The right of a member of the management board to represent an Estonian private limited company is not unlimited

The management board is a managing body of the private limited company (osaühing), whose purpose is to represent and manage the private limited company. In practice, it often occurs that the members of a management board of a limited liability company represent the company in all matters, without being aware that the board member’s power of representation is not unlimited. Such unawareness may lead to detrimental consequences for the members of the management board, the company, and the company’s business partners.

The provision permitting the members of the management board to engage freely in everyday business activities and transactions at market prices may be misleading

Generally, the members of the management board are aware that a transaction concluded between a private limited company and a member of the management board is void without the consent of the shareholders or the supervisory board when the transaction is outside the scope of the everyday economic activities of the private limited company or is exceeding the market price of goods or services. In such a case, the transaction requires shareholder or supervisory board approval, which may be given as independent written declarations of intent. The consent of the shareholders or the supervisory board is necessary even when the other party to the transaction is not a member of the management board itself, but a person with an economic interest that is equivalent or substantially similar to that of a member of the management board. In case law, such a person has been a company under the 100% control of a management board member and his spouse. Its purpose is to prevent the potential conflict of interest between the corporation and the member of the management board as the latter may wish to prefer his own economic interests when entering the transaction, which are essentially the same as those of a potential counterparty to the corporation.

Under the applicable regulations, it may falsely seem that if a transaction with a member of the management board falls within the scope of the everyday economic activities of the private limited company and is made at market price for goods or services, the board member has a free hand to enter the transaction with himself. In reality, the board member does not have the authority to represent the private limited company in any case when entering into a transaction with the company as the other party.

The restrictions on the right of representation of the management board

According to the Estonian Commercial Code, a member of the management board has no right to represent the private limited company in the performance of transactions for which, pursuant to law, the shareholders or the supervisory board must separately decide on the appointment of representatives.

The competence to appoint a representative to enter into transactions with a private limited company and a member of the management board is vested in the supervisory board or (in the absence thereof) in the shareholders. By law, the supervisory board decides on the transactions to be entered into with the members of the management board and the supervisory board also determines the conditions of the transactions thereof. Furthermore, the supervisory board appoints a separate representative of the company to execute such transactions. In the case of the absence of a supervisory board, the said competence lies with the shareholders.

Therefore, it is misleading to suggest that a member of the management board is allowed to enter into transactions with themselves without an approval, even if the transaction is within the scope of the everyday economic activities of the private limited company and is made at market price for goods or services. In case the member of the management board concludes a transaction with either himself or another member of the management board without having been appointed representation rights, the transaction is made without the representation rights and is therefore void. Such a transaction may nevertheless be ratified retrospectively by the shareholders or the supervisory board.

In addition, a separate representative of the company must be appointed each time in the event of a legal dispute with a member of the management board. This applies even when the private limited company has multiple board members, and the claim is to be brought only against one or some of them. The representative appointed by the shareholders, or the supervisory board must not necessarily be part of the management board. For example, the new representative can also be a law firm.

The articles of association can provide that board members have the right to represent the company jointly

In addition to the general restrictions imposed by corporate law on when board members lack the authority to represent the company, shareholders may restrict board members’ authority to represent the company on an individual basis. Thus, companies may stipulate in their articles of association that all or certain board members of the management board have the right to represent the private limited company jointly. Joint representation shall apply to third persons only if it is entered in the commercial register.

In a situation where members of the management board have joint representation rights, which are also entered in the business register, the action of one member of the management board does not bring the desired legal consequence. In such case, the transaction-like action carried out without the participation of the other management board members is carried out without representation rights. However, if the representation rights are not reflected in the business register, they do not apply to third parties. This means that the legal consequence applies regardless of the limitation provided for in the articles of association. In such a case, the question of the responsibility of the management board member may arise in the internal relationships of the private limited company.

Upon concluding transactions on behalf of a private limited company, the members of the management board are also obligated to comply with any additional restrictions prescribed by the articles of association or established by the shareholders, the supervisory board, or the management board. This applies regardless of the fact that such additional restrictions on the right of representation do not apply to third persons.