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Attorney-at-Law Annika Vait: Management Board Members Are Liable 24/7
Attorney-at-Law Annika Vait: Management Board Members Are Liable 24/7
The liability of management board members in Estonia is no longer a theoretical risk – it is an everyday reality. Annika Vait, Partner at RASK Law Firm and Co-Head of the Corporate Governance & Advisory practice, increasingly encounters disputes in which members of the management board come under scrutiny. Unfortunately, this often occurs even where the contested decision was taken in good faith and based on the best information available at the time.
Speaking at a seminar organised by the Estonian Human Resources Association (PARE) during Good Governance Month, Vait noted that awareness of board members’ obligations remains insufficient. “The range of parties who can bring claims against a board member has expanded considerably: beyond the company itself and the bankruptcy trustee, this may include shareholders, members, and, in certain cases, creditors,” she explains.
Board members’ obligations do not arise solely from the Commercial Code. Other key sources include the board member’s service agreement, the articles of association, owners’ expectations, internal corporate policies, and various special statutes. “In practice, it is often overlooked that a board member may also hold another contractual role within the company. These are two distinct legal relationships, and the termination of one does not automatically terminate the other – something that can prove costly in a dispute,” Vait adds.
A board member’s actions may give rise to civil, administrative, and, in some cases, even criminal liability. The two central standards are the duty of loyalty and the duty of care. The duty of loyalty requires avoiding conflicts of interest, particularly in transactions outside the company’s ordinary course of business. The duty of care requires acting with the diligence expected of a prudent businessperson.
“Board members with specific expertise are held to a higher standard of care. For instance, an HR professional on the board is expected to demonstrate professional competence in HR matters. The same applies to members with financial or IT expertise. In any event, a board member is personally liable 24/7,” Vait notes.
Importantly, a management board member is not liable for how a decision ultimately ‘turned out’, but rather for how the decision was made. “Was sufficient information gathered? Were risks properly assessed? Were experts consulted where necessary? If these steps were taken, the management board member has generally fulfilled the required duty of care,” Vait explains.
However, a critical nuance is that in the event of a dispute, the management board member must be able to prove that the duty of care was met. “If there are no relevant documents, minutes, or written justifications, it is very difficult to demonstrate retrospectively that the decision was well considered. Proper written documentation and the retention of records are the best possible means of self protection for a management board member.”
Many disputes stem from board member remuneration and informal (oral) agreements. “In good times, matters are agreed orally and decisions are not formalised. When relationships deteriorate, that same remuneration may be portrayed as unjust enrichment at the company’s expense,” Vait describes as a possible scenario.
The law requires that the remuneration of a management board member be proportionate both to the scope of their duties and to the company’s financial position. If the company’s economic situation deteriorates significantly, the company is entitled to propose a reduction in remuneration. Management board remuneration is determined by the supervisory board, or, in its absence, by a resolution of the shareholders.
In the case of a multi member management board, members are jointly and severally liable for any damage caused. “By signing, one cannot rely solely on the assumption that a colleague has done their job. Each management board member must have a sufficient overview of the company’s affairs,” Vait emphasises. Passivity does not release one from liability; therefore, holding a management board position ‘in name only’ is by no means a safe option.
In conclusion, Vait advises that anyone considering joining a management board should make a conscious and informed decision: trust should exist both among fellow board members and towards the owners, proper written agreements should be concluded, and decision making processes should be well thought out and carefully documented. “Risks can never be reduced to zero, but awareness, sound agreements, and robust procedures significantly reduce the likelihood that liability will fall unfairly on your shoulders.”
Speaking at a seminar organised by the Estonian Human Resources Association (PARE) during Good Governance Month, Vait noted that awareness of board members’ obligations remains insufficient. “The range of parties who can bring claims against a board member has expanded considerably: beyond the company itself and the bankruptcy trustee, this may include shareholders, members, and, in certain cases, creditors,” she explains.
Board members’ obligations do not arise solely from the Commercial Code. Other key sources include the board member’s service agreement, the articles of association, owners’ expectations, internal corporate policies, and various special statutes. “In practice, it is often overlooked that a board member may also hold another contractual role within the company. These are two distinct legal relationships, and the termination of one does not automatically terminate the other – something that can prove costly in a dispute,” Vait adds.
Duty of Loyalty and Duty of Care: The Most Commonly Breached Standards
A board member’s actions may give rise to civil, administrative, and, in some cases, even criminal liability. The two central standards are the duty of loyalty and the duty of care. The duty of loyalty requires avoiding conflicts of interest, particularly in transactions outside the company’s ordinary course of business. The duty of care requires acting with the diligence expected of a prudent businessperson.
“Board members with specific expertise are held to a higher standard of care. For instance, an HR professional on the board is expected to demonstrate professional competence in HR matters. The same applies to members with financial or IT expertise. In any event, a board member is personally liable 24/7,” Vait notes.
Importantly, a management board member is not liable for how a decision ultimately ‘turned out’, but rather for how the decision was made. “Was sufficient information gathered? Were risks properly assessed? Were experts consulted where necessary? If these steps were taken, the management board member has generally fulfilled the required duty of care,” Vait explains.
However, a critical nuance is that in the event of a dispute, the management board member must be able to prove that the duty of care was met. “If there are no relevant documents, minutes, or written justifications, it is very difficult to demonstrate retrospectively that the decision was well considered. Proper written documentation and the retention of records are the best possible means of self protection for a management board member.”
Remuneration and Agreements: How Oral Arrangements Can Lead to Disputes
Many disputes stem from board member remuneration and informal (oral) agreements. “In good times, matters are agreed orally and decisions are not formalised. When relationships deteriorate, that same remuneration may be portrayed as unjust enrichment at the company’s expense,” Vait describes as a possible scenario.
The law requires that the remuneration of a management board member be proportionate both to the scope of their duties and to the company’s financial position. If the company’s economic situation deteriorates significantly, the company is entitled to propose a reduction in remuneration. Management board remuneration is determined by the supervisory board, or, in its absence, by a resolution of the shareholders.
In the case of a multi member management board, members are jointly and severally liable for any damage caused. “By signing, one cannot rely solely on the assumption that a colleague has done their job. Each management board member must have a sufficient overview of the company’s affairs,” Vait emphasises. Passivity does not release one from liability; therefore, holding a management board position ‘in name only’ is by no means a safe option.
In conclusion, Vait advises that anyone considering joining a management board should make a conscious and informed decision: trust should exist both among fellow board members and towards the owners, proper written agreements should be concluded, and decision making processes should be well thought out and carefully documented. “Risks can never be reduced to zero, but awareness, sound agreements, and robust procedures significantly reduce the likelihood that liability will fall unfairly on your shoulders.”