Managing Director and Managing Director Agreement

The managing director of a limited liability company is a governing body of the company in the same way as the company’s board of directors and the general meeting of shareholders [Managing Director Agreement]. Consequently, the managing director does not have a contract of employment with the company (for further information, see Service contracts of managing directors) and for instance the Employment Contracts Act, Working Hours Act and Annual Holidays Act are not at all applicable. An exception is a managing director’s pension entitlement, which is determined in accordance with the Employee Pensions Act. The liability of the managing director is similar to that of the company’s board of directors. For further information, see [Liability of the Management] and [Criminal Liability].

Other rights and obligations between the company and its managing director are set out in an agreement between the parties. Although laws governing employment contracts are not applicable to managing directors, such laws may naturally be incorporated by reference in the service contract. The service contract could e.g. provide that the managing director’s holiday entitlements will be calculated in accordance with the Annual Holidays Act.

It is of great importance, both for the company and for the managing director, that the service contract of the managing director is drafted carefully. The service contract sets out the rights and obligations of the managing director and the company. It is common practice for the service contract to provide that the managing director’s remuneration will at least partly be in the form of options or shares. Such remuneration arrangements should be clearly set out in the service contract. The service contract should also set out what is to happen upon the termination of the contract, mainly the managing director’s notice period, compensation for termination of the contract and possibly relocation. In addition, it is desirable to make provision for pension benefits in the service contract and include a non-competition obligation after the termination of the service contract.

If the managing director is left unemployed upon the termination of the service contract he is entitled to unemployment benefits calculated on the basis of his/her previous earnings, provided he/she is party to the unemployment benefit society. For further information, see Service Contracts of Managing Directors.