Cover Story (#11 November 2014)

Management Mechanisms

The issue of a CEOs dismissal and termination of office is not as obvious as it might seem at first glance, since it is governed both by labor and corporate legislation. A CEOs appointment and termination of office belongs to the competence of the general meeting of shareholders in a joint stock company or the general meeting of participants in a limited liability company (hereinafter the general meeting). However, pursuant to the Labor Code of Ukraine a CEO is also an employee.

According to business legislation, the post of CEO is an elected office, which is an integral part of the companys management mechanism. In line with labor legislation, a CEO has an employment relationship with the company. Thus, in order to dismiss the top manager, there should be a decision by the companys owners, and also the order of dismissal along with a relevant record in the CEOs employment record book. The UJBL addressed Irina Grishchenko, an adviser of the LCF Law Group, in this regard. The latters key practice deals with labor disputes and corporate law. We asked her to discuss the dismissal of a companys CEO, voluntary resignation and discharge by mutual agreement, or upon the owners initiative

UJBL: What are the most common problems with the dismissal of top managers that you face in your practice?

Irina Grishchenko: Major corporations tend to have very detailed terms and consequences of their CEOs termination of offices. Therefore, all the problems are related to incomplete terms and consequences of dismissal in the labor contract, or (and this happens more often) to internal corporate conflicts, which often are manifested through implementation of corporate schemes when the dismissed ma- nager contests the decision of the participants general meeting.

Another problem that causes organizational complexities when a member/chairman of the board of JSC is dismissed, is the inconsistency of the termination of office and the actual dismissal.

When a board member is dismissed at the owners initiative on the grounds provided in the Labor Code and/or in the labor contract, the labor contract with the member/chairman of the board terminates on the day that the relevant order of the dismissal is issued. In the best case scenario, the termination of office of a member of the board in the corporate dimension (by a relevant decision of the competent body), and the actual dismissal (by the order on dismissal) should take place on the same day. However, this is possible to achieve only on condition that the competent body that can terminate powers of the board member is the supervisory board, and provided that it is possible to hold its meeting promptly, on the date of the actual dismissal. The inability to hold a meeting of the supervisory board on the day of dismissal of a board member, or, if the articles of association of the company delegate this issue to the general meeting (which implies at least 15 days to convene and hold the meetings), makes it impossible to register changes to the state register. Consequently, the manager who was actually dismissed remains the manager for third parties until his powers are terminated and appropriate changes are recorded in the state register by virtue of the On State Registration of Legal Entities and Individual Entrepreneurs Act of Ukraine. In fact, such a manager may continue to conclude agreements on behalf of the company or otherwise represent it dealing with third parties confirming his powers by an excerpt from the state register. This risk can be minimized by depriving the dismissed board member of his workplace, and his access to the companys stamp. In addition, it is recommended to report the dismissal to the banks, where the company has its account, and, if possible, to all counterparties.

UJBL: Often, the manager, who made a decision to quit the office, cannot convene the general meeting as there are contradictions between the owners, or they are not present in the country, etc. What legislative conflicts may arise in this instance?

I.G In this instance, there is a problem of the dual approach to the dismissal of the manager. On the one hand, nothing prevents the manager from making a statement about quitting his office, signing it, and thus terminating his labor relations with the company. At the same time, until the relevant decision is made by the supervisory board or the general meeting, the former manager actually retains his status of actually being a manager.

Currently, this problem does not have a solution in legislation. However, there is a draft that can regulate this issue if approved. In particular, the draft proposes to shorten the period to convene the general meeting if the dismissal of the CEO is in the agenda, and provides a procedure to terminate the CEO if the companys general meeting is impossible to convene.

UJBL:What recommendations could be offered to the CEO in the event of impossibility of proper termination of legal relations between such a CEO and the company? What action should the CEO take to minimize possible legal issues?

I.G If the manager quits by terminating his labor relations with the company but his powers are not terminated by the decision of the general meeting, and according to the register he remains the actual manager of the company, he should notify the fact of termination of labor relations with the company at least the companys participants the state register or other agencies the company submits its reports to in accordance with legislation. This does not solve the problem of the company that is left without its manager, but it would significantly minimize risks of the manager himself in the context of his involvement with the transactions concluded after he quits.

In order to completely avoid such situations, it is recommended to include in the companys charter a procedure to dismiss its CEO not requiring a decision of the general meeting.

UJBL: Due to some reasons, an owner/owners of the company intend to part with the CEO. Under what circumstances and on what grounds is dismissal of the CEO possible in such case?

I.G Dismissal of the companys officials due to termination of their office has been settled by the On Changes to Some Legislative Acts of Ukraine on Protection of Investors Rights Act of Ukraine that came into force on 1 June 2014. Pursuant to the Act, Article 41 of the Labor Code was amended. In particular, the Act provides for an additional ground for termination of labor contract upon the initiative of the owner or his authorized body for certain categories of employees under certain circumstances, as a termination of powers of officials without indication of specific reasons for such termination.

UJBL: What are the circumstances when the CEO cannot be dismissed by the owner?

