An act amending the Commercial Companies Code was published in the Journal of Laws on 12 April 2022. It establishes the rules for operation of capital groups in Poland and modifies certain rules for operation of corporate authorities. The act will enter into force six months after publication.
The need for special regulation of corporate groups
The amendment to the Commercial Companies Code, sometimes called the “Holding Law,” is designed to regulate systemically the operation of corporate groups, which until now has been subject only to general legal provisions.
The lack of a specific statutory regulation has made it difficult for a subsidiary to follow the interests of a corporate group when managing the affairs of the subsidiary, if the subsidiary’s interests diverge from the interests of the group or the parent company. The existing regulations require a company’s governing bodies to act in the best interests of the company, and provide no direct basis to take into account the corporate group’s interests when conducting the subsidiary’s affairs. This situation has been partially offset by the case law of the civil courts, holding that the interests of a corporate group are part of the broadly defined interests of a company that is a member of the group.
The current provisions of the Commercial Companies Code give the parent company only limited and conditional access to information on the affairs of the subsidiary. At the same time, there are no provisions on how to resolve conflicts in the competences of the bodies of individual companies operating within a capital group. Nor do the current regulations contain any separate rules on the parent company’s liability for injury suffered by the subsidiary and its creditors, apart from Art. 7 of the Commercial Companies Code, which is a dead letter. That provision speaks of the obligation to notify the registry court of the rules of liability set forth in an agreement on management of the subsidiary, but due to legislative errors in its wording, it cannot be properly applied. As a result, protection of the interests of creditors and shareholders of the subsidiary (including minority shareholders) has been incomplete.
The amendment is intended to allow the parent company and subsidiaries to follow a common business strategy to further the interests of the corporate group. It will also enable the parent company to exercise uniform management over subsidiaries. These objectives are to be served by a new institution in the Polish legal system, known as “binding instructions” issued by a parent company regarding the conduct of the subsidiary’s affairs. Members of the subsidiary’s corporate bodies will not be liable for injury to the company caused by carrying out binding instructions. The amendment also covers specific rules for a parent company’s liability for injury caused by the parent company to the subsidiary, and to creditors and shareholders of the subsidiary.
New rules for operation of corporate groups
The amendment provides that shareholders of a subsidiary will be able to adopt a resolution on affiliation of a subsidiary to a corporate group by a qualified majority of ¾ of votes. From the adoption of the resolution and disclosure of the dominance relationship in the commercial register, the parent company will be able to issue binding instructions to the subsidiary regarding the conduct of the subsidiary’s affairs. Also, from that moment on, the management board of a subsidiary will be able to follow the interests of the capital group when managing the subsidiary’s affairs, as long as this does not aim to harm the subsidiary’s creditors or shareholders (including minority shareholders). Significantly, Art. 4 §1(51) provides that only companies (spółki kapitałowe) will be able to form corporate groups within the meaning of the amended code, as parent companies and subsidiaries. Consequently, these provisions will not apply to corporate groups controlled by partnerships (spółki osobowe), which is the most common situation in structures created by private-equity funds.
To be valid, binding instructions will have to be issued in either written or electronic form (requiring use of a qualified electronic signature). A subsidiary will be able to refuse to carry out an instruction only if execution of the instruction could lead to its insolvency or a threat of insolvency. Subsidiaries that are not wholly owned by the parent can also refuse to execute a binding instruction if they reasonably fear that the instruction is contrary to the subsidiary’s interests and could cause the subsidiary harm that could not be remedied within two years.
The amendment provides that the parent company will be able, unconditionally, to obtain full information on the subsidiary’s affairs and have unrestricted access to its books. Therefore, the rights of the parent company will be broader than those of other shareholders, whose access to information about the company will remain on the existing basis, in many cases will be limited, and will depend on a determination that disclosure of the information to the shareholder will not injury the company.
The management board of a subsidiary participating in a corporate group will be required to prepare a report on the contractual relationships with the parent company, including binding instructions issued to the subsidiary.
Remedy for injury caused by binding instructions
The amendment contains special rules for the parent company’s liability for injury caused to the subsidiary, its creditors and shareholders when issuing binding instructions. This liability will exist concurrently with liability for damages under general principles.
Under the new provisions, a parent company will be liable based on fault for injury caused by issuing a binding instruction to a subsidiary. In this respect, the amendment imposes an obligation on the parent company to act with loyalty to the subsidiary in connection with issuance and execution of a binding instruction. It is to be presumed that this duty will set the standard of the parent company’s nonculpable conduct in determining liability on its part for injury caused by issuance of the instruction. The principle of loyalty is left undefined, and its normative meaning will have to be worked out in the course of applying the law.
