Changes to the Commercial Companies Code provisions concerning corporate groups.

The issue of corporate groups has long been a subject of discussion among lawyers specialising in commercial and economic law. There is no doubt that there remain matters that should find their place in statutory regulations. The amendment to the Commercial Companies Code and other acts proposed by the Ministry of State Assets regarding this issue is the subject of lively debate about the introduced regulations. The amendment in progress, introducing provisions concerning corporate groups, i.e. so-called holding law, introduces the concept of a joint economic strategy, which aims to enable a focus on the interest of the entire corporate group, moving away from the absolute primacy of acting solely in the interest of the individual company, and the institution of issuing binding instructions as a mechanism to ensure the implementation of the joint strategy. The latest changes that may soon come into force are discussed below.

Statutory definition of a corporate group

According to the proposed regulation, a corporate group means: “a parent company and one or more subsidiaries, guided – pursuant to the agreement or statute of each subsidiary – by a joint economic strategy (the interest of the corporate group), enabling the parent company to exercise unified management over the subsidiary or subsidiaries.”

Introducing the concept of a joint economic strategy changes the approach to managing companies within the group. Until now, the management board’s duty was solely to act in the company’s interest. The proposed changes assume, alongside acting in the company’s interest, also acting in the interest of the entire corporate group, provided this does not violate the justified interests of creditors and minority shareholders of the subsidiary.

Issuing binding instructions to a subsidiary by the parent company

The discussed amendment provides for the possibility for the parent company to issue binding instructions to a subsidiary, which would be the primary instrument ensuring the execution of the joint economic strategy.

Execution of a binding instruction by a subsidiary will require a prior resolution of the management board, which is intended as a safeguard against adverse effects on the company. According to the proposed amendment, the resolution will be adopted if it does not violate the interests of the subsidiary or if it can reasonably be assumed that any loss incurred by the subsidiary due to executing the parent company’s instruction will be remedied in due course by the parent company or another company within the corporate group. When adopting the resolution, the benefits gained by the subsidiary from being part of the corporate group in the last two financial years should also be considered.

Refusal to execute a binding instruction will only be possible in strictly defined cases. The first case assumes that a subsidiary in a group where the parent company directly or indirectly holds at least 75% of the share capital may refuse to comply only if executing the instruction would lead to insolvency or threatened insolvency of the subsidiary. The second case of refusal concerns a subsidiary where the parent company directly or indirectly holds less than 75% of the share capital and there is reasonable concern that the instruction is contrary to the subsidiary’s interest and will cause damage that will not be remedied by the parent company or another subsidiary in the group, and if this adverse circumstance threatens the subsidiary’s continued existence. An exception is a wholly owned subsidiary, which cannot refuse to execute the instruction.

Liability of the parent company for issuing binding instructions

The parent company may be held liable for issuing a binding instruction if its execution leads to the insolvency of a subsidiary in a group where the parent company directly or indirectly holds at least 75% of the share capital. It will also be liable towards the subsidiary for any damage caused, unless it is not at fault. The articles of association or statute of a wholly owned subsidiary may exclude the parent company’s liability.

The parent company will not be held liable for insolvency if it acted within justified business risk based on information, analyses, and opinions that should have been taken into account in making a diligent assessment under the circumstances.

The parent company’s liability under the current draft amendment is weakened by introducing the concept of fault, which in its current understanding seems quite difficult to establish, and the possibility of excluding liability in the case of a wholly owned subsidiary also raises concerns about the rationale of the introduced changes. It should be assumed that, given the strong position of the parent company, it should bear greater responsibility for the actions of subsidiaries resulting from executing binding instructions.

The right of the parent company to buy out shares of a subsidiary

A parent company holding at least 90% of the share capital of a subsidiary within the corporate group will be able to demand the buyout of shares held by a shareholder of that subsidiary. If it holds less than 90% but more than 75% of the share capital, the right to buy out shares or stakes will depend on an appropriate provision in the parent or subsidiary’s articles of association or statute.

The counterpart of this right for minority shareholders is the ability to demand the buyout of their shares or stakes if the parent company holds at least 90% of the subsidiary’s share capital.

The introduction of these rights will help ensure the durability of the corporate group and strengthen the position of the parent company. This right is a powerful tool directed at minority entities, who may at any time be “bought out” by the parent company without even their consent or a resolution of the subsidiary’s governing body being required.

Summary

The Ministry of State Assets has repeatedly postponed the date of entry into force of the amendment to the Commercial Companies Code introducing new provisions called holding law. At present, the bill is still under consultation, although earlier announcements indicated it would have been introduced last year. Despite the protracted procedure, we can expect that the bill will finally reach the Sejm and be enacted, introducing the mentioned institutions.

The way the issue of corporate groups is regulated seems significantly favourable to managers of the parent company, who will gain tools for efficient control of the entire corporate group. The situation of shareholders or members of subsidiaries seems much less favourable, as many experts see the proposed changes as prejudicing minority rights. Subsidiaries that, due to executing binding instructions, breach their interests—potentially leading to a decline in share value—may harm their shareholders or members.