CEO status – questions

Feb, 28 2019

Legal relationship with company’s CEO have many aspects. Below you can find the most important of them:

1. Before entering into labor contract with CEO, it is necessary to:

-             Request information from tax authorities whether a potential CEO is not disqualified. Disqualification is a measure of responsibility that prohibits person to occupy managing positions. If a disqualified person is appointed to the position of CEO, company may be fined up to 100 000 Rubles (art. 14.23. of the Administrative Code).

-             Check whether potential CEO occupies similar position in other companies. If he is CEO in 5 or more companies, then this is the basis for inspection by tax authorities (Letter of the Federal Tax Service of August 3, 2016 No. GD-4-14 / 14126).

-             Decide at the general meeting of company's shareholders (or single shareholder) on appointment for the position of company’s CEO (art. 33, 39 of Law “On the LLC”).

-             Within three days after the decision is made, to submit information about CEO into the Unified Companies’ Register (art. 5 of Law “On State Registration of Legal Entities”).

 

2. Term of employment contract with CEO

Employment contract with CEO may be concluded on an unlimited basis or for a fixed term. As a rule, the term of CEO’s authorities is established by Charter of the company.

However, in accordance with art. 58 of the Labor Code, term of the fixed-term employment contract cannot exceed 5 years.

At the same time, according to the definition of the Supreme Court dated 05.06.2017 N 304-GD 17-5722, the expiration or termination of the employment contract with an CEO does not mean the termination of his powers. He has the right to act on behalf of the company until the general meeting of shareholders decides on the appointment of a new CEO.

3. Change of CEO in the Unified Companies’ Register

According to art. 5 of Law "On State Registration of Legal Entities", when changing company’s CEO, it is necessary to notify registering authorities within 3 working days from the date of decision of general shareholders meeting. Tax authorities enter information about new CEO into the Unified Companies’ Register within 5 working days from the date of receipt of the notification.

Thus, there may be situation, in which:

- New CEO is entitled to act on behalf of the company, but he is not included into the Unified Companies’ Register. As the Supreme Court noted in its resolution dated July 25, 2016 No. 34-AD16-5, CEO of the company gets his authority from the date of the adoption of decision of general shareholders meeting and not from the date of entering information about it into the Register.

- Former CEO lost his authority but the contractors don’t know about it. If the former CEO enters into contract with a person who faithfully relied on information from the Register, then such contract by implication of art. 51 of the Civil Code is considered as valid.

In this regard, when changing CEO, it is necessary to promptly notify all counterparties, including potential ones.

 

4. Responsibility of CEO

According to art. 277 of the Labor Code, CEO bears full material responsibility for direct actual damage caused to the company. This means that, unlike ordinary employees who are responsible within their monthly salary, CEO is obliged to fully compensate caused damage. Damage in this case means as a real decrease or deterioration of the company's property.

Moreover, according to art. 53.1. of the Civil Code, CEO is obliged to compensate the company for losses caused by his unreasonable or dishonest actions, e.g. by performance of knowingly unfavorable contracts. In these cases, CEO is obliged to compensate not only the actual damage, but also expectation loss.

 

5. Features of CEO’s dismissal

Apart from the grounds for dismissal provided for all employees, employment relationships with CEO may be terminated by decision of general shareholders meeting (art. 278 of the Labor Code). Taking this decision is allowed without specifying reasons for dismissal. However, in case of such dismissal, in accordance with art. 279 of the Labor Code, CEO should be paid mandatory compensation not less than three average monthly salaries.