On 12 October 2022, the so-called holding company law will come into force in Poland. We invite you to familiarise yourself today with selected changes to the Code of Commercial Companies (hereinafter: the Act) brought by the new legislation.
Between the hammer and the anvil: the interests of the company versus the interests of the holding company
In the existing corporate practice, there has been a discrepancy between the legal status and the actual operation of corporate groups in corporate practice.
On the one hand – in business practice, the boards of directors of subsidiaries must take care of the interests of the entire group. On the other hand, the current state of the law obliges the subsidiary’s board of directors to look after its interests first and foremost. In an extreme situation, the board can even be held liable for causing damage to the company.
The new rules limit this problem by providing for the possibility to indicate that a company operates within a holding group and therefore pursues a group-wide strategy that takes into account not only the interest of the company in question, but also the common interest of the group (the interest of the group of companies). Consequently, a parent company and a subsidiary that participate in a group of companies will be able to be guided by the interest of the group of companies in addition to the interest of the company in question, as long as this is not intended to cause disadvantage:
- creditors,
- minority shareholders,
- or minority shareholders of the subsidiary.
The new legislation will also change the liability rules for the board of directors of companies operating within a holding company.
A binding order will exclude the board’s liability
The new rules allow a parent company to issue so-called binding instructions to a subsidiary. Their issuance will have to be in written or electronic form under pain of nullity and be justified by the interests of the group of companies.
The command should also indicate:
- interest of a group of companies justifying the execution of a binding order;
- the expected benefits or damages of the subsidiary that will result from the execution of a binding order;
- as well as the envisaged manner and timing of compensation to the subsidiary for any damage that may arise as a result of compliance with the binding order.
Significantly, the members of the subsidiary’s board of directors will not be liable for damage caused to the subsidiary as a result of following a binding order from the parent company.
As a general rule, the boards of directors of subsidiaries will be able to refuse to carry out a binding order if there is a concern that its implementation is contrary to the interests of the subsidiary and will cause damage to the subsidiary that will not be remedied within the next two years. Further grounds for refusing to comply with a binding order will be able to be provided for in the subsidiary’s contract or articles of association.
Need to be registered with the National Court Register
The application of the new holding company law to corporate groups will not be automatic. In order for the management of a subsidiary to benefit from the limitation of liability, it will be necessary for the shareholders of the subsidiary to adopt an appropriate resolution.
A further requirement will be for the parent company (if it is entered in the National Court Register) as well as the subsidiary to disclose its participation in the holding company in the National Court Register. Only from that point onwards will the companies be able to apply the provisions of the new holding law.
Summary
The new holding law responds to the needs of the market by introducing procedures into the Polish legal order that reflect the actual functioning of capital groups.
The new provisions formalise, on the one hand, the exercise of a dominant position by parent companies, on the other hand, they limit the liability of the boards of directors of subsidiaries for damages arising from the execution of the parent companies’ instructions.
Authors:
Norbert Czerniak, lawyer
Wojciech Paryś, attorney-at-law (PL)
