The biggest amendment to the Commercial Companies Code in 20 years
The amendment to the Commercial Companies Code aims to modernise the provisions of the Code in many areas, including those relating to the holding law, squeeze-out and liability of management and supervisory boards’ members in companies and their day-to-day operation.
On 4 April 2022, the President signed a long-running amendment to the Commercial Companies Code. This is one of the biggest amendments in more than 20 years. It raises a huge amount of controversy, introduces completely new solutions and eliminates some of the existing ones. What exactly will change?
Holding Law in Polish Legal Order
The first and fundamental change concerns groups of companies — known as the holding or corporate law. A group of companies is to be understood as a parent company and its subsidiary or subsidiaries, which are companies that follows a common strategy, on the basis of a resolution on participation in a group of companies, in order to pursue a common interest.
The holding law presupposes a much wider regulation of the private-law relationship between the parent company and the subsidiaries forming part of a group of companies, taking into account the interests of creditors, members of the governing bodies and small shareholders of both entities.
In order to form a group of companies, subsidiaries will have to include in their articles of association a provision explaining that the subsidiary is guided by the interest of the group of companies, i.e. a common, intra-group economic strategy. Membership in a group of companies will be notified to the business register of the National Court Register by both the parent company and its subsidiaries.
Binding instructions - a symbol of holding law
The amendment of the Commercial Companies Code in this area is also intended to protect managers of subsidiaries against liability for the instructions of their parent company. A parent company in a group of companies will be able to issue binding instructions to its subsidiaries regarding the conduct of the company’s affairs.
Binding instructions will somehow become a symbol of the new holding law, and at the same time its greatest controversy. In many situations, the subsidiary will not be able to refuse to follow them. The refusal will be allowed only in certain circumstances, e.g. where following the instruction results in the insolvency of the company or runs a risk of insolvency, and in the case of non-single-member companies, if there is a reasonable fear that the instruction would be contrary to the interests of the company and will cause damage that will not be repaired by the parent company or another subsidiary for 2 years from the event (in addition, articles may provide for additional conditions for refusal). In practice, decisions to follow/refuse to follow a binding instruction can be difficult and lead to significant economic disputes.
Parent company — more influence on subsidiaries
The strengthening of the parent company’s influence on subsidiaries entails a number of unprecedented solutions, including:
- the right of access of the parent company to the documents of the subsidiary;
- the right of minority shareholders of a subsidiary to submit an application to the court for the appointment of an expert in order to examine the activities of a group of companies;
- liability of the parent company vis-à-vis the subsidiary for damage resulting from the execution of a binding instruction;
- liability of the parent company vis-à-vis the shareholders of the subsidiary for reduction in the value of the share(s) of such shareholders as a result of following a binding instruction by the subsidiary.
Squeeze-out in a limited liability company
The second significant change worth mentioning is the introduction of a squeeze-out in a limited liability company. It gives the parent company the possibility of compulsory redemption of shares of minority shareholders of a limited liability subsidiary (on behalf of the parent company) where it directly holds at least 90 % of the subsidiary’s share capital. The redemption will take place at the price set by the expert selected by the shareholders’ meeting of the parent company.
It is worth adding that the articles of association of the subsidiary and the articles of association of the parent company may provide that the right to buy shares is vested in a parent company which holds directly or indirectly between 75% and 90% of the shares in the subsidiary.
This is a complete novelty, because, in the current legal situation, the removal of minority shareholders in a limited liability company can take place only for important reasons provided for in the law or the articles of association on the basis of a court decision. The entry into force of these provisions will allow significant structural changes to be made to certain groups of companies.
The above rules also apply to a joint-stock company. The difference is a more favourable approach to the squeeze-out procedure compared to the current one (which allows only the redemption of shares by a maximum of five shareholders holding a total of at least 95% of the shares in a joint-stock company).
Changes in the liability of members of the governing bodies
Another major change concerns the liability of management and supervisory board members and supervisory boards and involves the introduction of the Business Judgment Rule known in Anglo-Saxon law. According to that rule, the amendment provides for exemption from liability for damage caused to a company as a result of decisions of the governing bodies which turned out to be erroneous, provided that they were taken within the limits of a reasonable business risk on the basis of information appropriate to the circumstances. Thus, an assessment of the management’s actions in terms of loyalty to the company, within the limits of justified economic risk, will be introduced, including on the basis of the analyses and opinions that may have formed the basis of the decision in question.