It seems that the parliament’s intention is to create grounds for liability of the parent company to minority shareholders of a subsidiary for indirect injury manifested by a decrease in value of shares held by them in the subsidiary, if the injury results from issuance of a binding instruction to the subsidiary. Under the amendment, a minority shareholder will have to prove the occurrence of a loss on its part and a connection between the loss and the binding instruction issued to the subsidiary. Liability of the parent company for indirect losses of a minority shareholder of the subsidiary provides a statutory basis for this type of liability, which in some instances has been found in court decisions in the form of a duty to redress injury based on general provisions of law.
If enforcement against a subsidiary proves ineffective, a creditor of the subsidiary will be able to seek payment of the debt from the parent company unless the parent company proves that it is not at fault or that the injury did not arise from the subsidiary’s execution of a binding instruction. As a result, the new provisions, using legal presumptions, will allow a parent company to be held liable for the unsatisfied debts of a subsidiary solely on the basis of evidence resting with the creditor that the subsidiary was at the relevant time carrying out binding instructions and was unable to satisfy its obligations. This evidence would not be difficult to admit, as the relevant circumstances would be subject to disclosure by the companies involved in the group. It should be expected that the situation of parent companies with respect to their liability to creditors of the subsidiary will be substantially the same as the situation of the members of the subsidiary’s management board with respect to unsatisfied liabilities of the subsidiary.
Strengthening the protection of minority shareholders; rights of the parent company
Minority shareholders representing at least 10% of the share capital of the subsidiary will be able to demand that the registry court appoint an auditor to examine the accounts and operations of the corporate group.
Also, once per financial year, minority shareholders representing at least 10% of the share capital of the subsidiary will be able to request inclusion in the agenda of the next shareholders’ meeting or general meeting of a resolution on compulsory buyout of their shares by the parent company. This solution is intended to provide an exit option for shareholders whose rights may be marginalised in practice. The amendment also provides the parent company a right to squeeze out shareholders representing no more than 10% of the shares of a subsidiary. The company’s articles of association can raise this threshold to no more than 25% of the shares.
Consequently, via the provisions on corporate groups amending the Commercial Companies Code, the possibility of compulsory buyout (squeezeout) of minority shareholders of a limited-liability company will be introduced into the Polish legal system for the first time. With respect to both limited-liability companies and joint-stock companies, the provisions on corporate groups will substantially liberalise the threshold of the maximum number of squeezed-out shares of a subsidiary (the current threshold is 5% under the general provisions concerning joint-stock companies). We examine these issues in more depth in the article “Squeezeout and demanding buyout under the new Holding Law.”
The amendment will not allow public companies, or other companies subject to oversight by the Polish Financial Supervision Authority, to participate in a corporate group as subsidiaries. This is intended to protect equal access of shareholders to information about the company and ensure the confidentiality of information subject to special protection. However, these companies will be able to form capital groups as parent companies.
The principle of formalism
The amendment to the Commercial Companies Code systemically regulates the conflict between the interests of a company and the interests of its corporate group. Such discrepancies are common, and the current provisions do not contain rules for resolving these conflicts.
The modification of the rules of liability imposed on members of the corporate bodies by codifying in the Commercial Companies Code the body of judicial decisions regarding acting within the scope of reasonable business judgment as a condition excluding the unlawfulness of causing injury to the company by members of the corporate bodies while performing their functions should be assessed positively. The same applies to the part of the new provisions related to strengthening the position of supervisory boards in companies and vesting supervisory boards of parent companies with the power to oversee the pursuit of group interests by subsidiaries. We explore these issues more extensively in the article “The business judgment rule.”
But the rationale for imposing criminal sanctions for failure to provide the supervisory board with information or documents requested by the supervisory board in a timely manner is questionable. Moreover, a literal interpretation of the amendment requires that all the proposed provisions be applied only to those corporate groups where a shareholders’ resolution on participation in a group has been adopted and formation of the group has been disclosed in the commercial register. Only in such groups will it be possible to issue binding instructions to the subsidiary, and the amendment links the issuance of binding instructions to the regime of special liability of the parent company to the subsidiary, its creditors and shareholders.
Making application of the special rules on liability of the parent company conditional on acts under the exclusive control of the parent company should be considered erroneous. If the wording of the amendment is not corrected through systemic interpretation, it should be anticipated that the vast majority of capital groups will refrain from formalising relationships within groups, to limit the parent company’s liability to creditors and shareholders of subsidiaries. As a result, while largely useful, the new provisions may not be applied in practice.
Izabela Zielińska-Barłożek, attorney-at-law, Krzysztof Libiszewski, attorney-at-law, M&A and Corporate practice, Wardyński & Partners