“Can private limited company reclaim the fee paid to a member of management board?”, writes attorney-at-law Pirkka-Marja Põldvere
Mister X has been elected as a member of the management board of a private limited company. The member is satisfied – elected for 3 years and the parties have agreed to pay him as a member of the management board a significant amount of fee. However, one day the shareholders unexpectedly submit a claim for the repayment of the fee. Unprecedented? Not really.
The Estonian Supreme Court in its recent decision (3-2-1-44-17) took a standpoint that if shareholders determine a fee for a member of management board which fails to be in accordance with Art 1801 (2) of the Commercial Code, the company has the right to claim the repayment of the excessive fee by the board member. According to the Commercial Code, the shareholders or the supervisory board shall ensure that the total amount of the payments made by the private limited company to the members of the management board are in reasonable proportion to the duties of the members of the management board and the economic situation of the private limited company.
The law is not specifically prescribing the return of the agreed and paid amount. However, the company may demand the decrease of the fee and other benefits if the economic situation of the company significantly deteriorates and the continuous payment of the fixed or agreed fees would be extremely unfair to the company. The Supreme Court has extended the interpretation of the right to decrease the fees by enabling also the reclamation of the excessively paid amounts.
It is possible that in practice the standpoint of the Supreme Court will create more confusion than clarity. According to the Commercial Code, a presumption for the decreased fee is the significant deterioration of the company’s economic situation compared to the time of determining the amount of fee. The Supreme Court in its decision has not covered this presumption. According to the Commercial Code, a member of the management board may exercise the right to extraordinary cancellation of a contract entered into upon one month’s advance notice. The Supreme Court in its decision has not analysed the legal timeframe for the reclamation of the fee. Is it really possible for shareholders, for instance, after one year to reclaim a part of the agreed fee from the member of the management board for the whole year? Doubtful.
In the same resolution the Supreme Court established that just like a shareholder has the right to vote for his or her election or removal from the management and for the extension of the term, he or she also has the right to vote and decide upon entering into contract of a member of management board with himself or herself and determining the respective fee. Otherwise, the minority shareholders acting in bad faith could prevent the majority shareholders from receiving the fee of a member of the management board. The Supreme Court established that upon deciding the repayment of the fee, the right to vote of the respective shareholder who is a member of the management board is limited. Thus, in case the shareholders of a private limited company are subject to decide on the claim for repayment of the fee, the member of the management board personally (if he or she is also a shareholder) cannot make decisions.