For the majority of private (OÜ) and public limited (AS) companies, the financial year is the calendar year, and we would like to remind you that businesses should file their 2011 annual reports with the Commercial Register by 30 June of this year at the latest. Even though most companies file their reports with the Commercial Register well ahead of the deadline, others only do so at the last minute. We would like to remind those businesses that preparation and approval of the annual report of a private or public limited company consists of several steps:
- The management board prepares the annual report (consisting of annual accounts and a management report) and a proposal for distribution of profit.
- The annual report and the proposal for distribution of profit have to be inspected by a statutory auditor, who issues an audit opinion. This requirement applies to all public limited companies as well as to those private limited companies subject to mandatory audit (required either by their articles of association or by legislation).
- Concerning the annual report prepared by the management board, the supervisory board of a company issues a written opinion which must be presented to the shareholders of the private or public limited company – the requirement does not apply to private limited companies with no supervisory board.
- The management board convenes a (general) meeting of shareholders.
- The shareholders of the private or public limited company approve the annual report.
- The annual report and the documents filed with it, as well as any other information, are transmitted to the Commercial Register electronically.
Preparation of the annual report and the accompanying documents must comply in detail with requirements set by legislation (specifically, the Commercial Code and the Accounting Act) and also with the articles of association of the company (if they include special regulations as compared to legislation). It is also important that convening the meeting of shareholders in both private and public limited companies, drafting the invitation to the meeting and recording the minutes of the meeting should follow the requirements and deadlines set by legislation. Failing that, a decision may prove to be contestable or void outright.
Insofar as approval of the annual report falls within the jurisdiction of the highest management body of a company and, insofar as the supervisory board, if there is one, has to issue a collegial opinion concerning the annual report, it is worth considering whether other decisions within the jurisdiction of those management bodies could be adopted within the framework of the same meetings to tidy up the company housekeeping.
In the past couple of years, the Commercial Code has been amended several times, simplifying the management of both private and public limited companies. As a result of the changes, a private limited company, for instance, may opt out of having a legal reserve, set an indefinite term for the powers of its management board (should the powers be for a specified term under the articles of association), make use of electronic voting, etc. A shareholder in a public limited company, similarly to one in a private limited company, may vote electronically either before or during a general meeting of shareholders. The options have to be set in the articles of association of the company. A meeting to approve the annual report can also amend the articles of association or adopt a new version of them, to prescribe options better suited for managing the company and, similarly, abolish those provisions that are out-dated or not applied in actuality. Thus, a meeting convened to approve the annual report is a good opportunity to revise and, if needed, amend the existing articles of association of a company.
In addition to reviewing the articles of association, it is also advisable to review the powers of the supervisory board members. Under the Commercial Code, the maximum term possible for the powers of supervisory board members is 5 years; however, a shorter term (normally 3 years) is often set in the articles of association of both private and public limited companies. It is quite normal for supervisory board members to change from time to time, as a result of which the terms of the powers of supervisory board members often vary, with the expiry dates thus being difficult to keep track of. Insofar as renewal of the terms of supervisory board members’ powers falls within the jurisdiction of the shareholders of a private or public limited company, a meeting to approve the annual report is, again, a good opportunity to renew these terms (also in instances where the powers have not yet expired, but are about to), obviating the need to convene a new meeting to renew the powers in the near future or adopting a decision by some other method. Although there is no such explicit requirement in legislation, we recommend that a decision to renew the powers of supervisory board members, similarly to the decision to renew the powers of management board members, also be filed with the Commercial Register, insofar as the Commercial Register also publishes the terms of the powers of supervisory board members.
The powers of management board members, too, may be renewed alongside approval of the annual report. Even though the powers of the management board members of a private limited company may have an indefinite term, nonetheless many private limited companies continue to have specified terms – if so, these terms are set in the articles of association. In contrast, the powers of the management board members of a public limited company may only (i.e. must) have specified terms. Unless provided otherwise in the articles of association, the law limits the term of the powers of the management board members of a public limited company to 3 years. For a private limited company, the term of the powers has to be provided in its articles of association unless the management board members have elected with an indefinite term. For public limited companies and those private limited companies that have supervisory boards, renewal of the term of the powers of management board members falls within the jurisdiction of the supervisory board (which the supervisory board can do at the time of issuing its opinion on the annual report). If a private limited company has no supervisory board, then renewal of the powers of its management board members belongs within the jurisdiction of its shareholders (a decision which the shareholders can adopt when approving the annual report). It is good to keep in mind that the term of the powers of a management board member may also be renewed ahead of time – legislation permits powers to be renewed if the term of the powers is due to expire within the next year. Hence, if the powers of management board members have not yet expired but are about to do so (also within a year), a decision concerning renewal of the powers may already be adopted now, in order to avoid taking a new decision or convening a meeting in the near future. A decision concerning renewal of the powers of management board members should be filed with the Commercial Register immediately.
In light of the above, we recommend that, before convening a meeting to approve the annual report both now and in the future, thought be given to whether the shareholders of a private or public limited company or its supervisory board can adopt other decisions – for instance, if the powers of both supervisory and management board members are renewed at the time of the decision to approve the annual report, this will prevent a situation where at some point either the supervisory board or the management board has no power to act. The management board may also consider and propose to the shareholders of either private or public limited companies that they simplify certain company management processes, which may be done via the articles of association.