NOVE partner, attorney at law Urmas Volens successfully represented a client in a dispute which gave rise to a leading decision as regards assessing the validity of transactions between a board member and a private limited company.
The first sentence of § 181 (3) of the Commercial Code of Estonia provides that a transaction concluded outside the everyday economic activities of a company between that company and a member of the board requires agreement of the shareholders. Without such agreement, the transaction is void.
The Supreme Court held in the ruling (civil matter no 3-2-1-26-17) given in a dispute between the shareholders of an Estonian private limited company OÜ Hotell Pärnu that the shareholders’ agreement is also required if the other party to the transaction is a company controlled entirely by a member of the board and the spouse of that board member. The Court pointed out that the requirement of the shareholders’ consent to a transaction involving a board member has been set out to avoid conflict of interest, as the board member might be tempted to prefer in a transaction his own economic interests rather than act in the best interests of the company. A similar risk of conflict of interest occurs when the other side of a transaction is a company controlled entirely by a board member and the spouse of that board member. By adopting that position, the Supreme Court limited the possibilities of board members to divert assets without the consent of shareholders in a situation in which a board member is acting in a conflict of interest.
The above means, inter alia, that minority shareholders are able to defend themselves more effectively against harmful transactions that a majority shareholder exerting control over the management board would conclude with himself or a company controlled by himself. It should be underlined that in deciding over the shareholder’s consent to the conclusion of a transaction with an involved person, the shareholder whose interest is affected by the transaction is not allowed to vote.
Attorney at law and partner to NOVE Urmas Volens and LEADELL’s attorney at law Tambet Laasik acted for OÜ Hotell Pärnu in the civil case No 3-2-1-26-17 in the court of appeal and the Supreme Court.