The introduction of the principle of business assessment is undoubtedly the right solution, because it increases the safety of board members when undertaking steps reasonable but nevertheless risky for the existence and development of the company.
Strengthening the role of the Supervisory Board
A breakthrough change is also a significant strengthening of the Supervisory Board by clarifying its competences and introducing new supervisory instruments. So far, the activity of the supervisory board has been regulated very generally, with a small number of instruments giving it a real possibility of functioning, and consequently it was inefficient due to the need to cooperate on the part of the management board.
The amendment introduces a previously unknown a regular obligation of the management board to inform the supervisory board about the situation of the company, progress in the implementation of plans (strategies) of development, transactions and other significant business events, as well as the obligation to immediately provide information and documents, which the supervisory board will request within 2 weeks.
In addition, the amendment introduces the possibility of appointing an advisor to the supervisory board to examine a specific issue of the company’s activities or its assets. In this respect, the supervisory board will gain autonomous powers as an entity authorised to conclude a contract directly with an expert (without the company’s representation by the management board), and the management board is obliged to make available all information and documents for the purposes of the examination.
The supervisory board will also be entitled to appoint ad hoc or standing committees consisting of members of the supervisory board to carry out specific supervisory activities. In relation to the group of companies, the supervisory board of the parent company will exercise constant supervision over the implementation of the interests of the group of companies and will therefore have the right to request information, documents and accounting books also from subsidiaries. Group companies will not be able to rely on a separate legal entity, which will result in multi-level control — both as part of their own supervision at the level of the subsidiary and at the level of the group by the supervisory board of the parent company within the scope of its competence.
The issue of the term of office and mandate of the members of the management bodies will also be organised, which has so far led to problems in practice. The amendment eliminates the distinction between the term of office and the mandate of the members of the company’s governing body. The term of office after the amendment will be calculated in full financial years. After the expiration of the term of office, the amendment introduces an additional duty of loyalty and secrecy as to the information obtained during the performance of the function.
In the regulations concerning joint-stock companies, the supervisory board will gain enhanced competence in the field of control over the company’s assets. According to them, if a company enters into a transaction with a parent company, a subsidiary or a related company, the value of which exceeds 10% of the total assets of the company determined on the basis of the last approved financial statements, the approval of the supervisory board will be required, unless otherwise provided for in the articles. In addition, an obligation to provide the supervisory board, at no additional request, with current information has been introduced, among others on resolutions of the management board and their subject matter, the situation of the company, its property status, etc.
Meetings of the Management Board and Supervisory Board
The organisation of supervisory board meetings will also be formalised. The invitation to the meeting should include:
- day, time,
- venue of the meeting and the agenda,
- the use of means of direct distance communication during the meeting.
The supervisory board will also be able to hold meetings without formal convening if all members agree to do so and if they do not object to the inclusion of individual items on the agenda. The resolutions of the supervisory board will be recorded and the minutes will be signed by at least one member of the supervisory board holding the meeting or managing the vote. The law also introduces the publicity of votes.
The meetings of the management board will also be formalised. The meetings will include resolutions of the management board, which will be recorded in a formal manner, i.e. including the agenda, the names of the current members of the management board, the number of votes cast for individual resolutions and dissenting opinions with justification. The minutes will be signed by at least one member of the management board holding the meeting or managing the vote.
Amendments to the Commercial Companies Code — How to Prepare?
The amendment to the Commercial Companies Code was criticised by many business circles, in particular due to the far-reaching interference of parent companies in the functioning of subsidiaries and the significant formalisation of the activities of supervisory boards. Certainly, the implementation of the amendment will require a number of actions on the part of both groups of companies as well as individual companies, including by adapting the articles of association, in so far as the law allows for different regulation of certain issues and amendments to the regulations of the supervisory board or management board (if adopted) and other procedures.
The law will enter into force on 13 October 2022.
Director of the Company Law Department
TGC Corporate Lawyers
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