On 2 September 2021, a government bill to amend the Commercial Companies Code and other acts was submitted to the Sejm for a first reading. Among other things, the bill would introduce new principles into the Polish legal system in the form of a holding companies law, regulating the cooperation between parent companies and their subsidiaries. The rules for liability of management board and supervisory board members are also to be amended, vesting broader powers in supervisory boards to make corporate governance more effective.
The bill would add a new Section IV to Chapter I of the Commercial Companies Code. It contains a number of provisions strengthening and regulating the role of parent companies in corporate groups and safeguarding the interests of the corporate group in connection with execution by a subsidiary of binding instructions issued by the parent. This protection would extend to members of the management board of such a company, its shareholders and creditors.
The proposal can be divided into:
- Provisions facilitating the management of a corporate group by the parent company in connection with implementation of a common economic strategy for the group
- Provisions ensuring the protection of certain interest groups in the case of a corporate group—primarily subsidiaries, creditors of subsidiaries, shareholders of subsidiaries, and members of the corporate bodies of subsidiaries and the parent company.
The conceptual framework of the amendment is a “corporate group,” defined as “a parent company and its subsidiary or subsidiaries, guided by a common economic strategy to pursue a common interest, justifying exercise by the parent company of uniform management over its subsidiary or subsidiaries.” Both participation in a corporate group, and designation of the parent company, would require adoption of a resolution by the shareholders of the subsidiary. This would then be disclosed in the commercial register. In the case of parent companies registered outside of Poland, it would be sufficient to disclose this information in the register of the subsidiary.
The bill provides for a qualified relationship of dominance and dependence, consisting in being guided by a common economic strategy enabling the parent company to exercise unified management over the subsidiaries. This would have the effect of identifying the “interest of companies” as a new legal category.
The current definition of a parent company in the Commercial Companies Code would change. A parent company would be defined as a commercial company (or partnership) exercising a decisive influence over the activity of a subsidiary company or cooperative, in particular by means of an agreement between the parent and the subsidiary providing for management of the subsidiary or distribution of profits by the subsidiary.
Parent companies would be entitled to issue binding instructions to their subsidiaries regarding the conduct of the subsidiary’s affairs, provided that they promote the interests of the corporate group and do not violate specific provisions of law. The bill stipulates that binding instructions would have to be given in written or electronic form, and indicate at a minimum:
- The conduct expected by the parent company of the subsidiary in connection with execution of the binding instruction
- The interest of the corporate group justifying the subsidiary’s compliance with the instructions of the parent company
- The expected benefit or detriment to the subsidiary resulting from compliance with the instructions of the parent company, if any
- The method and timeframe for compensating the subsidiary for detriment suffered as a result of complying with the instructions of the parent company.
Execution of a binding instruction would require a resolution of the management board of the subsidiary, and notification of the parent company of execution of the instruction or adoption of a resolution refusing to execute it (e.g. if it would lead to the subsidiary’s insolvency).
Liability of management board members and supervisory board members
Under the proposal, the liability of management board and supervisory board members is to be based on a form of the business judgement rule. This is intended to exclude liability for injury to the company caused by decisions of corporate bodies that turn out to be unsuccessful, provided that they were taken within the bounds of reasonable business risk on the basis of information adequate to the circumstances.
Under this principle, each member of the management board, supervisory board or audit committee should exercise due diligence reflecting the professional nature of their duties, and should remain loyal to the company. Members should not be in breach of their duty if, in a manner loyal to the company, they act within the limits of reasonable economic risk, including on the basis of information, analysis and opinions which in the given circumstances should be taken into account in making a careful assessment.
Introduction of the business judgement rule is intended to avoid evaluating the actions of corporate bodies with hindsight, after seeing the results. Only the correctness of the method by which a decision was taken is to be assessed, as of the time when the decision was taken and in the circumstances surrounding it. This way, members of corporate bodies who have diligently and loyally performed their duties and decided to take risks for the company will be protected if it turns out ex post that the decision was incorrect and led to injury to the company. Reckless actions would continue to be sanctioned.
With respect to binding instructions, a member of the management board, supervisory board or audit committee, as well as a commercial proxy or liquidator of a group company, could invoke an act or omission in the specific interest of the group, provided that the company in question disclosed its participation in the group. These persons would not be liable for the damage caused by execution of binding instructions on the basis of Art. 293, 300125 or 483 of the Commercial Companies Code.
Currently, formal violation of a specific legal norm determines whether a member of a corporate body is held liable. But this rule began to evolve with the case law of the Supreme Court of Poland (e.g. judgment of 24 July 2014, case no. II CSK 627/13), by virtue of which members of corporate bodies were held liable also in cases where they failed to exercise due care reflecting the professional nature of their activities.
Increasing the effectiveness of supervisory boards
The explanatory memorandum to the bill points out that under the Commercial Companies Code, the supervisory board does not now have a single statutory task correlated with a specific area of company activity.
The amendment provides for more specific activities of supervisory boards, which would consist of the following duties:
- Assessment of the management board’s business report and the financial statement for the previous financial year for conformity with the books and records and the actual state of affairs (and in the case of a simple stock company, also their correctness and reliability)
- Assessment of proposals of the management board for distribution of profit or coverage of loss
- Preparation and submission to the shareholders of an annual report on the results of the foregoing evaluation and a report on the activities of the supervisory board for the preceding financial year (supervisory board report).
To perform its duties, the supervisory board could examine all documents of the company, review the company’s assets, and request the management board, commercial proxies, employees or persons performing certain activities for the company on a regular basis pursuant to a civil contract, to prepare or submit any information, documents, reports or explanations regarding the company, in particular regarding its operations or assets. The request could also cover information, reports or explanations held by the addressee regarding subsidiaries and related companies.
Such information, documents, reports or explanations would have to be provided to the supervisory board without delay, but no later than two weeks after the request, unless a longer period were specified in the request. The management board could not prevent the supervisory board from accessing such information, documents, reports or explanations.
Additionally, the supervisory boards in limited-liability companies and joint-stock companies would be given the right to establish ad hoc or standing committees of the supervisory board, consisting of members of the supervisory board, to perform specific supervisory activities. Supervisory boards in joint-stock companies could also delegate members to perform certain supervisory activities on their own.
Possibility of compulsory buyout
The bill provides for the possibility for a parent company to require the subsidiary to buy out minority shareholders if the parent directly holds at least 90% of the share capital of the subsidiary (squeeze-out). The new provisions would also apply to limited-liability companies. Currently, a squeeze-out is possible only with respect to joint-stock companies, and only by a maximum of five shareholders together holding at least 95% of the shares (or 90% in the case of public companies).
A compulsory buyout would be carried out at a price determined by an appraiser appointed by the shareholders’ meeting, except when it involved shares in public companies listed on a regulated market. In such case, the shares would be bought out based on the trading price on the regulated market (the average price for the last three months prior to the buyout resolution).
The articles of association of a subsidiary could confer such an entitlement on a parent company directly or indirectly representing less than 90% of the share capital in a subsidiary participating in a corporate group, but not less than 75%.
Daria Goliszewska, Jakub Gerula, M&A and Corporate practice, Wardyński & Partners