Amendments to the Polish Code of Commercial Companies

by Maciej Ogórek

19 April 2021

Significant amendments to the Code of Commercial Companies are underway.

What is the draft amendment about and what are its main principles?

The current version of the Code of Commercial Companies does not meet the needs of companies being part of holding structures. In the Polish legal reality there are many companies which belong to corporate groups and do business with other associated enterprises.  Often companies that are part of such a group pursue common business objectives and form a single economic entity. Such cooperation is often of a factual nature and there is no regulatory framework for it, which undoubtedly makes it difficult to do business within holding structures. The enactment of the so-called holding company law is to be the means to close this gap on the market.

Holding company law is primarily intended to make the management of a corporate group easier for the parent. On the other hand, an equally important aim of the law is to ensure an adequate level of protection for the individual companies forming the corporate group. The creation of a broader scope of possibilities for the parent to exert influence on the subsidiary must be accompanied by simultaneous mechanisms protecting the subsidiary, the subsidiary's creditors or members of the subsidiary's governing bodies. Balancing these interests is crucial for the new legal solutions to actually make doing business within holding structures easier. The main goal of the amendment is to regulate certain aspects of holding company law, and thus to respond to the needs of the market players, without having to comprehensively regulate all issues related to operations of holding companies.

Main principles of holding company law

The draft holding company law uses the terms “corporate group” and “interest of a corporate group”. A characteristic feature of a corporate group is that it is formed by a parent company and subsidiaries that follow a common economic strategy. A general clause will be introduced into the Code of Commercial Companies, according to which, when taking business decisions, the parent company will have to take into account not only its own interests, but also the interests of the group (respecting the rights of creditors and minority shareholders). This provision is an important directive for the boards of companies belonging to corporate groups. It also responds to the current practice of companies that take business decisions not only in their interest, but above all in the interest of the group as a whole.

Participation in a corporate group within the meaning of holding company law is intended to be voluntary. This means that the regulations of holding company law will not apply automatically. To use the new solutions, the shareholders’ meeting of an associated enterprise will have to adopt a resolution by a three-fourth majority. In addition, in order to apply most of the significant solutions of holding company law, it will be necessary to disclose information on membership in a corporate group in the register of enterprises of the National Court Register (the disclosure will have to be made both by the subsidiary and the parent company).

 
The latest version of the draft clears up the problem that appeared in its initial version which assumed that foreign entities participating in a corporate group had to disclose in the register the information on such participation. The requirement for foreign parent companies to disclose such information would have been highly impractical and often impossible to fulfil. Therefore, a change has been decided - in the case of foreign parent companies it will be sufficient to disclose information on a Polish subsidiary's participation in a corporate group, indicating the parent company.

Binding instructions – characteristics of the new instrument

One of the most important instruments introduced by the amendment will be the so-called binding instructions issued by a parent company to its subsidiaries. The purpose of this instrument is to regulate the current practice of giving instructions by parent companies to their subsidiaries.

Binding instructions should be issued in writing, otherwise they will be invalid. They should also specify the interest of the corporate group - which justifies the issuance of a binding instruction, the expected benefits (or losses) for the subsidiary, and the envisaged way of remedying the loss that may result from the execution of the instruction by the subsidiary. A binding instruction should be executed on the basis of a resolution of the management board of the subsidiary.

A subsidiary to which an instruction is given will not always be obligated to comply with it. Holding company law provides for several exceptions in this respect. The reasons for refusing to comply with an instruction will be different for one-person companies and for companies with more than one shareholder. A one-person subsidiary will only be able to refuse to comply with a binding instruction if it would lead to the insolvency of the company or pose such risk. Other subsidiaries, on the other hand, should refuse if there are reasonable grounds to fear that the instruction is contrary to the company's interests and will cause damage that will not be remedied by the parent company or another subsidiary of the corporate group within the next two years from the date on which the harmful event occurs.

Liability of members of the governing bodies of the subsidiary

The proposed solutions are intended to protect the interests of members of the governing bodies of a subsidiary that carries out a binding instruction received from the parent company. They will not bear civil or criminal liability for carrying out a binding instruction – if the instruction meets the statutory formal and substantive conditions. Liability for failure to carry out the instruction will also be excluded if there were grounds for doing so.

Rules for the parent company's liability

As the parent company acquires additional powers in relation to subsidiaries, it should also bear civil liability for the exercise of additional powers, according to the draft law. In relation to a one-person subsidiary, the parent company will be liable for damages caused by the execution of a binding instruction if it has led to the insolvency of the company. This liability is based on the principle of fault. With regard to other subsidiaries, the parent company will be liable for damages if the instruction was carried out in violation of the interests of the corporate group. The subsidiary and its shareholders will also be able to claim damages based on general rules.
In addition, in certain cases, the parent company will be liable to other shareholders of the subsidiary for a reduction in the value of their shares if this occurred as a result of the execution of a binding instruction.

Also the subsidiary's creditors may be entitled to claim damages from the parent company. In this case, the parent company will bear liability if, as a result of executing a binding instruction, enforcement of claims against the subsidiary proves to be ineffective. This type of liability is based on a mechanism similar to the liability of management board members for the obligations of a limited liability company regulated in Article 299 of the Code of Commercial Companies.

Other holding company law regulations

Apart from the solutions described above, membership in a corporate group will also open up other opportunities. The parent company will be able to review financial books and request information from the subsidiary. Another reason for participating in a corporate group may be the desire to have minority shares bought out by the parent company (the so-called squeeze-out). This may be a particularly attractive solution for limited liability companies, as, in their case, the Code of Commercial Companies currently does not provide for such an option.

On the other hand, a decision to participate in a corporate group will give minority shareholders of the subsidiary the right to demand repurchasing their shares (the so-called sell-out). Minority shareholders will also be entitled to demand that the court appoint an audit firm to examine the group's accounts and operations. In addition, the subsidiary will be obligated to include in its annual management report information on binding instructions received.

Waiting for changes

The intention to regulate certain aspects of holding company law is the right direction taken by the Polish legislator. This solution is particularly attractive from the perspective of management board members of subsidiaries, who in their day-to-day operations are often subject to pressure from the parent company and at the same time bear liability for decisions they make. It is to be hoped that the new regulations will aid corporate groups in developing more transparent rules of cooperation (and rules for bearing liability). Although we still have to wait for the final wording of the regulations, it is already worth keeping track of the progress of work on the bill and analysing what benefits can be reaped from the participation in a corporate group.