Until now, corporate officers have had to act solely in the best interests of their own company, which has made the operation of corporate groups difficult. As of October 2022, it will be possible to issue binding instructions to subsidiaries affiliated with formalised corporate groups. What must such an instruction contain, can the execution of such an instruction be refused, and what if the company suffers a loss as a result of execution of binding instructions?
Under the current provisions of the Polish Commercial Companies Code, persons charged with conducting a company’s affairs must act in the best interests of the company, and cannot be swayed from this duty by instructions from third parties. In companies, a clear ban exists on a supervisory board issuing binding instructions to the company’s management board, and with respect to joint-stock companies, also a ban on issuing binding instructions by the general meeting of shareholders (Art. 219 §2, 30069 §2 and 3751). Although not directly stated in the code (and the issue is by no means unequivocal), many commentators believe that this ban extends to other types of companies as well.
Persons exercising the duty to conduct the affairs of the company should act only with the best interests of the company in mind, disregarding the interests of others. Consequently, liability for breach of the duty to conduct the company’s affairs in the company’s best interests will not be excused by the fact that the body acted in compliance with instructions it has received. Moreover, current law precludes the conduct of a subsidiary’s affairs based on decisions of members of the parent company’s governing bodies. Thus it may often happen now that the same persons are appointed to the boards of different companies within a corporate group, so that uniform composition of the corporate bodies will enable consistent decision-making within the entire group.
The amendment to the Commercial Companies Code introducing the “Holding Law” will significantly change this state of affairs.
Issuing binding instructions
A parent company and a subsidiary participating in a corporate group will be allowed to take into account the interest of the group in the conduct of the company’s affairs, as long as this does not cause detriment to the subsidiary’s creditors or minority shareholders. Additionally, the amendment will allow corporate groups to follow a common strategy in order to pursue a common interest based on the exercise by the parent company of uniform management over the company and subsidiaries forming part of the group. For this purpose, the new law adopts the instrument of issuing binding instructions by the parent company to the subsidiary.
Issuance of a binding instruction will require either written or electronic form (using a qualified electronic signature), in each case under pain of nullity.
A binding instruction will need to indicate:
- The conduct expected by the parent company in connection with execution of the binding instruction
- The interest of the corporate group justifying the subsidiary’s compliance with the binding instruction
- The expected benefit or injury to the subsidiary resulting from execution of the binding instruction.
If execution of a binding instruction is expected to cause injury to the subsidiary, the binding instruction should indicate the expected method and timing of compensation for the injury to the subsidiary.
Execution of a binding instruction by a subsidiary participating in a corporate group will require a prior resolution of the subsidiary’s management board.
Refusal to execute a binding instruction
Issuance of a binding instruction will be a specific legal act shaping the legal relations arising from formation and operation of a company that is part of a corporate group. Within the legal relationship arising from serving on the management board, and within the framework of agreements governing the rules for performing this function, members of the subsidiary’s management board will be obliged to execute a binding instruction after the subsidiary’s management board adopts a resolution to this effect. However, if there are grounds for refusing to carry out a binding instruction, it will be the duty of the subsidiary’s management board to refuse to carry out the instruction based on a resolution of the management board. Breach of the duties of members of the company’s bodies related to obtaining a binding instruction by the company could be valid grounds for dismissal of the given person from the corporate body or termination of employment or cooperation for reasons not attributable to the company.
The members of the management board of a subsidiary participating in a corporate group will be obliged to pass a resolution refusing to carry out a binding instruction if carrying out the instruction would lead to the subsidiary’s insolvency or a threat of insolvency. In the case of a subsidiary participating in a corporate group which is not a wholly-owned subsidiary, a resolution refusing to carry out a binding instruction should also be adopted when there is a reasonable fear that the instruction will be contrary to the interests of the subsidiary and cause it injury that will not be remedied by the parent company or another subsidiary participating in the corporate group within two years after occurrence of the event causing the injury. However, when determining the amount of the injury, the subsidiary should also take into account the benefit derived by it from its participation in the corporate group during the last two financial years.
The amended provisions of the Commercial Companies Code are intended to enable cooperation between companies in situations that typically give rise to a divergence of interests within corporate groups. In particular, this applies to use of uniform purchasing or sales processes involving a number of companies, obtaining external financing on the basis of security of the financing party’s rights against the assets of the entire group, intra-group financing, conducting joint research and development, and other such scenarios.
Liability for injury caused to the company
Pursuant to the newly enacted Art. 215 of the Commercial Companies Code, a member of the management board, supervisory board or audit committee, or a liquidator, of a subsidiary will not be liable under the general provisions on the liability of members of corporate bodies for causing injury to the company in connection with execution of a binding instruction. Although not expressly stated in the amended provisions, it should be assumed that the members of the subsidiary’s bodies will only be able to invoke this provision if they comply with their obligations as to their conduct with respect to the binding instruction they have received.
It should be noted that the exclusion of liability on the part of members of the subsidiary’s bodies for injury resulting from execution of a binding instruction will not affect the substance of the legal relationship existing between the subsidiary itself and the parent company. Pursuant to Art. 2112 §1 of the amended code, the parent company will be liable to the subsidiary for injury caused by execution of a binding instruction, if the injury is not repaired within the period indicated in the binding instruction. If the injury is caused to a wholly-owned subsidiary, the parent company will only be liable if execution of the binding instruction led to the subsidiary’s insolvency.
The parent company’s liability for a subsidiary’s injury resulting from execution of a binding instruction has been construed as a form of tort liability, based on fault. In accordance to Art. 2112 §1, fault as a basis for liability will be determined taking into account the duty of the parent company’s bodies to act loyally towards the subsidiary in issuance and execution of binding instructions. The amended provisions introduce into Polish corporate law an explicit standard for acting on the basis of loyalty within corporate groups. It appears that any actions that do not provide the subsidiary with full access to information on the circumstances related to issuance and execution of a binding instruction would violate this standard. Illusory assurance of fulfilment of the duty to redress the financial injury that may result to the subsidiary in connection with execution of a binding instruction would also be a breach of the duty. These cases are just the most typical situations.
Finally, it is worth mentioning that binding instructions may be issued only with respect to companies that are part of formalised corporate groups, and only after the group membership is disclosed in the appropriate registers, as we discuss in more depth in the article “New law on corporate groups enters into force in October 2022.”
Krzysztof Libiszewski, attorney-at-law, Maciej A. Szewczyk, attorney-at-law, M&A and Corporate practice, Wardyński & Partners