Structuring the management of Estonian subsidiaries – know what you are responsible for

When advising foreign companies that have Estonian subsidiaries I have noticed a specific choice they tend to make which is not always the best or the most informed option in the light of the Estonian Commercial Code.

Namely, the management boards of the Estonian companies with significant foreign control consist of 3 to 5 members of whom all or all but one are managers of the foreign parent company living and working in a foreign country and not participating in the everyday business activities of the Estonian subsidiary. Such members mainly perform supervision and control over the management board of the Estonian company, which pursuant to the Estonian Commercial Code is actually the task of the supervisory board of a company. This is different for example from the Finnish corporate law where the management board (hallitus) is tasked with performing control and supervision.

In Estonia, the management board is tasked with managing the everyday business activities of the company and with bearing responsibility for the lawfulness of such management. Among other things, management board members are also liable for damage caused to the company by failure to act.

The management board members, who are actually not involved in the everyday management of the company and are instead engaged in the business activities of the parent company in another country and do not have information about the everyday activities of the Estonian company and often do not hold the Estonian e-residency necessary for intervening in the activities of the Estonian company, are in practice left aside from the management of that company. In the case of a local manager’s failure to act, they may find themselves in a situation where they must promptly act to take advantage of business opportunities of the Estonian company or even to prevent impending damage. Discovering the true meaning of their role may sometimes come as an unpleasant surprise for foreign members of the management board of an Estonian company – persons who thought they are merely fulfilling the function of strategic guidance and supervision, suddenly find themselves being responsible for the actual everyday activities of the Estonian company.

However, the Estonian Commercial Code also prescribes a body which is specifically tasked with strategic management and supervision, while not being engaged in conducting the everyday business activities. This body is the supervisory board. Pursuant to the Estonian Commercial Code, a public limited company (aktsiaselts) must have a supervisory board, while a private limited company (osaühing) may establish a supervisory board in its articles of association and elect its members at a meeting of shareholders. The supervisory board must consist of at least three members and a larger number of members can be prescribed in the articles of association.

If a company has both – the management board and the supervisory board – the supervisory board usually consists of people tasked with supervision and strategic management and the management board consists of people tasked with the substantive management of and responsibility for the everyday business activities of the company. It must also be noted that supervisory board members cannot sign or perform transactions on behalf of the company or represent the company.