Managing Director. * **Supervision of the Managing Director:** The Board supervises the Managing Director's work. They ensure the Managing Director is acting in the best interests of the company and carrying out their duties effectively. * **Financial Matters:** The Board approves the company's budget, financial statements, and any significant financial transactions. * **Reporting:** The Board is accountable to the shareholders. **Managing Director (Toimitusjohtaja):** * **Day-to-Day Management:** The Managing Director is responsible for the day-to-day management of the company's business operations in accordance with the instructions and orders given by the Board. * **Implementation of Strategy:** They are tasked with implementing the strategy and decisions made by the Board. * **Reporting to the Board:** The Managing Director must provide the Board with information necessary for the Board's supervision. * **Authority:** The Managing Director has the authority to act in matters that fall within the scope of day-to-day management, unless the Board has specifically reserved certain decisions for itself or delegated them to others. * **Legal Representation:** In many cases, the Managing Director is the primary legal representative of the company. **Key Aspects of the Relationship:** * **Hierarchy:** The Board is clearly superior to the Managing Director. The Managing Director reports to and is accountable to the Board. * **Collaboration:** While there is a clear hierarchy, effective collaboration is crucial for the company's success. The Board relies on the Managing Director for operational insights, and the Managing Director needs the Board's strategic guidance and approval. * **Information Flow:** Open and regular communication is essential. The Managing Director must keep the Board informed, and the Board must provide clear direction. * **Accountability:** Both the Board and the Managing Director have legal responsibilities and can be held accountable for their actions (or inactions). Directors have a duty of care and loyalty, and the Managing Director has a duty to manage the company diligently. * **Delegation:** The Board can delegate certain responsibilities to the Managing Director, but the ultimate oversight remains with the Board. In essence, the Board sets the "what" and the "why" (strategy and oversight), while the Managing Director focuses on the "how" (execution and day-to-day operations). The Finnish Companies Act aims to strike a balance, ensuring efficient management while also protecting shareholder interests through the oversight function of the Board.
The Board of Directors is responsible for the administration and proper arrangement of the company's operations, including measures that are unusual or extensive. A limited liability company often also has a Managing Director. The Managing Director may be a member of the Board but, according to the Finnish Corporate Governance Code, should not also act as the chair of the Board.
The Board of Directors appoints (and dismisses) the Managing Director and supervises the Managing Director's operations.
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 Company's operations with the explicit authorisation of the Board of Directors. The Managing Director is responsible for ensuring that the Company’s accounting practices comply with applicable law and that its financial matters are organised reliably.
The Managing Director Agreement – what is it and what is to be agreed
Managing Directors of limited liability companies are not considered employees and, therefore, they do not benefit from protection under the Employment Contracts Act. Accordingly, 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 concerning 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 set out in writing in the Managing Director Agreement. The agreement itself should be approved by the Board of Directors. The Managing Director Agreement should also specify the financial benefits of the role, including the Managing Director’s severance package and any other remuneration. In addition, the parties usually agree on occupational health care, a company car and other fringe benefits, and 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 interests should always be protected by a non-disclosure obligation and provisions stipulating that the Company owns all intellectual property rights developed by the Managing Director. It is advisable to agree on the use of a liquidated damages clause for any potential breaches.
Below some of these restrictive clauses are commented on in more detail.
Non-competition clauses in Managing Director 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 practise one’s profession.
In practice, the non-competition clauses for Managing Directors are usually between 6 and 24 months in duration. If the enforceability of the non-competition clause is to be ensured, the prohibited competitive activities should be restricted to cover only a certain geographical area or specific parts of the Company's business. It is also possible, for example, to limit the restriction to cover activities only with specified competitors.
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 same will be correspondingly reflected in the non-compete clause. 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, that the Managing Director cease continuing the breach of the non-competition obligation. Therefore, the Company’s remedy is not limited to claiming actual or liquidated damages.
Non-solicitation of the Company's customers and employees
Even with regard to employees governed by Finnish labour legislation, there are no statutory rules concerning the non-solicitation of the Company's customers and employees. Nevertheless, it is recommended that non-solicitation restrictions are also in effect for a limited time after an employee leaves the Company, especially as lengthy and broad non-solicitation clauses may be interpreted to act as non-competition clauses. Therefore, even non-solicitation clauses are null and void to the extent that they are 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. Confidential information is generally 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, an overly broad confidentiality obligation can act as a non-competition agreement. Hence, it is advisable that the Company does not draft the confidentiality obligation too “broadly”.
In general, a confidentiality obligation may continue for as long as it is necessary to secure the interests of the Company, as there are no statutory limitations. The courts in Finland tend to be very strict about breaches of confidentiality, especially if the breach concerns trade secrets.
With regards to information which may 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 which 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 they breach the restrictions listed above. Especially with regard to breaches of confidentiality obligations, the actual damages are very difficult to assess and prove, which is why the Company may not receive 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 disputes shall be settled by 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, disputes should be settled by arbitration in accordance with the Arbitration Rules of the Finland Chamber of Commerce by one arbitrator. Regarding 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.
In some cases, parties have agreed that the costs and expenses of arbitration shall be paid by the Company, unless the arbitrator deems that the Managing Director initiated the process without sufficient cause. The use of a similar clause is advisable if the Managing Director would not otherwise consent to the arbitration clause.
Dismissal of Managing Director
The Finnish Supreme Court confirmed in 2002 that there were no limitations in 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 grounds of a 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 upon the termination of a Managing Director's agreement, the Managing Director immediately vacates their position. However, the Managing Director may continue as consultant for a period, providing information to their successor or the Board of Directors.
It is not common for the Managing Director to remain in their position for the duration of the notice period. While this can be arranged, the Managing Director's motivation would most likely be very low. Therefore, this alternative is rarely beneficial for either party.
Agreement for Termination of Managing Director's Agreement
In Finland, when a Managing Director's or other manager's contract is terminated, the parties often conclude a separate agreement regarding the termination, known as a termination agreement. A separate termination agreement usually prevents costly and lengthy disputes. Therefore, it is recommended that the parties agree on a termination agreement, even if the Managing Director's contract has been well-drafted.
The termination agreement is usually concluded once the decision to terminate the Managing Director Agreement has been made. In the termination agreement, any payments to be made to the Managing Director, restrictions, and other relevant terms are agreed upon in detail. Generally, restrictive obligations (e.g. a non-competition obligation) can be agreed upon more freely, as the Managing Director can better assess the restrictions at the time of dismissal. Consequently, restrictions agreed upon in the termination agreement are generally easier to enforce.
Jari Sotka
Attorney-at-Law, MBA Helsinki, Finland
+358-40 544 0610