Amendment to holding law getting closer

The government draft amendment to the Commercial Companies Code (hereinafter: CCC) and certain other acts is currently under consideration by parliamentary committees. According to the official announcement from the Prime Minister’s Office, the draft concerns the introduction into Polish law of so-called holding law (law on corporate groups or concern law), which — in a broad doctrinal sense — regulates private-law relationships between a parent company and its subsidiaries, taking into account the interests of creditors, members of governing bodies, and minority shareholders of the subsidiary. The amendment also aims to equip supervisory boards with tools enabling more effective corporate governance and to resolve doubts raised by entrepreneurs and legal scholars.

What Are Corporate Groups?

The amendment defines them as “a parent company and one or more dependent companies acting according to a common economic strategy to realise a joint interest, justifying the parent company’s unified management over the subsidiary or subsidiaries.”

Rights and Responsibilities of the Parent Company

According to information from the government website:

• Holding law will regulate private-law relations between the parent company and its subsidiaries, in a manner that takes into account the interests of creditors, members of governing bodies, and minority shareholders, especially those of the subsidiary.
• The parent company will be held liable for the consequences of binding instructions issued and subsequently executed by the subsidiary participating in the corporate group. This liability applies towards:
  • the subsidiary,
  • creditors of the subsidiary,
  • minority shareholders of the subsidiary.
• Compensation liability of the parent company towards the creditors of the subsidiary is regulated where enforcement against the subsidiary proves ineffective and the damage to creditors results from the subsidiary following the binding instructions of the parent company.
• The draft includes direct liability of the parent company towards the shareholders of the subsidiary, relating to the diminution in value of the shares or stock of the subsidiary caused by adherence to binding instructions from the parent company.
• An important element of protection for minority shareholders is the granting of a sell-out right.
• To enable efficient management of the corporate group by the parent company, in addition to binding instructions, the following are introduced:
  • the parent company’s right to access information about its subsidiaries;
  • the supervisory board of the parent company’s right to exercise ongoing supervision over subsidiaries belonging to the corporate group, but only to the extent necessary to protect the group’s interests;
  • the right to force the purchase of shares or stock held by minority shareholders in the subsidiary, the so-called squeeze-out.

New Powers of Supervisory Bodies

• Supervision exercised by owners and supervisory boards in capital companies is strengthened:
  • This concerns real access to all reliable and complete information regarding the company, allowing owners and supervisory boards to act as a professional and adequate partner in discussions with management.
• The right to appoint an advisor to the supervisory board without management involvement and the possibility for the supervisory board to enter into an agreement with such an advisor is introduced.
• Matters relating to the terms of office and mandates of managerial bodies are clarified.
• A provision is introduced on the duty of loyalty and confidentiality, which continues even after the supervisory board member’s term expires.

Risk

The draft introduces the so-called business judgement rule, which excludes liability for damage caused to the company by decisions of governing bodies that later prove to have been mistaken — provided these decisions were made within the scope of reasonable business risk and based on adequate information.

According to the drafters, this will protect members of governing bodies who performed their duties diligently and loyally and decided to take a business risk on behalf of the company, should it later transpire that the decision was erroneous and caused damage. At the same time, reckless conduct will still be subject to sanction.

Formalising the connection between capital companies through the institution of corporate groups may be beneficial for parent companies, particularly by increasing control over subsidiaries. However, risks remain regarding compensation liability for losses arising from poorly considered binding decisions affecting subsidiaries, additional documentation obligations (especially updating existing company agreements/statutes and other internal acts), and the still unclear relationship between the new holding law and legislation regulating the liability of management board members.

Most of the new provisions will come into force six months after publication in the Journal of Laws.