The Commercial Companies Code – the largest amendment to date currently under consultation

The Ministry has announced that the draft amendments to the Commercial Companies Code (hereinafter referred to as the CCC), submitted for consultation, include the introduction of the law on corporate groups, i.e. so-called holding law. This concept, new to Polish law, would allow parent companies to issue binding instructions to other companies within the group aimed at implementing joint strategies. The consultation process will continue until 19 September 2020.

As stated in the explanatory memorandum, the act is intended to consist of two main parts. The first part concerns the introduction into Polish company law of regulations on so-called holding law (law of corporate groups, concern law), which — in a broad doctrinal sense — governs private-law relations between a parent company and its subsidiaries, taking into account the interests of creditors, members of corporate bodies and minority shareholders, especially of the subsidiary. The second part focuses on increasing the effectiveness of oversight exercised by the supervisory boards of capital companies.

The authors of the draft state that, during the legislative work on the CCC in 2000, a concept of limited (residual) regulation of holding law was adopted. This regulation was limited to the now-repealed Article 7 of the CCC, which referred to so-called contractual holdings, i.e. where the parent and subsidiary entered into a contract either for the management of the subsidiary by the parent or for the transfer of profits from the subsidiary to the parent. However, this regulation did not address the legal aspects of so-called de facto holdings, i.e. where a dominance-dependence relationship exists without a formal agreement. De facto holdings dominate Polish business practice. Contractual holdings are rare, as are so-called tax capital groups (Article 1a(1) of the Corporate Income Tax Act), which is why the existing regulation of corporate groups did not meet market needs. The proposed draft aims to address these needs.

Foundations of Holding Law

The amendment is based on the assumption that a distinction must be made between a “corporate group” (which is essentially the subject of holding law regulations) and the dominance-dependence relationship between companies, as referred to in Article 4 § 1 point 4 of the CCC. A corporate group is a “qualified” dominance-dependence relationship between specific companies that follow a common business strategy, allowing the parent company to exercise uniform management over one or more subsidiaries. This introduces a new legal category seen in both Polish and foreign corporate practice — the “interest of the corporate group”. Therefore, the need arose to normatively define a “corporate group” as a legal category separate from the dominance-dependence relationship. This is addressed in the proposed Article 4 § 1 point 51 of the draft CCC. Moreover, the general provision in Article 211 § 1 of the draft CCC states that both the parent company and subsidiaries within a corporate group should act in the “interest of the corporate group”, even though, by nature of company law, they should act in the interest of their own company — that is, the interest of the parent or subsidiary, respectively.

A corporate group, as a qualified dominance-dependence relationship based on the existence of a common group interest (Article 4 § 1 point 51 of the draft CCC), does not — under the adopted concept — require the formation of a formal organisational structure with a distinct name, quasi-bodies, rules of procedure, or admission criteria. Such a concept would imply the legal personhood of the group itself, which would be systemically difficult to accept due to the principle of numerus clausus of company types. Moreover, such a concept would fail to address the practical needs of the market, which focus primarily on regulating de facto rather than contractual holdings, and would drift towards a concept of full regulation of holding law — a concept rejected in this draft.

The provisions in the draft can be divided into two categories (excluding general provisions such as Article 4 § 1 point 51, Article 211, and the referral provision in Article 2115 of the draft CCC):

a) those facilitating effective “management” of the group by the parent company in connection with implementing the group’s business strategy (Articles 212–213 and 216–217 of the draft CCC);

b) those ensuring protection of certain interest groups arising within a corporate group, primarily the subsidiary (Articles 214 and 2112), also the parent company and indirectly the whole group (Article 2111), creditors of group companies, especially subsidiaries (Articles 218 and 2114), minority shareholders of subsidiaries (Articles 218–2110 and 2113), and members of management bodies of both subsidiaries and parent companies (Article 211 § 3 and Article 215).

The draft also provides for the liability of the parent company for the consequences of issuing binding instructions that are executed by a subsidiary within the group. This liability extends to the subsidiary itself, its creditors, and its minority shareholders.

Specific Legal Instruments for Group Management

In addition to binding instructions, the draft includes provisions enabling effective management of the group by the parent company, such as:

a) the parent company’s right of access to information about its subsidiaries (Article 216). This is particularly important where the subsidiary is a joint-stock company. Otherwise, such broad access would be excluded under Article 428 of the CCC;

b) the right of the parent company’s supervisory board to conduct ongoing supervision of subsidiaries in matters relating to the group’s interest (Article 217);

c) the right to a compulsory buyout of shares or stock held by minority shareholders in the subsidiary (squeeze-out — Article 2111).

Protection of Minority Shareholders

Specific provisions aimed at protecting minority shareholders of subsidiaries include:

a) the obligation for subsidiaries to prepare an annual report on their relations with the parent company, including all binding instructions received (Article 218). This may also serve to protect the subsidiary’s creditors;

b) the right to request that the registry court appoint an entity authorised to audit financial statements to review the accounting and operations of the corporate group (Article 219);

c) the right to a compulsory sale of shares or stock held by minority shareholders (sell-out — Article 2110).

New Powers of Supervisory Boards

The proposed regulation creates legal conditions conducive to strengthening oversight exercised by owners and supervisory boards. With real access to accurate and comprehensive information about the company, these bodies will be able to professionally engage in meaningful discussions with management.

In addition, the draft includes provisions for:

a) clarifying the terms of office and mandates of management board members;

b) introducing a duty of loyalty and confidentiality even after the expiration of a supervisory board member’s term;

c) enshrining the Business Judgement Rule in the CCC;

d) extending Article 203 § 3 and Article 307 § 3 to include new cases of mandate expiration;

systematising rules for adopting resolutions and holding meetings of management and supervisory boards.

Selected Proposed Amendments to the Commercial Companies Code:

A. Management board’s obligation to provide certain information to the supervisory board on its own initiative;
B. Clarification of the supervisory board’s right to request information, documents, reports or explanations;
C. Right to appoint a supervisory board adviser without management board involvement;
D. Approval requirement for significant transactions with the parent company, subsidiaries, or affiliates;
E. Clarification of terms of office and mandates of management board members;
F. Duty of loyalty and confidentiality even after the expiry of a supervisory board member’s term;
G. Introduction of the Business Judgement Rule into the CCC;
H. Expansion of Article 203 § 3 and Article 307 § 3 to include additional cases of mandate expiration;
I. Procedural provisions — obligation to minute resolutions adopted via remote communication, and determination of the voting majority for resolutions of a limited liability company’s supervisory board.