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Constitutional hostile takeover?

Can the outgoing government’s “digging in” at state institutions be compared to the actions of a company’s management board abusing their powers, in their own interest, to keep the shareholders from transferring control of the company to a new investor? And if so, does the Polish Constitution ban such actions by holders of public authority, just as private law bans such actions by the management board (or anyone else acting in a fiduciary capacity)?

Fiduciary duties and the management of all organisations

Anyone who manages an organisation under the authority of its members or shareholders is obligated to exercise their powers in a manner consistent with the purpose for which they were granted those powers. This applies to the authorities of a housing cooperative or the management board of a company, as well as those running the state under the rule of law: the President, members of parliament, senators, and government ministers. Managers may have different visions of what is beneficial to the organisation, but they must carry out their vision and exercise their powers in good faith.

The duty to act loyally towards principals and not to abuse management powers becomes especially relevant when a change of control over the organisation is looming. The managers may oppose such change due of their own particular interests (a desire to preserve their positions or prevent disclosure of mismanagement) or due to the interests of allies among the members of the organisation. Then they may try to use their powers to hinder or obstruct the change of control. If they do so for such improper motives, even though following the legal forms, their actions constitute an abuse.

In such a situation, the court may grant protection to persons interested in carrying out changes in the organisation, declaring the obstacles created by dishonest management ineffective. A good example of how the law achieves this goal is cases involving hostile takeovers of companies.

Hostile takeovers and the ban on unfairly opposing them

A hostile takeover is a situation in which an investor—whether an outsider or an existing shareholder—attempts to take control of the company and make changes in the company with the support of the majority of shareholders, but against the wishes of the management board.

For various reasons, the management board may oppose takeover of control of the company. They may, for example, believe in good faith that acquisition of the company by a particular investor is not in the company’s long-term interest. Then the board members will talk to the shareholders and convince them of their own vision of development and not to sell shares to the investor or otherwise cooperate (e.g. not go along with a proposed merger). Alternatively, they may find another investor who is better in their opinion, conveying the proposed investor’s merits to the shareholders fairly and objectively, allowing both contestants to compete fairly and persuading the company’s owners to accept their preferred offer. Such actions by the management board raise no legal doubts.

However, expecting a takeover of control, the management board may also pursue its own particular interest (for example, seek to preserve positions and perks, or conceal their own mismanagement). The board may also pursue the interests of an affiliated group of shareholders who for various reasons may not like the transaction with the new investor (e.g. because they exercise effective control despite a relatively small stake, due to fragmentation and lack of interest in the company’s affairs among the rest of the shareholders). Then the board has a number of defence tactics at its disposal against a “hostile takeover.” It can amend the company’s internal policies (inserting various “poison pills”), or direct the company’s activity with the aim of making the acquisition impossible, difficult or unprofitable.

As a rule, such obstructive activities by the management board are legal in themselves. It is only from the context and circumstances that it becomes clear that they are being taken for the wrong reasons and for an illicit purpose—that in undertaking them, the managers are betraying their office and their fiduciary duties. To counter such abuses, the courts in countries with highly developed capital markets (particularly common-law jurisdictions) have developed a number of legal principles and doctrines. These include the principle of “non-interference,” originating from the principle of “proper purpose,” which has been developed in the case law and is addressed to all those who handle other people’s affairs on their behalf. It commands them to exercise any powers they are granted solely in the interests of the principals.

The proper purpose principle in the Polish Constitution

From the perspective of what is happening in Poland today (following the elections of October 2023 and formation of a new government by the former opposition), the question arises whether the same principles can be deduced from Polish law, above all from the Constitution, and whether they can be applied to the outgoing authorities. According to the new government, the old guard expected a “hostile takeover” (losing the elections) and “dug in” to their position in the state (abused their powers to make it difficult for the new majority to take control and manage the state, and thus secured their particular interests). Primarily, these allegations focus on the solutions introduced by the outgoing government in two areas critical to operation of the state: state media and the prosecution service.

The starting point for deliberations should be the observation that the previous rulers had the right, at least formally, to introduce the disputed solutions. They held a majority in parliament and enjoyed the favour of the President of Poland. Leaving aside the issue (an important one, but not for purposes of this discussion) that contrary to the Constitution, the National Media Council established by the prior government has marginalised the influence over public media of the constitutional media oversight body, the National Broadcasting Council, the legal solutions introduced by the previous parliamentary majority were technically legal. In particular, this applies to the arrangements pertaining to the prosecution service. For years, the legal literature has suggested the need for the head of the prosecution service to be independent of the government, and formally speaking, the solution introduced by the outgoing Law & Justice government achieved this objective.

But the new ruling coalition points to the specific circumstances under which these actions were taken, to show that the outgoing government undertook them in its own particular interests, misappropriating its duties to the state. It intended to install, and did install in these positions, persons actually guided by the interests of the outgoing political forces.

If this were shown to be the case, these measures by the previous government would have to be considered grossly abusive, and when called upon, the relevant courts should recognise specific appointments, for example, as unlawful and unprotected. Just as the actions of the management board of a company attempting, for improper motives and with an unworthy purpose, to prevent a corporate takeover, abusing its management powers accordingly, are considered unlawful and invalid in this respect, even when formally speaking they were within the limits of the board’s powers.

Admittedly, this would require evidence which might be hard to come by, potentially weighing the various motives that may have guided those in power. But the courts are established precisely to resolve difficult disputes, and for this reason are regarded as the third branch of government.

The duty to act for the “right purpose” can be easily derived from the general ban on abuse of the law, from the principle of the sovereignty of the people, and from the principle that the President, members of parliament, senators, and the government, although belonging to certain political parties, owe allegiance to the state and the general public and must always act exclusively in their interest.

Prying the former authorities out of their entrenched positions in the state by invoking this principle would require clear and convincing evidence of actual abuses by the outgoing government. But this would be safer than resorting to legal ploys and rationalisations which the next government could then also employ to further-reaching effect in the opposite direction.

Stanisław Drozd, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners