When appointing members of the management board (or members of the board of directors) of a capital company, shareholders place in their hands the competence to manage the company and the assets accumulated in it. It is therefore essential that cooperation with the management board is arranged in the best possible way for the company. So how to establish the principles of performing the function of a management board member to secure the company’s interests?
For simplification, below we will refer to members of the management board of a capital company. However, identical principles apply to members of the board of directors in a simple joint-stock company.
Form of Cooperation with a Company Management Board Member
When undertaking cooperation with a management board member, shareholders can choose the form in which they will regulate the conditions of this cooperation. This can be an act of appointment (most often a resolution on appointment), an employment contract, or a management contract.
We presented a brief description of each of these forms in one of our earlier articles (Forms of Cooperation with a Management Board Member in a Limited Liability Company – Employment Contract, Management Contract, or Appointment?).
The act of appointment provides limited possibilities for establishing cooperation principles. Therefore, it is most often supplemented by an agreement concluded with the management board member.
An employment contract is subject to the provisions of the Labor Code, so in this case too, the possibility of freely shaping rights and obligations is limited.
For this reason, in companies focused on development, where management requires commitment and implementation of strategic goals, a management contract is most often concluded with management board members. We will take a closer look at it in this article.
Management Contract – What Kind of Agreement Is It?
A management contract is a civil law agreement constituting an unnamed type of service agreement, concluded within the limits of freedom of contract. It guarantees the greatest flexibility in establishing cooperation principles, which provides broad opportunities to secure the company’s interests.
In a management contract, it is worth regulating the basic competencies assigned to a given management board member. This can be done by indicating, for example, the area for which they are responsible (finance, operational management, etc.).
Remuneration and Incentive Programs for Management Board Members
A key provision for both parties to the agreement is undoubtedly the establishment of principles for remunerating the management board member for the function they perform.
In a management contract, this remuneration is usually established as a combination of a fixed base and a series of supplements, bonuses, and premiums, the receipt of which depends on the management board member fulfilling specific conditions specified in the agreement.
Financial Bonuses Based on KPIs
To motivate the management board member to work effectively for the company’s development, financial bonuses can be introduced in the management contract, the granting of which depends on achieving specific results within a specified time.
The company can introduce such KPIs that correspond to its strategic goals. However, it is important that they are appropriately specified and measurable – so that achieving the indicator can be verified in a fully objective manner. The introduction of KPIs of a general and evaluative nature may lead to disputes with the management board member in the future.
Examples of KPIs on which premiums may be awarded include EBITDA ratio, employee turnover rate, number of new customers, etc.
Programs Based on Shares in the Company
Management board members may be granted rights (options) to acquire or subscribe for shares in the company on preferential terms, after meeting established conditions. Such a condition may be, for example, achieving specific financial results, implementing assumed organizational goals, or length of cooperation with the company.
The company may grant this right as part of a broader program directed to all employees or specific groups (ESOP – Employee Stock Option Plan) or in an individual agreement with a management board member.
When granting this type of entitlement, however, one must remember to adequately secure the company’s interests. Important here will be:
- precise determination of conditions whose fulfillment entitles the management board member to acquire shares,
- determination of the maximum pool of shares that can be acquired or subscribed in this mode – to protect existing shareholders against dilution,
- indication of the period during which gradual acquisition of rights will occur (so-called vesting) – to motivate longer cooperation with the company,
- indication of the minimum period of holding the management board member position, after which it will be possible to exercise the option right (so-called cliff).
How to Additionally Secure the Company – Malus and Clawback Clauses
Basing the remuneration of management board members on company results may sometimes encourage managers to take excessively risky actions or actions inconsistent with company policy, in order to achieve the best results and consequently obtain the highest premium.
One way to protect the company against such violations is to introduce malus and clawback clauses into the management contract.
A malus clause enables the reduction or cancellation of a premium that has not yet been paid – despite meeting the conditions for its payment – when negative events specified in the agreement (grounds for cancellation) come to light.
A well-constructed malus clause requires precise determination of the grounds for canceling the premium and the procedure in which these circumstances should be established.
Example: The agreement provides for granting a premium to a management board member in case they acquire a specified number of new customers in the first half of 2025. The company acquired the assumed number of new customers during this period. An inspection revealed that to acquire them, the management board member significantly violated personal data protection regulations. This exposes the company to significant financial consequences. In this situation, the company – invoking the malus clause contained in the management contract – may refuse to pay the premium to the management board member.
A clawback clause, on the other hand, enables demanding the return of a premium already paid if circumstances specified in the agreement (grounds for return) are revealed after performance of the obligation.
Circumstances entitling the company to demand the return of a paid premium may include, among others:
- finding irregularities in the company’s financial documentation, on the basis of which fulfillment of premium payment conditions was assessed,
- violation by the management board member of principles and policies in force in the company, conditions of the management contract, etc.,
- action by the management board member to the detriment of the company (regardless of the mere fact of damage occurring).
When constructing a clawback clause, in addition to precisely determining the grounds for return, attention should be paid to designating the period during which events entitling to demand the return of paid bonuses may occur.
Prohibition of Competition by Company Management Board Member
Basic regulations regarding undertaking competitive activity by a management board member of a capital company are contained in the Commercial Companies Code. We presented them in an article on the rights and obligations of the management board in a limited liability company. In a joint-stock company and simple joint-stock company, the legislator regulated the statutory prohibition of competition in an analogous manner.
In a management contract, parties can extend or specify the statutory prohibition of competition, for example, by specifying the definition of competitive activity.
Importantly, the prohibition of competition resulting from the Commercial Companies Code is only in force during the time of holding the management board member position. For a person holding this function not to be able to undertake competitive activity also after expiration of the mandate – it is necessary to conclude an appropriate clause of extended prohibition of competition.
Usually, a supplement to such a clause is the stipulation of a contractual penalty in case of violation of the prohibition of competition. The combination of these two regulations in a management contract already constitutes significant protection of the company’s interests.
Protection of Confidential Information
As a person exercising management over the entire activity of the company, the management board member has unlimited knowledge about information essential for the company’s future. They have access to short- and long-term development strategies, know-how, information about the financial situation, etc.
It should therefore be important for the company to protect against disclosure of confidential information by the management board member or their use for their own interests. For this purpose, it is worth including confidential information protection clauses in the management contract, in force during the time of holding the function and after its termination.
How to Secure the Company in Case of Termination of Cooperation with Management Board Member?
Termination of cooperation with a management board member can pose many problems. How to smoothly carry out the transfer of management so that there is no downtime in the company’s activity? What about management shares that the management board member acquired?
Problems that may arise during the period of termination of cooperation are best anticipated already at its beginning. And even better – to anticipate solutions for them. Therefore, the management contract should contain provisions regulating the principles of the management board member’s departure from the company.
This is a topic that definitely requires broader discussion – therefore we will return to it in the next article. We encourage you to follow our blog regularly.
What Else Should a Management Contract Contain?
Above, we indicated basic clauses that are introduced in standard management contracts. However, a tailored agreement should regulate all issues that a given company considers important for it. Depending on whether a given company emphasizes foreign expansion, entry into the capital market, or survival of a crisis – the management contract may require establishing cooperation principles in a slightly different way.
Therefore, preparation of the agreement is worth entrusting to experienced lawyers. First, they will conduct an interview, and then propose solutions appropriate to the current situation of the company and its needs. So if you want to comprehensively establish cooperation principles with a management board member of your company – we invite you to contact us.
