Is the shareholders’ wish the management board’s command? | In Principle

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Is the shareholders’ wish the management board’s command?

A few remarks on the limits of the management board’s decision-making autonomy from the shareholders

While companies have legal personality, it is understandable that they don’t have the characteristics of individuals. First, obviously, legal persons exist only to the extent permitted by law, and second, companies are established and operated at the initiative of other persons and to serve their interests. So in this sense they are not standalone, autonomous creatures.

And lacking the properties of natural persons, companies do not act on their own, but managers specially appointed for this purpose act “for” them. They play the role of the company’s authorities, and their actions in certain situations constitute actions of the company.

Finally, although companies are ascribed legal personality and formally constitute entities separate from their owners (shareholders), nonetheless their actions are intended to further the goals set for them by their owners.

But it sometimes happens in practice that an action by a company is disadvantageous for the company itself, but also advantageous for the company’s shareholders, or vice versa.

This article does not attempt to address the whole complex issue of the relations between the interests of the company and the interests of its owners. It should be pointed out, however, that these relations, regarded in jurisprudence as an element of the law of holding companies, have not been regulated yet in a systematic way in Polish law.

Thus the question raised in the title: whether, and if so when and to what extent, the management board of a company should consider the interests of the company’s shareholders. This is a question about the boundaries within which the owners of a company can effectively instruct the company’s managers to take or not take certain actions.

When purposes conflict

When forming a limited-liability company (sp. z o.o.) or a joint-stock company (SA) in Poland, the shareholders define its purposes and equip it with the tools for pursuing these purposes (including property), and to the extent permitted by the Commercial Companies Code they can also establish the corporate governance rules for the company. Corporate governance includes the mutual relations between the authorities of the company, their rights and obligations.

While the company is operating, the owners can also modify these elements to suit the evolving economic conditions and goals. But sometimes such intervention in the company provides insufficient, particularly when there is discord between how the management board sees the direction of the company and how the shareholders see it.

In such cases, the question obviously arises whether the shareholders can in some way force the management board to comply with their expectations. Clearly, the shareholders generally can replace the members of the management board at any time if the discrepancy between the management board’s policy and the owners’ expectations is unacceptable to the owners. But such a radical solution may not guarantee success because it is not certain that the new management board members will be sufficiently deferential to the shareholders.

Thus other solutions should be considered which might legally oblige the management board to act or not act in a certain manner.

A question of liability

Assuming for the moment the permissibility of this type of intervention by the shareholders in the sphere of the management board’s competence, it should be pointed out that the function of the management of a company is inextricably linked with the issue of liability for actions taken by the management board as well as omissions (when an action was supposed to be taken but was not taken). The Commercial Companies Code provides that the members of the management board of a limited-liability company or joint-stock company are liable to the company for injury caused to the company by an act or omission contrary to law or the company’s articles of association (or statute), unless they are not at fault in the given instance (Art. 293 §1 and 483 §1). The members of the management board of a limited-liability company may in some instances be jointly and severally liable with the company to third parties (creditors of the company), particularly where execution against the company proves ineffective (Art. 299 §1). Finally, members of the management board of either type of company may be liable for injury (to the company or third parties) under general rules (Art. 300 and 490).

On the other hand, the shareholders of a limited-liability company (with certain exceptions not generally relevant to this discussion) or a joint-stock company do not bear any comparable liability, even if they exert actual influence over the activity of the company.

This means that blind obedience to instructions of the shareholders does not exclude liability of the management to the company (if the company suffers a loss due to actions by the management board) or third parties.

Who can issue instructions to the management board?

In seeking to direct these abstract considerations along the tracks laid down by the Commercial Companies Code, it should be pointed out that the drafters of the code provided for a dual set of limitations on the shareholders’ exertion of influence over the management board.

First, the supervisory board is expressly precluded from issuing binding instructions to the management board (Art. 219 §2 and 3751). This is thus a limitation on the influence the owners can exert on management via their representatives in an authority designed in the code to fulfil only a supervisory function (generally overseeing the activity of the management board and reporting to the owners on the situation in the company).

Second, exclusively in the case of a joint-stock company, the code prohibits issuance of binding instructions by the general meeting of shareholders (Art. 3751).

There is no such express prohibition in the regulations governing limited-liability companies. In the justification for the bill amending the Commercial Companies Code to add Art. 3751, this was explained by the fact that in practice, the affairs of the company are often managed de facto by shareholders not formally appointed to the management board. Thus, according to the proponents of that amendment (in this case the Council of Ministers), introduction of a comparable regulation in the case of limited-liability companies would threaten to drive “underground” the practice of the shareholders’ issuing instructions to the management board, “eliminating any trace of the shareholders’ impact on the company.”

The dualism in the regulations governing issuance of instructions to the management board gives rise to issues in respect of the code rules for liability of board members. While it is clear that a management board member acting in accordance with an instruction from the shareholders cannot use this as a shield to protect against liability to third parties under Art. 299 of the code, it seems at least that the board member’s liability within the company (Art. 293 §1) would be greatly limited. Thus, if a management board member causes a loss to the company by acting in compliance with a resolution of the shareholders, and the action was not contrary to law or the articles of association, then it should not be grounds for holding the board member liable to the company.

Of course, if a management board member does not agree to carry out instructions issued by the shareholders, the board member can resign at any time.

One rule for SA, another for sp. z o.o.

It seems correct to assume that an action by an administrator of an asset (which in this case is the company) only in the interest of the asset (the company), contrary to the wishes of the shareholder who owns the asset, is essentially pointless. This division of the ownership sphere from the decision-making sphere is thoroughly justified, however, under the organisational conditions of a joint-stock company, which by design is intended to support the operation of a business on a larger scale and to raise funds for growth by issuing shares. It is specifically the issuance of shares that often causes the ownership structure of this type of company to become highly fragmented. The shareholders of a joint-stock company are generally not directly involving in the business conducted by the company, limiting their role to passive investors hiring professionals to conduct the company’s affairs and only periodically evaluating their work.

The case is different in limited-liability companies, where the shareholders’ involvement in the company’s affairs is the rule more than the exception. The lack of a counterpart for Commercial Companies Code Art. 3751 in the case of a limited-liability company can thus be explained as yet another personal element in this type of company (along with the right of personal inspection, liability for undue payments received from the company, and so on), which distinguishes it from the model for a capital-raising company represented in Polish law by the joint-stock company.

Maciej Szewczyk, M&A and Corporate Practice, Wardyński & Partners