How to protect company assets from dishonest actions of managers

"The history of the investment company BaltCap and former partner Šarūnas Stepukonis shows that the company pays insufficient attention to internal control procedures and the control of the use of funds. There is public talk about the embezzlement of an extremely large amount (up to EUR 30 million), which was possibly carried out by the only employee Š. Stepukonis , who had the right to act on behalf of companies belonging to the fund.

 

 

 

It is publicly announced that the violation was discovered during the audit, i.e. a long time has passed since the violation itself. Therefore, the violations were not noticed in time, which made it possible to continue the violations and cause even greater damage.

 

 

 

Opinions are heard in the press that the payment institution or state institutions may not have performed control functions properly. However, first of all, one should look at what preventive measures could have been applied by the company itself in order to avoid potentially illegal actions of the manager and to reduce the damage.

 

How could such situations be avoided?

It is believed that such a situation could probably be avoided if the company had established a "two signature" rule and thus limited the manager's right to unilaterally make decisions.

 

 

 

The "two-signature" rule, or quantitative representation, means that the head of the company must act together with a board member when concluding contracts. In this case, situations where the company does not even know about the contracts concluded by the manager would be avoided.

 

 

 

The law on joint stock companies stipulates that the head of the company acts on behalf of the company and has the right to unilaterally enter into transactions, except for cases where quantitative representation of the company is established in the company's articles of association.

 

 

 

Thus, the easiest way to limit the authority of the manager to unilaterally enter into contracts is to change the statutes and establish a rule of quantitative representation. The articles of association of the company can also provide for decisions that require a prior decision of the board.

 

Are the statutory safeguards sufficient?

 

The law on joint-stock companies stipulates that the board of the company makes decisions on the investment, transfer, lease of long-term assets, the balance sheet value of which is greater than 1/20 of the company's authorized capital (calculated separately for each type of transaction), unless a different value is specified in the articles of association.

 

 

 

However, if the company does not have a board, the functions assigned to the competence of the board are performed by the company manager, with the exceptions set forth in this law on joint stock companies. This means that the requirement to obtain the approval of the board does not apply if the company does not have a board.

 

 

 

Also, this rule applies only if the value of the transaction is greater than 1/20 of the company's authorized capital. It is believed that this rule is not sufficient to protect the company from illegal decisions of the manager. Therefore, the articles of association of the company could specify a wider list of situations where the approval of the board is required for the conclusion of the contract.

 

How to enforce the "two signature" rule?

 

 

 

The rule of quantitative representation should be established in the articles of association of the company. In this way, all third parties, including notaries, are informed that the signatures of two leading employees are required to conclude the contract.

 

 

 

For this purpose, the board of the company should be established and the statutes should limit the manager's right to unilaterally make decisions and enter into contracts. The articles of association can also provide for decisions on the purchase or sale of assets, the adoption of which requires the prior approval of the entire board.

 

 

 

The articles of association must establish a specific rule of quantitative representation, according to which, together with the members of the management bodies, the head of the company must act on behalf of the company in all cases. Usually, the company can be represented by the manager together with one of the board members. In this way, the manager's right to unilaterally conclude contracts is limited and the manager's actions are controlled.

 

 

 

The bylaws can provide for a contract value that requires the manager and board member to enter into the contract. In this way, the company's operations are not complicated when small daily contracts require the signatures of two employees.

 

 

 

If the company's employees are given the authority to enter into contracts, they may also contain certain restrictions. For example, depending on the value of the contract, it can be stipulated that certain transactions can be concluded only by two authorized employees, i.e. general representation is provided for. In this case, the contract could only be concluded by both authorized employees acting together.

 

 

 

The Civil Code also provides for the possibility of issuing a power of attorney to employees or other persons, if this is provided for in the company's articles of association. A power of attorney can be issued to several persons (joint power of attorney). In this case, all procurators must act together. Powers of attorney must be registered in the Register of Powers of Attorney.

 

Is the contract concluded in violation of the quantitative representation rule valid?

There is a general rule of law that if a person acts without having this right or in excess of the rights he has, his actions do not create legal consequences for the principal. Therefore a contract concluded in violation of the rule of quantitative representation enshrined in the articles of association would be considered invalid.

 

 

 

Quantitative representation is therefore an important instrument not only to establish control procedures, but also acts as a preventive measure to avoid fraud and dishonesty by third parties, as well as mistakes by the company's manager.

 

 

 

Thus, the company can take effective measures that would help prevent cases of fraud by managers and/or partners or significantly reduce the amount of losses. Therefore, this situation has a positive aspect, it encourages a closer look at company management processes."