Significant changes to the Polish Commercial Companies Code were passed on 12 April 2022. The changes include, among other things, a set of rules regulating the organization and the functioning of a group of companies, the business judgement rule principle in relation to directors’ decisions, broader powers of supervisory boards to make corporate governance more effective and many others points. The changes come into force on 13 October 2022 but now it is the time to start preparations to comply with the new rules.
What are the proposed changes?
The new law is introducing a number of provisions strengthening and regulating the role of a parent company in the group of companies and safeguarding the interests of the group in the context of the binding instructions issued by the parent company to its subsidiaries. This protection would extend also to directors of such a company, its shareholders and creditors.
The main idea of the proposed changes is the introduction of a notion of “group of companies”, defined as “a parent company and its subsidiary or subsidiaries, guided by a common economic strategy to pursue a common interest of the group through the uniform directorship of the parent company.
” Both participation in the group and indication of the parent company, will require a shareholders’ resolution of the subsidiary. This would then be disclosed in the commercial register (KRS). In the case of parent companies registered outside of Poland, it would be sufficient to disclose this information in the register of the Polish subsidiary.
The new law provides for a qualified relationship of dominance and dependence, consisting in being guided by a common economic strategy enabling the parent company to exercise uniform directorship over the subsidiaries. This would have the effect of identifying the “interest of companies” as a new legal category.
The current definition of a parent company in the Commercial Companies Code will be also expanded. A parent company will be also defined as a company exercising a decisive influence over the activity of a subsidiary, in particular by means of an agreement between the parent company and the subsidiary providing for management of the subsidiary or distribution of profits by the subsidiary.
What are the “binding instructions”?
Under the new law, parent companies would be entitled to issue “binding instructions” to their subsidiaries regarding the conduct of the subsidiary’s affairs, provided that they promote the interests of the group. The new law stipulates that binding instructions would have to be given in written or electronic form, and indicate at a minimum:
- what does the parent company expect from the subsidiary in connection with execution of a binding instruction?
- what is the interest of the group which justifies the subsidiary’s compliance with the instructions of the parent company?
- what is expected benefit or a loss to the subsidiary resulting from compliance with the instructions of the parent company?
- the method and timeframe for compensating the subsidiary for a loss incurred as a result of complying with the instructions of the parent company.
- Upon receiving the binding instruction from its parent company, the subsidiary will have to pass a resolution of the board and then – after execution – the directors will have to notify the parent company about the execution of the task. In the case of disagreement, the directors will have to pass a resolution refusing to follow the instruction while giving specific reason for the refusal. A wholly owned subsidiary will be allowed to refuse to follow the instruction only if the execution of the task would lead to insolvency. Subsidiaries with more than one shareholder will be allowed to refuse to follow the instruction also if the instruction is in a conflict with the interests of the subsidiary and it could cause damage to the subsidiary that will not be remedied within 2 years.
What is the business judgement rule principle?
Under the new law, the liability of management board and supervisory board members will be based on the business judgement rule principle. This is intended to exclude liability for a loss incurred by a company caused by directors’ decisions that turn out to be unsuccessful, provided that they were taken within the bounds of reasonable business risk on the basis of information adequate to the circumstances. This is a new thing in the Polish corporate law.
Introduction of the business judgement rule is intended to avoid evaluating the actions of corporate bodies with hindsight, after seeing the results. Only the correctness of the method by which a decision was taken will be assessed (as of the time when the decision was taken). This way, directors who have diligently performed their duties and decided to take risks for the company will be protected if it turns out ex post that the decision was incorrect and led to a loss.
Increasing the effectiveness of supervisory boards
The new law provides for more specific competences of supervisory boards, which would consist of the following duties:
- assessment of the financial statement for the previous financial year for conformity with the books and records and the actual state of affairs
- assessment of proposals of the management board for distribution of profits
- preparation and submission to the shareholders of an annual report on the results of the foregoing evaluation and a report on the activities of the supervisory board for the preceding financial year.
- To perform its duties, the supervisory board should examine all documents, review the company’s assets and request the management board and employees to prepare or submit any information, documents, reports or explanations regarding the company, in particular regarding its operations or assets. The request could also cover information, reports or explanations held by the addressee regarding subsidiaries and related companies.
Such information, documents, reports or explanations would have to be provided to the supervisory board without delay, but no later than two weeks after the request, unless a longer period were specified in the request. The management board could not prevent the supervisory board from accessing such information, documents, reports or explanations.
Sell out and squeeze out rights
So far sell out and squeeze out rights were only provided for joint-stock companies. The new law extends these rights to both joint stock companies and limited liability companies operating within a group of companies.
Shareholder or shareholders representing no more than 10% of the share capital of a subsidiary participating in the group of companies may request that the agenda of the next meeting of shareholders include adoption of the resolution on compulsory buyout of their shares by the parent company that represents directly, indirectly or on the basis of agreements with other persons, at least 90% of the capital of a subsidiary (sell out). Until the whole payment is made minority shareholders keep all rights to shares.
On the other hand, the new law provides that a parent company will be able to require a subsidiary to buy out its minority shareholders' shares in the event that the parent company holds directly at least 90% of the share capital of the subsidiary (squeeze out). Importantly, the Articles of Association of subsidiary may provide this right for the parent company, even if the parent company directly or indirectly represents less than 90% of the capital of subsidiary participating in the group of companies, but not less than 75% of the capital. The buyout will take place at a price determined by an expert selected by the shareholders' meeting.
The changes come into force on 13 October 2022 but now it is the time to start preparations to comply with the new rules. The companies should review its corporate governance structures and prepare for the new corporate regime.
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