The Authority of the Managing Director to Incur a Significant Loan and Pledge Shares Without Express Authorisation of the Board of Directors (KKO 2026:9)

Background

A limited liability company operating in the construction sector (the "Company") had acquired shares in a Finnish housing company (asunto-osakeyhtiö), gaining thereby control over apartments under construction. Part of the purchase price remained unpaid. After completing the transaction, the Company continued construction of the apartments. The Company's managing director, who had the right to represent the Company alone in accordance with the Company’s articles of association, had subsequently incurred a short-term loan of EUR 3.7 million from a bank and pledged the housing company shares as collateral. The loan proceeds were used to pay the remaining purchase price for the housing company shares. The Company repaid the loan following the sale of the housing company shares upon completion of construction of the apartments.

Capacity of the Managing Director

Finnish law, as many other systems of law, makes distinction between the capacity and authority to represent a company. Capacity refers to the legal right to represent a company. Authority refers to the internal right within the company to decide on legal acts that are the subject of representation.

Under the Finnish Limited Liability Companies Act, managing director may represent the company in matters within the scope of managing director’s duties under Chapter 6, Section 17 of the Limited Liability Companies Act. In addition, the articles of association may stipulate that the managing director has the right to represent the company (Limited Liability Companies Act, Chapter 6, Sections 25 and 26).

The capacity to represent concerns the legal right to represent a company in relation to third parties, for example when entering legal transactions. It does not, as such, constitute an independent decision-making authority. The Supreme Court emphasised that a general right of representation granted in the articles of association gives, in principle, the same capacity to represent the company as the board of directors possesses.

In KKO 2026:9, the managing director had independent representation right under the articles of association. Neither incurring the loan nor pledging the shares constituted a matter that required approval by the shareholders’ meeting, nor were they contrary to mandatory provisions of the Limited Liability Companies Act. Accordingly, the managing director had the capacity to represent the Company in incurring the loan and pledging the shares.

Authority of the Managing Director

Pursuant to the Limited Liability Companies Act, the managing director is responsible for the day-to-day management of the company in accordance with the instructions and directions issued by the board of directors. The managing director is further responsible for ensuring that the company's accounting complies with applicable law and financial management is organised in a reliable manner. The managing director may undertake measures that are unusual or extensive in view of the scope and nature of the company's activities only if authorised by the board of directors, or if awaiting board approval would cause material harm to the company (Limited Liability Companies Act, Chapter 6, Section 17). The authority is also limited by provisions in the articles of association concerning the company's field of activity.

Day-to-day management encompasses, among other things, the management and supervision of the company's business operations as well as ensuring the implementation of resolutions adopted by the higher corporate bodies. Whether or not a particular legal act falls within the managing director's authority must be determined based on the circumstances of each case. In principle, the managing director has the authority to decide on legal acts related to the company’s ordinary course of business that do not have extensive effects. The Supreme Court noted that, on a case-by-case basis, consideration may be given to how the board of directors has, through its actions, determined the division of authority between itself and the managing director, and what practices have consequently developed within the company. In addition to the nature of the legal act and the significance of the related financial interest and business risk, consideration may be given to whether the legal act relates to decisions previously made within the company or constitutes an entirely new business decision.

In this case, the starting point for the Supreme Court’s assessment was the amount of the loan and the value of the security. The amount of the loan and the value of the security provided were significant in relation to the Company's turnover and assets, supporting the conclusion that these transactions were unusual and extensive.

However, when evaluating the managing director's authority, the Supreme Court took into account the overall arrangement to which the loan and the pledge related:

• The measures in question were connected to the Company's prior purchase of housing company shares and their subsequent sale and were therefore based on the Company's previous investment decisions.
• The funds borrowed were used to pay the remaining purchase price of the shares. Failure to pay the remaining amount could have had adverse material economic effects on the Company.
• Completion of the project required the loan and providing security.
• The financing was short-term and temporary in nature.
• The pledged shares were part of the Company's current assets and were already pledged for the bank's receivable in a financing arrangement related to the same construction project.
• The loan and pledge did not increase the Company's overall indebtedness or the amount of security it had provided.
• It was not established that there were any unusual features in the loan or security terms.
• It was undisputed that the arrangement, to which the loan and the pledge were connected to, complied with the provision on the Company’s field of business in the articles of association.
• Obtaining the loan aligned with the Company's business objectives.

In conclusion, the Supreme Court stated that, under these circumstances, the managing director’s actions were considered as practical measures necessary for the payment of the final purchase price of the share purchase and the resale of the shares.

Therefore, incurring the loan and providing security fell within the scope of the managing director’s authority, and the managing director did not need authorisation by the board of directors to take such acts. Because the said actions were within the scope of managing director’s authority, no further evaluation of the counterparty’s possible knowledge of the facts was necessary.

Conclusion

The limits of a managing director’s authority are often a matter of interpretation and require a case-by-case assessment. The Supreme Court's ruling provides some guidance for evaluating the limits of such authority. The decisive factor in this case was not the financial significance of the measures, but rather the overall business arrangement to which the measures were related.

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Notwithstanding the ruling KKO 2026:9, it is advisable to document any authorisation granted to the managing director to obtain loans and provide the necessary security in connection with the board's investment decisions, to avoid any potential ambiguities.

We are available to assist with documentation issues and other corporate law matters.

Link to the SupremeCourt's decision: KKO 2026:9 - SupremeCourt

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