Liability of Organs and Directors in a Finnish Limited Company (Oy)

The operative organs of the Finnish Oy, in particular the members of the Board of Directors and the Managing Director, are liable towards the company for the diligence and legality of their work. Liability suits may not emerge often, but when they do, they may threaten the respective person’s economic existence. This article provides an overview.

Diligence and legality

According to section 1:8 of the Finnish Companies Act, the company’s directors must promote the company’s interest diligently. If due diligence is disregarded, the members of the Board and the Supervisory Board as well as the Managing Director must compensate the company for the resulting damage.

In addition to liability for diligence, a director is also liable for legality. The company’s organs are liable for the consequences of any intentional or negligent breach of provisions of the Companies Act or the company’s articles.

One crucial element of the director’s liability is his or her fault. Whenever a breach of the Companies Act (except for the general duty of diligence) or of the company’s articles is at hand, the presence of fault is presumed, i.e. the director must provide evidence that he or she has acted diligently.

No “Business Judgement Rule”

The concept of organ liability under Finnish law includes that the required diligence is assessed according to an objective standard, based on the knowledge available to the acting person at the time of the act. An act that appeared diligent at the time will not (should not) lead to liability, even if one has learned in hindsight that the consequences were negative.

However, Finnish law does not recognize a privilege for business decisions, as it is known in common law countries (but also other countries such as Germany) under the “business judgement rule”. This means that a director may not defend against a liability claim stating that he or she has made a business decision acting in good faith, in the best interests of the corporation, and on an informed basis. In Finland, these criteria can presumably be considered only as minimum requirements for a diligent business decision.

Enforcement and waiver

As a starting point, action against liable organ members is taken by the company’s board of directors. In addition, claims may be brought by the shareholder assembly. Finally, a minority of 10% of the shareholders may raise a claim which the company is not pursuing.

In advance, the company may waive claims based on organ liability only in the company’s articles, and with substantial limitations. A claim once emerged may be waived (only) by the shareholder assembly by way of discharge of liability.

However, discharging organ members from liability does not prevent a bankruptcy administrator from invoking an organ member’s liability if the application for opening bankruptcy procedures is filed within two years from the decision discharging the organ member.

Scope of liability

In principle, liability of the members of the board and other organs is unlimited and covers all damages caused by the liable person’s behaviour.

The law provides for the possibility that a court of law reduces the amount owed by the liable person in case that such amount is considered disproportional. Finnish courts have shown little inclination to grant such reductions as far as the case concerned breaches of particular provisions of the Companies Act, including the rules on distribution of company assets.

However, in the big liability cases against board members and managing directors of Finnish banks ensuing the big economic crisis in the early nineties, the Supreme Court has applied quite substantial reductions. In these cases, liability was based on breaches of the general obligation of diligence, more specifically, concerning the preparation of loan approvals.

Insurance

Liability insurances for the responsible persons in companies (D&O insurances) are being offered also in Finland.

There is a great variety of terms of insurance using the name D&O insurance. Some of them are plain legal expenses insurances and are thus limited to the cost of legal representation. Others cover actual liability but contain exclusions, for example regarding liability from labour law breaches, liability for gross negligence or liability for breaches of criminal law, even if committed only negligently.

Risk management and compliance

At the end of the day, even a good insurance concept does not relieve the board and the managing director from the threat of liability. Deductibles on the one hand, and the limitation of the insurance sum on the other hand should be enough to keep organ members on alert – not to mention the personal consequences suffered by a person subject to liability litigation.

It remains the best means of risk management to conduct business with diligence. This entails stringent delegation of responsibilities to suitable staff, appropriate supervision and reporting, and procurement of reliable compliance advisory.