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The Warsaw Voice » Law » October 29, 2008
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The Ins and Outs of a CEO's Contract
October 29, 2008   
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The employment of a CEO tends to be a long-drawn process because it is such a crucial business commitment. Assuming the candidate is right for the job, it's not just a question of whether the money's right to entice the chosen candidate into a commitment, but also how to secure his continued loyalty if he is worth his salt, or how to get rid of him if he proves undesirable.

There are three types of "relations" typically serving as a basis for the formal engagement of a CEO. Because each option has its pros and cons, it is not unusual for different sets of a CEO's services to be secured by different types of contracts. It all depends on the angle taken by each of the contracting parties. The negotiable arrangements between these parties must be accompanied by strict adherence to the law as the contractual and financial consequences of legally defective conditions can cost either party dear. Tax and social security issues always play an important part in such negotiations. Complicated as they are, they can get even more so if the CEO has non-resident status or wishes to retain that status. And, given that the legal validity of a contract depends on its compliance with statutory requirements, it is always best to play it by the book even if there are loopholes that might allow for a bit of sailing close to the wind. The purpose of this overview is to highlight just some of the ins and outs to be considered in drawing up a CEO's contract.

There is no statutory form of contract for a CEO though, typically, he will be tied to his company by two separate legal bonds. The first of these is by appointment to the management board which establishes a corporate relationship. There is no legal requirement for a CEO to serve on his company's management board, but that is the normal pragmatic arrangement. Such a relationship is regulated by the Polish Commercial Companies Code, which creates a legal relationship between the parties, but it must not be confused with an employment contract or any other relationship based on civil law. Such an appointment to the management board, shall be made by an authorized body of the company. The advantage of this is that the CEO's remuneration is not subject to social security contributions, which is a saving for both the CEO and the company. A further advantage for the company, though a disadvantage for the CEO, is that the instant removal of a management board member only requires the adoption of a resolution by the authorized body of the company.

The second type of contractual bond, based on employment or civil law, is an option to be considered on its merits. An employment contract will entitle a CEO to employee benefits (including greater job security and statutory severance pay entitlements), sick pay and full social security cover, all of which ups costs and risks for the company, with no truly compensatory advantage in return, but the company may see benefit for itself in this arrangement-a stronger relationship between the CEO and itself. In a civil law contract, the parties may arrange their legal relationship as they see fit. Here, as in all other types of contracts, one must always be mindful of the fact that no contractual provision is legally valid if it overrides any restrictions laid down by law. It is crucial to remember that it is a formal legal requirement that, regardless of whether it is to be an employment or civil law contract, the contract must be signed on the company's behalf by the supervisory board or by an attorney-in-fact appointed by a resolution of the general meeting. The purpose of this is to protect the company's interests, not least against management board members abusing their powers by appointing a CEO willing to conspire in wresting control of say, the remuneration paid to management board members.

It should be borne in mind that the manner of a company's representation in contracts with a CEO is legally binding and cannot be overruled by any contractual provision. This only applies to current appointments to management board membership. In the case of resignation or dismissal of a CEO or, indeed, any other management board member, the body to terminate the contract is the management board itself. A resolution to dismiss a management board takes immediate effect, thus within the twinkling of an eye, the person affected by such a resolution, the CEO included, may have his contract terminated by the management board.

Technically, from the legal point of view, any agreement with a CEO signed by any other corporate body is null and void. But there are vociferous doctrinal arguments positing the view that, effectively by default, such a legally void contract becomes valid if the agreement is implemented on the nod. But then the CEO cannot lay claim to any fringe benefits typically attaching to such an agreement should he enter into a court dispute with the company.

In a nutshell, the law gives ample leeway with regard to the contractual basis on which a CEO may be appointed and provides mechanisms to help safeguard the contracting parties' interests. There is no perfect formula for the right balance between mutual commitment, as reflected in the contract type, and the escape clauses, as reflected in the appointment mechanisms. As with most things in life, a CEO's contract will be a compromise reflecting mutual expectations and, perhaps above all, mutual confidence and trust. And the quality of the weft depends on the skill of the weaver.

Aleksandra Minkowicz-Flanek
Adam Brzeziński
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