The need to regulate the so-called “holding law” within the commercial law has raised much controversy for some time now. Unlike certain foreign legal frameworks, the Polish law had been functioning with merely fragmentary regulations in that regard – legal scholars had been debating the purpose of introducing such solutions to the Polish Commercial Companies Code.
On 5 August 2020, the Government Legislation Centre published the detailed assumptions of the draft amendment to the Commercial Companies Code developed by the Commission for Owner Oversight Reform with the Ministry of State Assets (the “Draft”). The Draft’s primary assumption is to enact the so-called “holding law” laying down the principles of how a parent company may instruct its subsidiaries, as well as stipulating the parent company liability and the principles of creditor, officer and minority shareholder protection.
Definition of Group of Companies and Obligation to Disclose It
The Draft introduces new definitions: “group of companies”, which will include the parent company and its subsidiaries, guided – according to each subsidiary’s deed or articles of association – by the pursuit of a common economic strategy (group interest) enabling the parent company to exercise uniform management of its subsidiaries, as well as “group interest”, which is an independent legal category separate from the dominance and subsidiarity relationships.
According to the Draft, the companies within the group should, apart from pursuing their individual interests, be guided by the group interest, unless this contradicts the reasonable interest of their creditors, minority shareholders or subsidiary shareholders. In principle, therefore, the subsidiaries ought to be guided by the group interest.
A certain novelty to be introduced in the wake of comments made during the consultations stage is excluding publicly held subsidiaries from the holding law’s subjective scope.
The proposed provisions originally obliged the entities within the group (both the parent company and its subsidiaries) to notify that fact to the National Court Register (KRS). Disclosure of participation in the KRS enabled members of the management board, the supervisory board, the review commission, the board of directors or the liquidator of the company within the group to refer to actions or inactions in pursuit of certain group interests. According to the newest iteration of the Draft (dated 27 October 2020), the obligation to disclose the group in the KRS has been waived.
Binding Instructions for Subsidiaries
According to the Draft, the parent company will be authorised to give a subsidiary within the group binding instructions with regard to such subsidiary’s affairs, if this is justified by a certain group interest. In order for a subsidiary to act on such instructions, its management board or its board of directors will have to first adopt an appropriate resolution. However, the legislator has allowed adopting such resolution only if this does not contradict that company’s interest, or if it may be reasonably assumed that the damage sustained by the subsidiary due to acting on the parent company’s instruction will be rectified by the parent company or by another company within the group (no later than two years following the date of the event causing the damage).
The subsidiary has little leeway in refusing to act on such instruction, depending on its ownership structure. Single-shareholder subsidiaries within the group will not be able to refuse to act on a binding instruction. For subsidiaries in which the parent company accounts for, indirectly or directly, at least 75% of the share capital, the subsidiary may waive acting on the instruction, though only if following the instruction could lead to or threaten the subsidiary’s insolvency. If the parent company accounts for less than 75% of the share capital, refusal is possible if there are reasonable grounds to believe that the instruction contradicts the subsidiary’s interest and will cause it damage that will not be rectified within two years, and if such adverse circumstance threatens the subsidiary’s future existence. Moreover, the amendment to the Draft dated 27 October 2020 has restricted the parent company’s ability to issue binding instructions if specific laws prohibit that, among them the energy law. According to the Draft, refusal will require a prior resolution adopted by the subsidiary’s management board or its board of directors.
Parent Company’s Liability
According to the Draft, members of the management board, the supervisory board, the review commission and the board of directors of the subsidiary will not be held liable in civil law for any damage sustained by the company as a result of their actions, nor will they be held liable in criminal law for any fiduciary abuse while acting on the binding instructions.
The new regulations are meant to introduce the parent company’s fault-based compensatory liability toward the subsidiary. This will apply where acting on the parent company’s binding instruction results in the insolvency of a subsidiary in which the parent company accounts for at least 75% of the share capital. The parent company will not be at fault if it acts within the confines of reasonable business risk, including drawing on information, analyses and opinions that ought to be considered when conducting due diligence.
Moreover, the new regulations also provide for the parent company’s liability toward the subsidiary’s creditors in the case of ineffectual enforcement against the subsidiary, as well as for the possibility for the parent company to raise claims against the remainder shareholders of the subsidiary due to the subsidiary’s shares depreciation.
However, the new regulations allow such liability to be modified by way of a particular provision to that effect in the deed or articles of association. Such limitation may include waiving the parent company’s liability toward the subsidiary for the damage sustained.
