A New Holding Law

On 13 October 2022, the Act of 9 February 2022 amending the Code of Commercial Companies and certain other acts will enter into force. It will introduce regulations in the holding law (the law of groups of capital companies) into the Polish legal system.

As the justification of the draft amendment act states, the introduced regulation mainly aims at regulating private-law relations between parent companies and their subsidiaries in a way that considers the interests of minority shareholders of subsidiaries, members of their governing authorities and their creditors. Although it mainly refers to mutual relations between companies within the capital group, the new regulation also introduces rules relating to companies operating independently. Furthermore, the Act, among other things, will extend the powers of supervisory boards in corporate supervision over companies, which in turn is supposed to increase the effectiveness of companies' operations.

THE HOLDING LAW – FOR WHOM?

The regulations in the holding law introduced by the legislator will not apply to all companies operating in the market. These provisions will only affect limited liability companies, i.e. spółka z ograniczoną odpowiedzialnością, spółka akcyjna and prosta spółka akcyjna (limited liability companies, joint-stock companies and simple joint-stock companies, respectively) operating within a group of companies.

At this point, clarification should be made on what a group of companies or a corporate group is. According to the definition introduced in the amending Act, a corporate group is a parent company and a subsidiary capital company/ companies. Such companies, following a resolution on participation in a corporate group, pursue a joint strategy to achieve a common interest. That constitutes the grounds for the parent company to exercise uniform management of the subsidiary or subsidiaries. The above definition directly shows that applying the holding law within a group of companies is not obligatory.

 The parent company and its subsidiaries will only be subject to the introduced company law institutions if their shareholders' meetings adopt a resolution on joining a corporate group. Another condition required to benefit from the new regulations is registration of the participation in a group of companies in the register of entrepreneurs of the National Court Registry held for both the parent company and the subsidiary. A contrario, the parent company and subsidiary's failure to take the above actions will prevent them from benefiting from the new regulations.

BINDING INSTRUCTIONS

The key privilege for companies operating within the group is the parent company's right to issue binding orders to its subsidiaries which oblige them to take specific actions. Such an instruction can be given provided it is in the interest of the group of companies.

Notably, the legislator has significantly formalised the procedure for issuing binding instructions by the parent company. Binding instructions must be given in writing or electronically, otherwise being null and void. Also, the Act specifies the minimum content the binding instruction must contain. Thus, the parent company is obliged to identify the behaviour it expects of the subsidiary following the execution of the binding instruction and the interest of the corporate group, which justifies the subsidiary's performance of the binding instruction. Also, the expected benefits or damage to a subsidiary that will be a consequence of the execution of the binding instruction must be presented. Furthermore, the envisaged manner and date of redressing the damage suffered by the subsidiary due to the implementation of the binding instruction need to be specified. Before the subsidiary executes a binding instruction, its board of directors must adopt a resolution that will include the above-mentioned items.

It should be emphasised that, as a rule, a subsidiary is obliged to carry out a binding instruction. However, the amending Act provides for cases which force the subsidiary to refuse the execution of a binding instruction. With regard to single-partner companies, the board of directors may refuse to execute a binding instruction if that would lead to the company's insolvency or threatened insolvency. Other subsidiaries will need to adopt a resolution refusing to carry out a binding instruction if there is a justified risk that it is contrary to the company's interests and will cause damage to it, which will not be repaired by the parent company or another subsidiary participating in the group of companies within two years, counting from the day on which the harmful event occurs.

OTHER POWERS OF PARENT COMPANIES

The new holding law also authorises the parent company to review the ledgers and documents of the subsidiary from the corporate group at any time and to request information on its operations. Should the subsidiary fail to fulfil this obligation, the parent company may apply to the registry court to obligate the subsidiary's board of directors to provide the parent company with the required ledgers and documents.

 A significant difference from the current regulations in the Code of Commercial Companies is a remarkable extension of the powers of supervisory boards in parent companies. Until now, this body has only been authorised to exercise control functions within the company where it was established. After the new regulations come into force, the parent company's supervisory board will be obliged to continuously supervise the implementation of the corporate group interests by the participating subsidiary.

LIABILITY OF COMPANIES IN A CORPORATE GROUP

The holding law has introduced critical changes to the parent companies' responsibility for the activities of subsidiaries participating in the corporate group. Previously, neither the parent company nor its board of directors was liable for damage caused by the subsidiaries' operations.

The new regulations change the current rule stating that if the subsidiary executes a binding instruction, it will not be liable for any damage caused in conection therewith. In such a case, compensation for the damage can be claimed from the parent company unless the parent company was not at fault for causing it. Additionally, the legislator introduced the parent company's liability towards minority shareholders for reducing the value of the shares in a subsidiary if the decrease was a consequence of the subsidiary's execution of a binding instruction. The above regulation aims to protect minority shareholders who hold shares in the parent company and a subsidiary.

Another extension of the parent company's responsibility concerns its liability for damage to the subsidiary's creditors. The parent company shall be liable for damage caused to the subsidiary's creditor unless it was not at fault or the damage did not arise due to the subsidiary's performance of a binding instruction from the parent company. This liability is of a subsidiary nature. Creditors can only bring a claim against the parent company if enforcement against the subsidiary in the corporate group is ineffective.

THE HOLDING LAW IS NOT FOR EVERYONE

The regulations discussed above significantly extend the parent company's powers in exercising control and influencing the operations of subsidiaries from the corporate group. Granting the parent company the right to issue binding orders to subsidiaries is a formal and legal resolution of the hitherto operation of actual holding companies. Therefore, theoretically, it may seem a beneficial solution. However, due to the significant formalism of the procedure to issue and execute binding orders, companies may not use this regulation, as businesses frequently require instant decisions. As a consequence, the introduced provisions, as well as the existing regulation in this respect, may turn out to be a dead letter.

The institution of binding orders restricts the freedom of subsidiaries' operation, which may refuse to carry out an instruction imposed by the parent company only in a few cases provided for in the Act. The new regulation extends the parent companies' powers yet still protects the subsidiaries' interests. Nevertheless, it affects the parent companies themselves, shifting the burden of responsibility for subsidiaries' activities to them.

In view of the above, corporations operating within actual holding companies should always consider the expediency of adopting and applying the holding law. These companies are not subject to new regulations compulsorily – it is their authorities' decision to fall into the updated law framework.

Authors:

Anna Godlewska, Lawyer awaiting registration on the list of attorneys-at-law, CHUDZIK i WSPÓLNICY Radcowie Prawni

Agnieszka Krzyżaniak, Head of the Commercial Law Department, CHUDZIK i WSPÓLNICY Radcowie Prawni

This article comes from magazine:
FOCUS ON Business #5 July-August (4/2022)