Corporate / M&A

Romania: What do Companies Risk when Dismissing their Managers?

Under the Romanian Companies Act, mandate agreements governing the relations between companies and their managers are essentially revocable. In recent cases, the courts have taken a position against early termination, awarding damages to managers.

Terminating mandate agreements with management

Many com­pa­nies con­clude com­mer­cial man­date agree­ments with their direc­tors, which are sub­ject to the Com­pa­nies Act and are not safe­guard­ed by the labour leg­is­la­tion in case of dis­missal. In the case of Joint-Stock Com­pa­nies, man­date agree­ments are the only option of employ­ing man­agers (admin­is­tra­tors and direc­tors) as indi­vid­ual labour agree­ments are incom­pat­i­ble with a man­age­ment posi­tion.

Com­pa­nies gen­er­al­ly favour the intro­duc­tion of man­date agree­ments for man­agers (the con­cept was intro­duced in a 2006 amend­ment to the Com­pa­nies Act), in par­tic­u­lar due to the increased flex­i­bil­i­ty of employ­ers to ter­mi­nate man­date agree­ments com­pared to ter­mi­na­tion con­di­tions in indi­vid­ual labour agree­ments.

But a com­pa­ny ter­mi­nat­ing a man­date agree­ment may become a sen­si­tive mat­ter, espe­cial­ly if the ter­mi­na­tion is decid­ed by com­pa­nies uni­lat­er­al­ly with­out good cause.

The Com­pa­nies Act allows man­agers to sue for dam­ages if their man­date agree­ment was ter­mi­nat­ed with­out cause. Unlike indi­vid­ual labour agree­ments, where the employee’s claim may also refer to the company’s duty to re-employ the per­son dis­missed, a manager’s claim in case of ter­mi­na­tion with­out cause may con­sist only of dam­ages. In response, com­pa­nies tend to min­imise the risks of hav­ing to pay dam­ages to their man­agers for ear­ly ter­mi­na­tion by devel­op­ing broad and com­pre­hen­sive ter­mi­na­tion claus­es encom­pass­ing a wide vari­ety of cir­cum­stances that may stand as “good cause” in case of ear­ly ter­mi­na­tion.

Recent case: Damages to a manager for early termination

In a rel­a­tive­ly recent deci­sion, the High Court of Jus­tice1 chal­lenged the ter­mi­na­tion con­di­tions of a man­date agree­ment, rul­ing that, when a man­date agree­ment has defined the cir­cum­stances that may lead to the ter­mi­na­tion of the agree­ment, those cir­cum­stances should be exhaus­tive­ly inter­pret­ed, and any oth­er sit­u­a­tion lead­ing to the ter­mi­na­tion should be con­sid­ered ter­mi­na­tion “with­out cause”.

In prepar­ing the defence, the com­pa­ny argued that a man­age­ment agree­ment has the legal nature of a man­date agree­ment, and that man­date agree­ments are revo­ca­ble. The com­pa­ny fur­ther argued that it would be unrea­son­able to con­sid­er that the ter­mi­na­tion clause has list­ed the sit­u­a­tions enabling ter­mi­na­tion for good cause in an exhaus­tive man­ner, while the Com­pa­nies Act gen­er­al­ly allows com­pa­nies to dis­miss their man­agers at any time, sub­ject only to a rea­son­able notice.

The High of Jus­tice fur­ther explained the grounds of its deci­sion: A man­age­ment agree­ment may indeed by revoked at any time by the com­pa­ny, but whether the ter­mi­na­tion was with or with­out cause lies in how the par­ties con­trac­tu­al­ly defined the cas­es of ter­mi­na­tion. The court con­clud­ed that, where ter­mi­na­tion caus­es have been defined, they should be inter­pret­ed as the lim­its of ter­mi­na­tion for “good cause”, and any oth­er cir­cum­stance trig­ger­ing ter­mi­na­tion should fall under the con­cept of “with­out cause” and hence allow man­agers to claim dam­ages.

The court’s ratio­nale for this con­clu­sion was that there is no legal def­i­n­i­tion for “good cause”, so it is the par­ties’ respon­si­bil­i­ty to fill in the gaps and con­trac­tu­al­ly define when ter­mi­na­tion of the man­age­ment agree­ment may safe­ly occur.

This recent case law has strength­ened the impor­tance of a well-draft­ed man­age­ment agree­ment. The terms of the man­age­ment agree­ment draw the fine line between a company’s right to ter­mi­nate its agree­ment with the man­ag­er and the manager’s right­ful claim for dam­ages in case of ear­ly ter­mi­na­tion.

Since a manager’s suc­cess in the com­pa­ny is relat­ed to the trust he enjoys from its share­hold­ers, the terms defin­ing “good cause” ter­mi­na­tion should not be nar­row­ly draft­ed

A man­ag­er should not be removed from his posi­tion only because of incom­pe­tence or gross neg­li­gence, but also for rea­sons such as dif­fer­ences with share­hold­ers or oth­er mem­bers of the board of direc­tors, insuf­fi­cient com­mu­ni­ca­tion with the strate­gic direc­tions of the com­pa­ny, or inabil­i­ty to adapt to the organ­i­sa­tion­al cul­ture of the com­pa­ny.

As con­cerns the dam­ages to which a man­ag­er is enti­tled, they would tra­di­tion­al­ly cov­er the con­trac­tu­al remu­ner­a­tion of the man­ag­er for the peri­od between the date of the unlaw­ful ter­mi­na­tion of the man­age­ment agree­ment and the date when the agree­ment was sched­uled to elapse. Oth­er rep­u­ta­tion­al dam­ages may also be includ­ed in the manager’s claim against its for­mer employ­er.

Conclusion

The recent inter­pre­ta­tion giv­en by the High Court of Jus­tice to the terms of a man­age­ment agree­ment is expect­ed to change the gen­er­al per­spec­tive of draft­ing ter­mi­na­tion claus­es and change the approach of hav­ing ter­mi­na­tion cas­es list­ed only as exam­ples to hav­ing com­pre­hen­sive­ly defined cir­cum­stances allow­ing com­pa­nies to dis­miss their man­agers at no or min­i­mum risks.

Due to the pecu­niary sig­nif­i­cance and sen­si­tive­ness of this sub­ject in pri­vate prac­tice, the par­ties should align their con­tracts with the recent case law (eg, by stip­u­lat­ing in their con­tracts the jus­ti­fied cas­es of ter­mi­na­tion of their man­date agree­ments) in order to avoid oth­er inter­pre­ta­tions in the event of lit­i­ga­tion or arbi­tra­tion.

According to a recent ruling of the High Court of Justice, dismissing a manager for causes other than those expressly defined in the management agreement may trigger the manager’s right to claim damages from the company.

1
Deci­sion no. 3237 dat­ed 11 Octo­ber 2013, the 2nd Civ­il Court of the High Court of Jus­tice