Mandatory Squeeze Out and Reverse Squeeze Out
The new regulations introduce subsidiary minority shareholder protection by way of squeeze out and reverse squeeze out. According to the Draft, minority shareholders of the subsidiaries in which the parent company holds at least 90% of the shares may demand share squeeze out within three months following the date on which participation of the subsidiary in the group was disclosed in the KRS or once in a given trading year. Moreover, the parent company may demand share squeeze out from a minority shareholder of the subsidiary. Additionally, the deed or articles of association may extend the right to squeeze out and reverse squeeze out onto parent companies accounting for less than 90% of the share capital, but more than 75%. The squeeze out price is determined according to the principles set out in the Commercial Companies Code, i.e. at the regulated market price, at the average rate for the three months prior to adopting the resolution or, if the shares are not traded on the regulated market, at the price determined by an expert appraiser of the general meeting’s choosing.
Other Draft Assumptions
Apart from introducing the holding law, the Draft provides for a number of additional regulations, including those enhancing the supervisory board’s position, both within the holding law framework and for companies not comprising any group.
According to the new regulations, the supervisory board of the parent company will exercise continuous supervision over the subsidiaries’ pursuit of the group interest. Additionally, it will be able to request that the subsidiary’s management board present documents or provide information. The Draft also provides for the possibility for the supervisory board to appoint ad hoc or standing committees within the supervisory board to take particular supervisory measures. Moreover, by including particular provisions in the deed or articles of association, the supervisory board will be authorised to appoint a special advisor who will, at the company’s expense, examine its assets. Another material competence in terms of M&A transactions will be the requirement to seek the supervisory board’s approval for the parent, subsidiary or affiliated company effecting transactions exceeding a particular amount, if this follows from the company’s deed or articles of association.
Somewhat of a novelty is introducing the business judgement rule waiving liability for the damage caused to the company due to the officers’ decisions, which may prove to have been misguided, if they had been taken within the confines of reasonable business risk and based on information adequate to the circumstances. According to this rule, the company officers, obliged to exercise due diligence, will not be breaching this obligation if – displaying loyalty toward the company – they act within the confines of reasonable business risk, including based on information, analyses and opinions that ought to be considered when conducting due diligence.
The Draft also solves the problem of calculating the term of a company officer, which has for years raised much controversy within both the doctrine and the case law. There have been two concepts so far: (1) the reduction concept, referring to strict interpretation of the law, whereby the term should be determined in full trading years drawing on the assumption that the last full trading year is included in its entirety in the officer’s term, and (2) the prolongation concept, referring to the functional construction of the law, whereby the term should be determined in full trading years drawing on the assumption that the last full trading year is the last year which even partially overlaps with the officer’s term. The new regulations unequivocally indicate that the officer’s term is calculated in full trading years during which the officer has held their position. Given the above, according to the proposed amendments, the mandate of a management board member appointed, for example, on 1 June 2020 for a one-year term at a company where the trading year overlaps with the calendar year will expire upon approving the financial statements for 2021. However, the company’s deed or articles of association may regulate this issue differently.
The consultations of the Draft were completed on 19 September 2020. The proposed amendments, particularly with regard to the holding law regulations, were hotly debated. There were postulates to narrow the new norms down only to private companies and to leave out publicly held companies, and to apply the holding laws to banks, insurers and investment companies only to the extent of the parent companies, excluding the provisions pertaining to the subsidiarity relationships. Moreover, according to some lawyers, introducing the possibility of a parent company issuing binding instructions may lead to abuse and may be detrimental to the creditors and other stakeholders of the subsidiary, which may be pursuing the group interest at their expense.
Work on the Draft and its possible amendments is still underway. Having analysed the motions and comments raised during the consultations stage, the ministry is now implementing amendments.
The contemplated assumptions of the Draft have both ardent supporters and staunch opponents. What raises most controversy is the definition of “group interest”, hence it is yet to be known what will be considered a “group economic strategy”, what entities will comprise such group and what objectives will have priority. Introducing a vague term will, in practice, cause many interpretational concerns, which may affect numerous business entities. Commentators emphasise that there is no need to introduce a new term if it has already been moulded by strong Supreme Court body of rulings, whereby the company interest ought to be understood as a shared interest of all of its groups of shareholders, both majority and minority. There may not, then, be any separate, isolated interest of a company as a legal entity, entirely removed from the shared interest of all shareholders.
The parent company’s entitlement to issue binding instructions to its subsidiaries is also debatable. Such competence on the part of the majority shareholder may infringe on the subsidiary’s minority shareholder’s rights and be detrimental to it.
The Polish version of this article is also available to view online: WERSJA POLSKA