Two parties, one representative: Applying Art. 108 of the Civil Code to corporate representatives
In business practice, it is common for contracts to be entered into by companies in the same corporate group. And sometimes the same person sits on the management board of both companies. Can the same person represent both companies in the transaction—and in a sense enter into a contract with themselves?
Under Art. 108 of Poland’s Civil Code, an attorney-in-fact may not represent both parties to a single transaction, i.e. he or she may not perform an act with himself or herself, unless the wording of the power of attorney indicates otherwise, or the nature of the legal act excludes the possibility of violating the principal’s interest.
Pursuant to the established line of decisions by the courts, including the Supreme Court of Poland judgment of 24 April 2018 (case no. CSK V 425/17), Civil Code Art. 108 applies by analogy to members of corporate bodies. In the court’s view, application of Art. 108 to companies is supported by the possibility of a conflict of interest between the two companies represented by the signatory.
This means that members of the management board representing companies cannot represent both parties to a transaction unless the conditions of Art. 108 are met.
But what to do if two companies belonging to the same group have only one and the same board member, but want to enter into an intercompany agreement (e.g. a corporate guarantee, an intercompany loan, or a contract transferring the enterprise or shareholder entitlements)?
Applying Art. 108 by analogy to corporate representatives
Civil Code Art. 108 states that an attorney-in-fact may not be the other party to a transaction executed on behalf of the principal, unless:
- The wording of the power of attorney indicates otherwise, or
- The nature of the transaction excludes the possibility of violating the interests of the principal.
Art. 108 applies respectively when both parties performing the act are represented by an attorney-in-fact.
Due to analogous application of this provision to representatives of corporate bodies, it should be recognised that a member of a corporate body cannot represent both parties to a transaction unless:
- The company’s articles of association provide otherwise, or
- The nature of the transaction excludes the possibility of violating the interests of the principal.
Therefore, one solution is to include a provision in the articles of association authorising representatives of the company’s bodies to perform acts for the company when the other party is represented by the same person. Then Civil Code Art. 108 will not be violated.
The second solution is to ensure that the interests of both companies entering into the transaction are not violated when represented by the same person. But it can be problematic to demonstrate that there is no infringement of either company’s interest.
First, under the specific facts, it is necessary to consider whether the company’s interests are at risk at all. In other words, it should be examined whether performance of an act by two companies represented by the same person creates a risk of a conflict of interest arising for either of the companies involved.
Defining conflicts of interest
To establish a violation of the company’s interest, we must first consider the definition of such an interest. Currently, the prevailing view in the legal literature and the case law is that the company’s interest is driven by the interests of the shareholders. In short, the company’s interest will align with the objectives of the majority shareholder or shareholders.
It should also be remembered that all companies have a certain degree of distinctiveness. In some capital structures, there can be a noticeable disconnect between the interests of the company and the interests of its shareholders.
Therefore, when determining the company’s interest, not only the shareholders’ interest is taken into account, but also the objectives of the company itself, which will not always coincide.
Under the Supreme Court judgment of 5 November 2009 (case no. I CSK 158/09), the company’s interest corresponds to the interests of all its shareholder groups, taking into account the common purpose set forth in the company’s articles of association.
It follows that the least risk of a conflict of interest arising will be in a situation when two transacting companies represented by the same person belong to the same corporate group and, indeed, have the same sole shareholder. Despite being separate entities, each with its own autonomy, two such wholly-owned companies are ultimately incorporated by the same entity (the sole shareholder), and that entity is vested with the shareholders’ rights in both companies. In such case, the risk of harming the companies’ interests seems small.
But this risk should not be trivialised. To sufficiently safeguard the company’s interests, we cannot ignore even a small chance of occurrence of a conflict, or proof that a risk does exist, even if the risk is very low. For this reason, it is worth considering measures that can be taken to completely eliminate the risk of violating Civil Code Art. 108 (these are discussed together in the last section of this article).
