If members of the management board are not reappointed for another term, the company does not have a properly constituted representative body. This can affect the validity and effectiveness of actions taken for the company.
June is high season for annual shareholders’ meetings of limited-liability companies and joint-stock companies in Poland.
The agenda for the annual meeting should include reappointment of the corporate authorities for another term.
The Commercial Companies Code states that unless otherwise provided in the articles of association of a limited-liability company (sp. z o.o.) or the statute of a joint-stock company (SA), the appointment of a member of the management board (or supervisory board, respectively, although the rest of these comments will refer only to management board members) expires at the time the shareholders meeting is held to approve the financial report for the first full financial year the board member has held office.
Sometimes, due to appointment of management board members for multi-year terms of office, or when some members are appointed in the middle of the term of the other members, the shareholders neglect to reappoint them to the board.
Lack of statutory representative
The consequence—often not revealed until due diligence is conducted prior to a transaction in the company’s shares or assets—is a situation in which the company is left with no corporate body authorised to represent the company (or is left with a “rump” board made up of fewer members than required by law or the company charter).
This has far-reaching consequences, as by law a legal person acts through its authorities (Civil Code Art. 38), and in the case of a capital company primarily through its management board, which conducts the affairs of the company and represents the company (Commercial Companies Code Art. 201 §1 and 368 §1).
The lack of a representative body, including improper composition, deprives the company of the ability to conduct its affairs, which in the longer term may lead the register court to appoint a custodian for the company (Civil Code Art. 42 §1).
But the lack of a properly authorised body (the management board) has a much more harmful impact on the day-to-day operations of the company. As mentioned, it is fairly common for the shareholders to overlook their duty to reappoint the members of the management board for another term in office. The existing members may also not be aware that their appointment has lapsed. In the erroneous belief that they still hold office, they may enter into transactions for the company, incur obligations and so on. What are the consequences?
Ratification of prior acts
Under the regulations governing legal persons in general and capital companies more particularly, it may be accepted that in order for an action by a natural person (corporate officeholder) to be treated as an act of a legal person, the following conditions must all be met:
- The individual is acting expressly or implicitly as a member of the corporate authority of the legal person.
- The individual holds an appointment to serve as a member of the corporate authority of the legal person.
- The action lies within the competence assigned to the corporate authority by law or under the charter of the legal person (the company’s articles of association or statute).
Therefore, if any of these conditions is not met, a legal act made without authority (e.g. made by a management board member after his appointment has lapsed) should generally result in the invalidity of the act.
For a long time, the prevailing view in the case law was that this type of legal act by a “false body” should be regarded as absolutely void under Civil Code Art. 39 in connection with Art. 58.
In recent years, however, this view has softened somewhat following certain statements by the Supreme Court of Poland and commentators, permitting the regulations concerning actions by a supposed proxy (Civil Code Art. 103 and following) to be applied respectively to actions by a person acting as a corporate officeholder without authorisation. This involves the possibility of subsequent ratification of actions taken by the false body.
It should be borne in mind, however, that this solution is not absolute, for at least three reasons.
First, the position permitting ratification of actions cannot yet be regarded as a firmly established line of precedent, as witnessed by some recent statements by the Supreme Court returning to the earlier conception of absolute invalidity.
Second, under Civil Code Art. 104, the possibility of ratification of actions generally does not apply to unilateral legal acts made in the property of another without authority (such actions being absolutely void).
Third, the possibility of ratification of actions by a false body does not apply to actions which by law require not so much the act of a representative of the company as the act of the body itself. For example, under the Commercial Companies Code, certain declarations require for their validity the action of all members of the management board, which excludes the possibility that they could be made by a proxy, and this in turn would appear to exclude ratification of the act via Civil Code Art. 103. This has to do more specifically with submission of a declaration on making all contributions to cover the share capital (Commercial Companies Code Art. 167 §1(2) and 320 §1(3)), drawing up the list of shareholders of a limited-liability company (Art. 167 §2), and appointment of a commercial proxy (Art. 208 §6 and 371 §4).
Retroactive resolutions
Acceptance of the permissibility of ratification of actions by a false body under Civil Code Art. 103 in no event means retroactive recognition of the person or persons performing such actions as officeholders of the corporate body.
So, returning to the question posed in the title whether management board members may be appointed retroactively, the response must plainly be critical.
The practice that is sometimes encountered of making changes to shareholders’ resolutions after the fact—adding items appointing the management board members to a further term (e.g. adopting a resolution in 2014 amending a resolution adopted in 2013)—must be regarded as particularly harmful. The notion that the management board may be appointed for a retroactive period is unacceptable under the principle of terms of office set forth in the code as well as the regulations providing for lapse of the appointment at the end of the term of office.
Permitting this type of practice would also violate the principle of certainty in commerce by allowing the membership of the management board of a company to be manipulated practically at whim, creating problems in determining which persons clearly held an appointment to perform a legal act as a member of a corporate authority at the time the act was made.
Maciej Szewczyk, Mergers & Acquisitions Practice, Wardyński & Partners
See also J. Grykiel, M. Szewczyk & I. Zielińska-Barłożek, “Manner of Representation of Parties in Concluding Contracts,” in P. Ciećwierz & I. Zielińska-Barłożek (eds.), Legal Risks in M&A Transactions (Warsaw 2013), pp. 476 and following.