I.G Pursuant to the companys internal procedures, dismissal of the CEO is not different from dismissal of any other employee (order, entry in the employment record). Therefore, the general provisions of labor legislation on dismissal apply to the CEO. For example, a manager cannot be dismissed when on leave (including on a maternity leave or on a child care leave), or on sick leave. The judicial practices are clear in this regard: dismissal of the CEO under such circumstances will be regarded by courts as an obvious violation of labor legislation.

UJBL: What are the main stages of a CEOs dismissal?

I.G The stages of dismissal may vary depending on the legal form of a business and its charter. Conventionally, they can be divided into two stages: a corporate decision on termination of powers by a competent body and registration of the dismissal pursuant to the provisions of labor legislation.

UJBL: Can the procedure for dismissal of the CEO be effected by such nuances as early termination, existence of an employment agreement versus a contract, availability of relevant provisions in the companys charter that regulate dismissal of the CEO?

I.G Availability of the contract significantly simplifies the process of dismissal, since it contains detailed terms, grounds and consequences of the CEOs dismissal. If there is no contract, relations of the CEO and the companys owners are governed exclusively by labor legislation, which significantly narrows the grounds and procedures for termination of employment.

UJBL: How different is dismissal of a non-resident CEO?

I.G Foreigners, who work under the labor agreement/contract in Ukraine, are governed by provisions of both labor and corporate legislation of Ukraine.

UJBL: What measures do you recommend to your clients to take after dismissal of the CEO?

I.G The need to make sure that the dismissed CEO does not have powers to represent the company in dealing with third parties (the information of the CEO is removed from the register). If the time of termination of powers and the time of actual dismissal differ, before making any entries in the register, they need to inform all counterparties, banks, and possibly other agencies related to the companys operation.

UJBL: What problems did you encounter in your practice in cases when the time of termination of powers differed from the time of actual dismissal of the companys CEO?

I.G The risk of this problem is caused by the fact that according to the On State Registration of Legal Entities and Individual Entrepreneurs Act of Ukraine, the minutes of the general meeting (if other is not provided by the charter) serve as grounds to changes in the register. Thus, de facto dismissed manager is a legal representative of the company and may conclude transactions on behalf of the company.

And if there is a corporate conflict involving the dismissed CEO, it could be a destabilizing factor in the companys operation. There are cases when dismissed employees file lawsuits seeking employment reinstatement and bans are imposed on registration actions. Such situations actually block the companys operation as the former CEO does not work any longer, while the new one cannot receive powers.

UJBL: How do they determine jurisdiction in cases on CEO dismissal?

I.G Article 24 of the Civil Procedure of Code Ukraine states that courts have the jurisdiction over cases on civil, family, and labor relations, if at least one party of the dispute is a citizen, except for cases, where other agencies have jurisdiction over such disputes in accordance with legislation.

The article implies that cases on dismissal of CEOs (like any other employees, who are subject to the provisions of the Labor Code) are reviewed by courts of general jurisdiction. When considering whether a case relates to a labor dispute, courts should determine the subject of the legal dispute (labor relations), the party of the disputed relations (whether one of the parties is a citizen), and a possibility that the given dispute should be reviewed by a different agency in line with legislation.

The last aspect is where most mistakes occur. Analysis of judicial practices shows that when courts of general jurisdiction consider cases on invalidity of a decision of the general meeting in the context of invalidity of the decision on dismissal of the executive body (as an act based on which the manager has been dismissed), they establish facts that relate exclusively to the competence of commercial courts (corporate disputes).

In case No.554/8297/14-ts, the Oktiabrsky District Court of Poltava denied a claim by the former CEO seeking invalidation of the decision of the general meeting, which dismissed both the CEO and participants. Thus, the court actually established a prejudice that violates the rights of the companys participants when similar or related disputes are reviewed.

Despite the seemingly clear issue of jurisdiction of labor disputes, the facts that are established during the review (not inherently related to labor disputes) still serve as a mechanism to apply corporate schemes.

UJBL: What are claims by subjects of labor relations? What conflicts took place in your practice when claims were filed?

I.G Labor disputes on dismissal always go along with requests to reinstate employment, to pay salaries for downtime, to make other payments under labor agreements, and less often to award moral damages.

In the context of the present topic of the balance between labor legislation and corporate legislation, most often they seek invalidation decisions adopted at a general meeting.

On one hand, the document is a ground of dismissal (if the companys participants voted for that) and, on the other hand, when considering labor disputes, courts of general jurisdiction cannot examine circumstances that may be grounds to invalidate a decision by the general meeting. The grounds for invalidation of the general meetings decision are governed by corporate legislation in the first place. And secondly, the owners decision to dismiss the CEO is still an unconditional right of the former. The absurdity of the situation is that when filing this kind of claim (seeking invalidation of the general meetings decision), the CEO seems to have to prove to the court that the owner did not intend to dismiss him, but when the general meetings decisions are contested they establish facts that directly affect the legality of the general meetings in the corporate aspect, not the labor one.

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