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The content concerns Finnish legislation.
 

Managing Director Agreement

Although the managing director works in and for the company he/she is not in an employment relationship with the company. For this reason the Employment Contracts Act and other legal provisions applicable to employment relationships or collective bargaining agreements are, with certain exceptions, not applicable to a managing director unless otherwise agreed. For instance, some provisions in the Employees’ Pension Act and in the Occupational Accidents, Injuries and Diseases Act are, nevertheless, applied to a managing director.

The provisions of the Limited Liability Companies Act mainly concern the competence and liability of the managing director in relation to the company, the board of directors and the shareholders. Therefore it is recommendable to conclude a written agreement covering issues relating to the office of the managing director. In the agreement it is possible to stipulate, inter alia, the remuneration, vacation and pension terms, term of office, conditions of termination as well as the compensation to be paid at termination of the assignment. A well-drafted agreement will provide clear rules and bind the managing director to the company. Every company has different needs.

Therefore, there is no ready model for a managing director agreement. As a starting point at least the following matters should be covered in the agreement:

  • parties;

  • commencement of the duties and the contractual relationship;

  • duties;

  • compensation (salary, other possible incentive schemes);

  • insurance;

  • annual holiday (inter alia, the duration of the holiday and the holiday remuneration);

  • retirement benefits;

  • possible salary during sickness and work disability;

  • travelling and representation;

  • training;

  • secondary occupation and prohibition of competition;

  • intellectual property rights and employee inventions;

  • duty of confidentiality;

  • validity and termination of the agreement (termination and cancellation);

  • applicable law; and

  • dispute resolution (arbitration proceedings).

The board of directors decides on behalf of the company upon the terms and conditions of the agreement and negotiates them with the managing director. Nevertheless, the managing director agreement is not legally an employment contract. For this reason, the managing director may be dismissed from his/her office without a notice period as far as a notice period has not been separately agreed upon. The board of directors may dismiss the managing director at any time without a specific reason thereto. In case the dismissal is made in accordance with the provisions of the managing director agreement the managing director may not refer to any provision or law in order to improve his/her situation. Therefore, clauses on compensation in case of dismissal and more exact provisions relating to termination of the agreement are commonly incorporated into a managing director agreement.

In case dismissal is made without a just cause, the company is possibly liable to compensate the managing director with the remuneration for the period during which the managing director agreement would have continued if it was concluded for a fixed period or for a period corresponding to the notice period if such had been agreed upon in the managing director agreement. In addition, the managing director may be entitled to compensation for damages. If the managing director resigns without a just cause stated in the agreement, the company may through legal proceedings demand indemnification due to breach of the agreement. Generally, the managing director agreement is concluded until further notice with a certain term of notice.