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Liability for binding instructions in the proposed holding law

It will probably be only months before legislation on corporate groups, also known as the holding law, enters into force in Poland. The proposal is considered to be the most sweeping change in the Commercial Companies Code in the last two decades.

The changes are to regulate the cooperation between parent companies and subsidiaries. Pursuant to the planned regulations, a parent company will be capable to issue binding instructions to a subsidiary if that is justified by the interests of the corporate group, and is not prohibited by law. However, the authority of a parent company is to be balanced by provisions protecting the interests of the subsidiary itself, its creditors, members of its corporate bodies, and minority shareholders.

To be valid, an instruction from a parent company would have to be in written or electronic form, and indicate at least the following four components: the expected conduct of the subsidiary, the interest of the corporate group justifying compliance with the instruction, the expected benefit or detriment to the subsidiary, and the method and time for compensating the subsidiary for loss suffered as a result of complying with the instruction.

As the decision-making is to be shifted to a parent company, members of the subsidiary’s management board are not to be liable for loss caused to the company by complying with the instruction. To maintain equilibrium, the proposal provides that a parent company is to be liable for the consequences of a subsidiary implementing instructions.

A parent company that is at fault is to be liable to a subsidiary for any losses caused by implementation of an instruction and not remedied within the time specified in that instruction. However, liability to a wholly owned subsidiary is only to occur when the subsidiary becomes insolvent, or is threatened with insolvency. If a subsidiary does not sue for damages within one year after the time for compensating the subsidiary that is specified in an instruction, that right is to pass to the shareholders of the subsidiary.

A parent company is also to be liable to the minority shareholders of the subsidiary for a reduction in value of the subsidiary’s shares that is caused by implementing an instruction.

The proposal does not adopt the doctrine of “piercing the corporate veil”, and a parent company is not be a guarantor to the creditors of a subsidiary, but instead a parent company is to be liable to compensate creditors when enforcement against a subsidiary is ineffective, and the creditors suffer loss as a result of the subsidiary implementing an instruction in circumstances for which the parent company is at fault.

Currently in Poland there are more than four hundred thousand companies  and even though it remains to be seen how the legislative process unfolds, it is safe to assume that many companies expect major changes after the proposal comes into force.

Aleksandra Drożdż, lawyer, M&A Practice, Wardyński & Partners

The content of this article is a part of Episode 11 of the programme News from Poland – Business & Law. You can watch the episode here >>>