Consequence of violating the provision
The prevailing view is that performance of an act in violation of Civil Code Art. 108 results in the sanction of “suspended ineffectiveness.” This means that for such an act to have effect, it must be ratified by a properly appointed representative-in-fact. With regard to company representatives, this means that the act needs to be ratified by another person authorised to represent the company in accordance with the company’s rules of representation.
But a minority view is also expressed in the legal literature and the case law that a violation of this provision results in the sanction of absolute ineffectiveness of the act. This means that an act performed in violation of Civil Code Art. 108 is void and cannot be cured in any way. The only solution is to redo the act without violating the provision.
It seems that a company should be allowed to ratify an act performed in violation of Civil Code Art. 108; that is, the sanction should be suspended ineffectiveness. This view was shared by the Supreme Court in its judgment of 24 April 2018 (case no. CSK 425/17) based on analogous application of Civil Code Art. 103 to the authorities of legal persons.
Nonetheless, considering the potential consequences of violating Civil Code Art. 108, it is recommended that in any situation, solutions should be applied that will cut the risk of violating this provision to zero, even if the risk of violating the interests of either of the companies involved is minimal—for example, when one person is representing two single-shareholder companies with the same sole shareholder.
Proposed practical solutions
The first solution allowing the parties to remove the risk of violating Civil Code Art. 108 is to include in the articles of association of all companies in the group a provision expressly authorising corporate bodies (members of the management board) to represent both parties to transactions entered into by the company. This solution is reliable and directly confirms the absence of a violation of Art. 108, even when a conflict of interest does arise in any of the companies involved. Authorisation to perform an act derived from the wording of the company’s articles of association is the simplest and best solution.
But if the companies’ articles of association do not include authorisation for a board member to represent both parties, adding such authorisation by amending the companies’ articles of association may prove problematic, or at least time-consuming. In such situations, it is better to apply other solutions.
The second solution is to avoid a situation where both parties to a transaction are represented by the same person. For either company, the simplest thing would be to grant a simple power of attorney to perform the act.
Such a power of attorney can be granted to any third party. But it cannot be ignored that in the case of a one-person management board of a company, if that management board member grants a power of attorney to a third party who subsequently transacts business with the other company represented by the same management board member, it might be alleged that the parties are attempting to circumvent the law, i.e. to artificially get around Civil Code Art. 108. The same applies when a one-person management board appoints a commercial proxy (prokurent) to represent the company.
The third recommended solution is for the shareholders and the transacting companies to submit statements confirming that the entities (i.e. shareholder or company) do not foresee the possibility of violating the companies’ interests by performance of the act with both parties represented by the same person. Such a statement may be included for example in:
- A shareholders’ resolution approving the transaction
- A power of attorney granted by the company to perform the act
- A separate statement in the matter made by the shareholder, or
- A resolution by the company’s management board (if it has more than one member) or its supervisory board (if the company has a supervisory board).
A “declarative” solution does not completely eliminate the possibility of a violation of Civil Code Art. 108, but does create an evidentiary record protecting the transaction. When reviewing the circumstances of a transaction in which both parties were represented by the same person, a court or third party will have no doubt that in the view of the shareholders, the management board or the supervisory board, performance of the act does not carry a risk of violating the interests of any of the companies involved.
Despite these possibilities, the simplest and best solution is to organise the capital structure and composition of the corporate authorities within the group so that each body has more than one member. Another possibility to consider is appointment of commercial proxies, who are members of the management board but allow the companies to transact business bypassing the members of the management board. The companies’ appointment of commercial proxies may make it easier in the future to avoid a situation where two companies would have to be represented by the same person, i.e. a situation where hypothetically Civil Code Art. 108 could be violated and a transaction could be exposed to the risk of suspended ineffectiveness.
Adrian Budny, Waldemar Oryński, M&A and Corporate practice, Wardyński & Partners
