General remarks
On October 13, 2022, an act amending the Polish Commercial Companies Code1 and certain other acts (hereinafter referred to as the "Amendment Act") enters into force. The Amendment Act introduces a number of solutions to the Commercial Companies Code in order to improve the current functioning of capital companies (in particular within holding structures) and increase the security of business transactions and position of subsidiaries' managers. One of the key instruments included in the Amendment Act is the institution of formalized "binding instructions" that might be issued by a parent company to its subsidiary.
Current legal status
Pursuant to the current wording of the Commercial Companies Code, individuals responsible for the affairs of companies and commercial partnerships (which include registered partnerships, professional partnerships, limited partnerships, limited joint-stock partnerships, limited liability companies, simple joint-stock companies and joint-stock companies) should act in the best interest of the company or partnership and must not follow any third party's instructions as to how to perform their obligations. In case of limited liability companies, simple joint-stock companies and joint-stock companies, the Supervisory Board must not issue any binding instructions to the Management Board as regards the management of the company's affairs2. For joint-stock companies, this prohibition applies also to the General Meeting.
Therefore, the liability for breach of the obligation to conduct the company's affairs in its best interest is not waived if the company's corporate body acts in accordance with the obtained instructions. Furthermore, the currently applicable legal regulations do not allow to manage the internal affairs of the subsidiary based on the parent company's decisions. The Polish legislator intended to significantly change this state of affairs and has introduced a new Polish holding law which includes the already mentioned institution of "binding instructions".
New Polish holding law regime - definitions of "group of companies" and "binding instructions"
The Amendment Act introduced a new legal definition of a "group of companies", which means a parent company and a subsidiary or subsidiaries (all being limited liability companies, simple joint-stock companies or joint-stock companies), which implement the same strategy in order to act in a joint interest (interest of a group of companies), which in turn justifies the performance by the parent company of uniform management over the subsidiary or subsidiaries3. Establishment of this structure requires a specific formal corporate procedure, including adoption of a resolution on participation in the "group of companies" with the indication of the parent company by a qualified, 75% majority of votes, as well as formal registration of this mechanism in the Polish corporate register4. After all these requirements are satisfied, the parent company is entitled to issue a binding instruction.
Binding instructions relate to the conduct of the company's affairs and may only be issued when justified by the specific interest of the group of companies. The binding instruction will have to indicate:
- the expected by the parent company behavior of the subsidiary in relation to the performance of a binding instruction,
- the interest of a group of companies that justifies the performance of a binding instruction by a subsidiary, and
- the expected benefits or damages on the part of the subsidiary resulting from the performance of a binding instruction.
A binding instruction may be issued in writing or in an electronic form (using a qualified electronic signature). Performance of a binding instruction by a subsidiary participating in a group of companies would require a prior resolution of this subsidiary's Management Board.
Practical challenges related to performance or failure to perform binding instructions by subsidiaries
In principle, the Management Board of the subsidiary participating in the "group of companies" would be obliged to perform its parent entity's binding instruction that meets the above requirements. However, there are certain circumstances allowing the Management Board to refuse to perform binding instruction, which include:
- in case of a single-shareholder (wholly-owned) subsidiary company - if it would lead to insolvency or a threat of insolvency of such subsidiary; and
- in case of the other (non-wholly-owned) subsidiary companies - if there is a reasonable fear that such instruction will be contrary to the interests of the subsidiary and will cause damage that cannot be remedied by the parent company or another subsidiary participating in the corporate group within 2 (two) years following the occurrence of the event causing the damage.
When determining the loss, the subsidiary must take into account the benefits obtained by this company in connection with the participation in the group of companies in the last 2 (two) financial years5.
Members of Management Boards of subsidiary companies will need to assess, if the "interest of a group of companies" indicated in the binding instruction coincides with the interest of these subsidiaries. Such assessment will be difficult to make from the practical point of view and will require an in-depth, individual analysis of each case. On the other hand, they will be released from liability for the damage caused to the subsidiary in connection with the performance of the binding instructions received from the parent company. Therefore, new regulations affect the scope of responsibility of members of the governing bodies of subsidiaries participating in the "group of companies".
Is it worth a hassle?
From the transactional and corporate point of view, the ability to exercise centralized management seems to play a key role. The new regulations will give the parent company of a "group of companies" the right to issue binding instructions to its subsidiaries, under which it will be able to request a specific conduct of their affairs to pursue the interests of the entire group. At the same time, in order to minimize the risk of managerial liability under the Amendment Act, such managers of the entity being part of the "group of companies" will need to reasonably assess, whether there exist any negative premises that would allow them to refuse to perform a binding instruction. Due to the fact that new Polish holding regulations introduce certain general clauses (such as "reasonable fear", "contrary to the interest of group of companies") or impose an obligation to calculate the value of hypothetical damage, it seems that legal, financial and commercial advisers will play an important role in the interpretation and application of the new regulations, in order to minimize the risks and adapt groups of companies to the new legal reality.
These changes introduced to the Polish Commercial Companies Code are the most comprehensive amendments introduced since the adoption of this Code over 20 years ago. One thing is sure - managers will need to think about the pros and cons of new legal mechanisms and answer the question of whether their application will suit the needs of the organizations they are in charge of. The clock is ticking - the new rules enter into force on October 13, 2022. The time and practice will show whether the game is worth a hassle.
Footnotes
1. Act of September 15, 2000 - Commercial Companies Code (consolidated text: Journal of Laws of 2022, item 1467), hereinafter referred to as the "Commercial Companies Code" or "CCC".
2. In accordance with - respectively - Article 219 §2 CCC, Article 30069 §2 CCC and Article 3751 CCC.
3. Article 4 §1 point 51) CCC, as introduced by the Amendment Act.
4. Article 211 §2-3 CCC, as introduced by the Amendment Act.
5. Article 214 §1-2 CCC, as introduced by the Amendment Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
